Healthcare Mergers and Acquisitions Face $30M in Unrealized Value

October 09, 2019 - Healthcare mergers and acquisitions are increasingly popular, but the average health system is leaving approximately $30 million per year on the table following deals, according to a new report from Accenture.  

The global professional services company recently analyzed the untapped post-merger cost savings opportunity for US health systems by comparing average cost savings realized in provider deals to the typical cost savings realized from major merger and acquisition transactions in other industries, including telecom, financial services, and hospitality.

The research showed that healthcare mergers and acquisitions “may not be leading us to a better future.”

Healthcare mergers and acquisitions have occurred at a rapid pace. 2017 saw a record number of deals at 115 announced merger and acquisition transactions, Kaufman Hall reported. And the momentum has carried over into 2019, with healthcare providers not only engaging in mergers and acquisitions but increasing the size of their deals, the consulting firm announced earlier this year.

Healthcare organizations say these deals will improve the value of care delivered to patients and the community by lowering costs, enhancing care quality and access, fostering innovation, and more.

READ MORE: How Hospital Merger and Acquisition Activity is Changing Healthcare

But research has shown that healthcare mergers and acquisitions are not delivering on the benefits touted by hospital and health system leaders. One of the more comprehensive analyses of the impact of hospital mergers and acquisitions on prices found that prices at monopoly hospitals are 12 percent higher than those in markets with four or more rivals and monopoly hospitals negotiate more favorable terms with hospitals.

Analyses conducted by Accenture last year and cited in the report also revealed that patient experience can suffer post-merger. The company reported that the average Net Promoter Score for providers was 28 out of 100, which was over 40 points lower than the scores of top retailers, and one in five customers said they would switch providers if they do not receive good value for their money.

“These disappointing outcomes are a stark contrast from what companies in other asset-heavy, service-oriented industries—such as telecommunications, financial services and hospitality—experience after consolidation,” the report stated.

Researchers explained that these industries have faced similar merger and acquisition drivers, including the need for vast networks, the ability to succeed in high-risk product lines, and the capability to compete with customer experience. Yet companies in the three industries are realizing greater value post-merger.

Deals in the financial services industry realized an average of 11 percent in cost savings post-merger, the report showed. Meanwhile, the telecom and hospitality industries generally achieved 8 percent and 2 percent in cost-savings, respectively.

READ MORE: Hospital Mergers and Acquisitions Reduce Costs, AHA Report Shows

In contrast, healthcare mergers and acquisitions only saved about 1 percent on average post-merger, meaning the average health system with about 1,000 beds is facing tens of millions in untapped value.

Healthcare organizations may argue that what they do is unique compared to other industries. But the report explained that the analysis was based on non-labor operating costs, which are common across industries.

The findings indicate that healthcare organizations should ditch the notion that their industry is so unique that best practices from other sectors cannot apply. Instead, the organizations should be approaching mergers and acquisitions “from a holistic perspective,” researchers stated.

“In these other industries, Wall Street is watching. Facing scrutiny from shareholders, analysts, regulators—and their own performance-focused boards—these newly-formed companies have no choice but to double-down on value,” they wrote in the report. “They apply stringent approaches and clever techniques to lock-in new value in the near-term and sustained value over time. “

One of those techniques, which healthcare organizations should adopt according to researchers, is implementing zero-based budgeting. Other industries use a defined, aligned operating model to show cost synergies and target major cost-saving opportunities, including supply chain costs, IT, and third-party spend.

READ MORE: Major Healthcare Mergers and Acquisitions Making Waves in 2019

Healthcare organizations can adopt the zero-base strategy by creating “clean rooms,” researchers said.

“Take third-party spend. With intense review of vendor contracts, combined with next-generation benchmarking and forecasting, companies can have a targeted plan as soon as the ink dries. These clean rooms not only support a zero-based mindset and rigorous cost discipline, they can also expose biases early in the impending merger,” they wrote in the report.

Researchers also recommended that healthcare organizations focus on customer experience post-merger by identifying a customer “maestro” and work on aligning culture between the two organizations to ensure a smooth transition.

“By tackling culture head on and early on and assessing how the cultures of the organizations best fit together for strategic advantage, these organizations can cultivate a new working environment and value system that keeps the workforce satisfied and productive, which is essential to win the war for talent and sustain enterprise value,” the report concluded.