M&A in Health Care Opportunities Abound, Risks Loom

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1 M&A in Health Care Opportunities Abound, Risks Loom Jeanette Brizel, Senior Consultant, Mergers and Acquisitions Ellen Federman, Senior Consultant, Mergers and Acquisitions (Facilitator) Denise LaForte, Senior Consultant, Talent and Rewards Rick Sherwood, Health Care Provider Industry Leader, Talent and Rewards Nell Stanton, Senior Consultant, Talent and Rewards Merger and acquisition (M&A) activity among U.S. health care organizations is on the rise up 20% in 2012 over the previous year. Driving the surge is a host of game-changing forces that threaten the sustainability of many small hospitals and health care systems. These organizations may lack the capital, infrastructure, talent or technology to thrive or even survive in the radically different health care environment that s taking shape. There s no doubt that both the rapidly aging U.S. population and the expansion of health insurance coverage mandated by the Patient Protection and Affordable Care Act (PPACA) will mean more patients needing more and more care. But even as patient rolls increase, providers profits will likely take hits from possible reductions in government reimbursements and major changes in the payer mix. And on top of these challenges, health care employers are seeing competition heat up for not only patients, but also physicians, nurses and other talent essential to their success. In this discussion, Towers Watson experts explore the significant workforce opportunities and risks that corporate transactions generate for health care organizations, and discuss how HR can help leaders develop meaningful solutions to foster deal success. Federman: What are the most important things Q for health care organizations to consider as they evaluate a potential deal? Sherwood: The primary consideration is how an A acquisition, merger, affiliation or spin-off fits into the organization s strategic plan, particularly in light of the requirements of the PPACA. For example, if a hospital system s strategy is to provide convenient access to cost-effective, high-quality care, it may need to broaden its geographic footprint by acquiring regional hospitals. But if it s looking to specialize, it will need to acquire physician groups or clinics, or partner with academic research groups to strengthen its bench and broaden its capabilities in the specialty area. There s no doubt that both the rapidly aging U.S. population and the expansion of health insurance coverage mandated by the Patient Protection and Affordable Care Act will mean more patients needing more and more care.

2 As health care systems rush to position themselves for success, the sheer number and speed of deals increase the likelihood of undetected risks. Brizel: The issues in health care deals run the gamut from the risks common to deals in all industries like underfunded pensions to those unique to health care organizations. The latter include retaining physicians with crucial practices, as well as the integration and culture issues related to merging facilities across various locations and creating larger, more complex footprints. Physician retention is particularly important in a transaction, because doctors often drive hospital utilization. The loss of revenue-generating physicians and drops in utilization can offset any revenue growth that leaders had expected from the deal. Also, health systems have cultural and operational differences that can pose risks not faced by organizations in other industries. In the legacy systems, you could have employee groups with dramatically different perspectives and behaviors relating to patient care, efficiency or innovation. One facility may have nurses with broad responsibilities while another uses a specialist model. These significant differences among employees with the same title could not only generate confusion in day-to-day activities, but also limit leaders flexibility in redeploying talent. And when a unionized organization combines with one without unions, there are additional challenges. Aside from the obvious issues of reward harmonization, the deal team must address culture-related matters. Sherwood: As health care systems rush to position themselves for success, the sheer number and speed of deals increase the likelihood of undetected risks. Organizations can often overlook cultural differences among businesses they re targeting. For example, I ve seen a hospital system with a strong culture of lean operational efficiency acquire a community hospital focused on patient and family care. In a situation like this, the acquiring hospital system needs to consider the significant cultural change that full integration will require. What are the barriers to a successful integration? How will they overcome those challenges? Federman: You both raise some very important Q issues for health care executives, including culture, retention and financial liabilities all areas in which HR needs to play a front-and-center role. How can HR help the organization execute a transaction successfully? LaForte: HR needs to work closely with the A acquiring organization s leadership and the deal team right from the start. During due diligence, if HR leaders feel the organization really isn t ready to execute a deal, they ll need to have very frank conversations about the risks of disruption to operations. HR can also help the team develop an M&A toolkit to facilitate readiness. When it comes time for integration, the organization can take one of several different approaches. And HR can help leaders choose the right path by understanding their expectations and advising them on the people-related risks. For example, do the system s leaders expect to integrate all patient operations, technology, collaborative methods, culture and the like within a year of closing? Or do they intend to maintain the acquirees existing brands and let them operate more independently for some time? There are pros and cons of each approach and trade-offs to consider. The integration decision needs to be right for that system at that time. For example, one system we worked with bought hospitals over a 10-year period and ran them as stand-alone businesses under more of a holding-company model. When the organization was ready from both an operational and financial standpoint, its leadership worked with HR to develop a comprehensive integration plan it would implement over time. Leaders need to think about those types of approaches, and HR can be a helpful guide. M&A in Health Care Opportunities Abound, Risks Loom 2

3 Federman: How do successful organizations Q assess the strengths and weaknesses of various integration approaches both at the beginning and as issues arise? Stanton: It s crucial for acquisitive health care A systems to develop a strong program management office (PMO) at the outset, by either building it or partnering with an external consultant. When Towers Watson conducted research with Harvard University s School of Public Health, we found that organizations that use a PMO during a corporate transaction are far more effective in driving the desired organizational change than those that don t. The PMO helps the acquiring system enhance its risk management capability even before beginning a transaction, and then articulate and enable very specific governance and decision-making protocols during the deal process. The most successful acquirers assign a project analyst to each integration work stream to capture those detailed line items, quantify the integration action plans and ensure quick delivery of the promised cost savings. Federman: Is there a downside to becoming Q bigger? And how can organizations manage their scale? Brizel: As hospital systems grow, they typically A become less agile and take longer to make decisions. And some people are uncomfortable working differently and being stretched into new areas. For example, if a hospital announces it s adding a location, some employees could worry about how they ll handle their additional responsibilities, such as leading an ambulatory care facility 50 miles from the primary inpatient facility. HR needs to prepare leaders to address such issues and facilitate a successful transition. We typically advise HR to increase communication to all employees before, during and after closing a deal. With a hospital system s multiple shifts, 24-hour operations and distributed locations, it s important for HR to be creative and diligent about communicating with employees in all workforce segments. Also, HR must give leaders the right tools to help guide their teams through an acquisition s challenging times. For example, to prevent employees from feeling overwhelmed, leaders should be clear about employees roles and leaders expectations. Workers in patient-facing roles, particularly, need to be clear on who s doing what. And in addition to its impact on patient care, that understanding can affect the bottom line. We know from our research that health care workers attitudes are major influencers of patients satisfaction and health, and of patients likelihood to recommend providers to their friends and family members. Federman: Denise, in your work with large health Q care organizations, what best practices have you seen for managing scale? LaForte: I can cite an illustrative example. After A several mergers, one provider became a very large health system with over 100,000 employees. Leaders focused on engaging the entire workforce in the new culture as quickly as possible. They started with the top 500 leaders in the organization from both the physician and administration sides. Now, HR is building a technology-enabled onboarding tool that fully integrates with new performance and talent management programs. It s an interesting approach to HR service delivery. First, they re engaging leaders and clarifying their roles and expectations. Next, HR will use the tool to promote the new culture throughout the organization, with the top leaders as champions. We also see HR functions themselves facing challenges after big transactions, as they adapt to support suddenly much larger organizations. If a health system has traditionally managed HR centrally, chances are it doesn t have locally based HR resources. Once it starts acquiring entities such as nursing homes, it needs different kinds of HR programs for various employee populations. Many consider decentralizing HR by embedding resources within the acquired entities to keep corporate HR from being completely isolated from acquired employees. Federman: How else do HR functions change the Q way they do things after deals resulting in much larger systems or in organizations with a wider range of service offerings? LaForte: For one thing, technology suddenly A becomes more important. Small, traditional hospitals typically have many manual processes. Even small systems can have many disparate processes across their facilities. The larger they get, the more they need technology to automate and streamline HR processes. It s crucial for acquisitive health care systems to develop a strong program management office at the outset, by either building it or partnering with an external consultant. M&A in Health Care Opportunities Abound, Risks Loom 3

4 HR functions that grow through M&A deals and that inherit decentralized HR functions from acquired organizations can improve efficiency by transferring much of the administrative and transactional work to an HR shared services center. This gives local HR departments with limited resources more time for work that s aligned with the organization s business strategy, such as recruiting the right people, driving innovation and developing leaders. Sherwood: There s a really interesting parallel between leveraging technology to improve care on the clinical side and using it to improve HR services. Probably 10 years ago, people looked askance at technology s role in delivering care, but clinicians and administrators have come to see how technology can improve the quality of care delivery. Similarly, many hospital systems have traditionally thought that good HR service meant one-to-one, handson activity by an HR professional for even the most basic processes. But now they re realizing they can deliver more valuable, efficient, effective HR service by leveraging technology. And in an M&A situation, the value of that leverage can increase significantly and help speed the pace of effective integration. LaForte: The good news is that technology capability is definitely improving, even in the not-for-profit sector, where investment dollars for technology have historically been constrained. Now that many large systems have completed the installation of costly electronic medical record systems to meet the PPACA s quality and efficiency mandates, funds for upgrades to HR service delivery technologies are freeing up. And the complexities of integrating facilities in a merger or other deal give any health care system small or large, not for profit or for profit an excellent business case for technology upgrades. Federman: Does the shift toward greater Q reliance on HR technology to meet the demands of increased size require different skill sets for the HR team? Sherwood: Yes, it does. HR professionals in all A industries have always prided themselves on their people skills. But now, HR functions in health care organizations are facing the same pressures to cut costs and increase efficiency that their peers in other industries have faced for some time. So they need skills in areas such as data analysis, to improve decision making and operational efficiency, that aren t in their traditional skill set. LaForte: And they need other skills to operate in the post-reform environment. They need to attract and manage the right talent, lead succession planning and leadership development, and foster a culture of innovation. Traditionally, they haven t had the skills to help workers innovate. We recently helped a hospital create a role within HR that s focused on innovation. The person in that position will lead an initiative to build a culture of innovation within the patient operations groups. Federman: How is all the M&A activity in the Q industry affecting the leadership capabilities required for success? Sherwood: We re seeing a huge change. Many A health systems are digging into this shift now, trying to define what a good leader is for their organization. Often, the discussion is initiated when a long-term CEO announces that he or she is leaving. The individual might have been a great CEO over the years, as the hospital grew into a first-rate acute-care center. But now the hospital has become a system with a complex group of care centers, such as a dedicated physician group, an ambulatory care center and a long-term nursing care center. And the skills that made a good hospital CEO typically a clinician who became an administrator aren t the same as those needed to run a large and complex system. Today, systems are looking for things like business acumen, influence and collaboration skills. Many hospital presidents today do have a clinical background, but the more complex systems that have grown through a series of deals are looking for leaders with broader leadership skills. LaForte: Reward programs which traditionally met the needs of clinical experts are changing, too. Today, an organization might need an incentive plan for a leader who s running several different businesses and potentially managing the stock price, if the organization goes public. Sherwood: On the clinical side, these acquisitions are challenging leadership development programs. Some of the big, new systems are finding that leaders at the acquired clinical organizations have the talent to lead large clinical areas within their systems. During the deal, they have to look at their leadership development programs to make sure they re bringing in leaders from these acquired groups. M&A in Health Care Opportunities Abound, Risks Loom 4

5 Q Federman: What happens when faith-based institutions merge? LaForte: There are unique challenges. For A example, one faith-based organization that we ve worked with includes three or four orders of nuns. They ve reconciled their missions to create one culture for the new organization. It took some time, but the work was amazingly successful. Of course, it helped that the groups share a common goal of caring for the poor. Federman: Often such a vision of community service and caring for the poor is shared, even among faith-based groups affiliated with different religions. But organizational culture is more than just a vision, it s also how you operate and get things done. And often, while the legacy organizations might share a common vision, they could do things in dramatically different ways. One could be mostly consensus-driven and another more hierarchical. One could be more collaborative and another could operate in silos. So it s important to distinguish between vision and culture, and to address both when you re combining organizations. About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management. Copyright 2013 Towers Watson. All rights reserved. TW-NA