Mergers in health care: avoiding divorce IDS style.

The recent flurry of merger activity in the healthcare industry has given rise to a significant number of integration efforts. Unfortunately, some of these "marriages" will end in "divorce." Reasons for failure can be found in four critical dimensions of integration: structural, operational, clinical, and informational. Each dimension has its associated pitfalls, and every merger confronts clearly identifiable risks.

By taking steps to mitigate such risks, merging organizations can improve the chances the merger will succeed. If the merger does fail, measures taken prior to the merger, such as including an escape clause in the merger contract, can help avoid problems in dividing operational assets, physicians practices, and information assets.

In recent years, healthcare organizations have been merging to form or expand existing integrated delivery systems (IDSs), in the hope of adding value, reducing costs, and Improving their competitive position. Many of these mergers have been hastily constructed, however, and may be doomed to fail.

In 1996, for example, Pittsburgh Mercy Health System merged with Western Pennsylvania Healthcare System to create a for-profit, physician-run healthcare system with 150 primary care physicians. This new entity, Community Health Partners (CHP), planned to launch a stock offering to physicians by the spring of 1997. By August 1997, the deal was off. Mercy rejected Western Pennsylvania's offer to merge the two systems' operations, and Highmark Blue Cross Blue Shield announced it would not contract with a major IDS like CHp.(a)

As another example, in July 1997, three years after merging to form the Lahey-Hitchcock Clinic, the Lahey Clinic of Burlington, Massachusetts, and New Hampshire's Hitchcock Clinic, agreed to operate as separate entities. The reasons cited for the separation were different markets and cultures. New Hampshire markets are largely fee-for service, while Massachusetts includes some of the most heavily capitated markets in the country. The fact that the organizations are more than 100 miles apart also was an impediment to achieving clinical integration and shared services.

Why do merged entities divorce? Like marriages, mergers succeed or fail for many reasons. To add economic and clinical value, integration needs to occur structurally, clinically, operationally, and informationally. In a study by First Consulting Group and the Scottsdale Institute for Health and Medicine, Scottsdale, Arizona, 40 IDSs self-assessed their levels of integration with respect to these four dimensions of integration (see Exhibit 1). Although the surveyed organizations would be considered successful IDSs by their peer organizations, the survey results indicate that not one of these organizations regards itself as a fully integrated system.