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,

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.

The four dimensions of integration provide a framework for understanding the difficulties an IDS may encounter with a merger and identifying actions that may prevent divorce.

Structural Integration

Structural integration involves integrating governance and organizational strategies. The newly formed IDS needs to develop a single corporate mission statement and a single business strategy. In addition, responsibility for governance of the IDS as a whole should be invested in a single chief executive and board.

A major obstacle to fulfilling these requirements, however, is culture clash. If the cultures of the merging organizations cannot be effectively combined, the consensus required to make strategic and governance decisions will be difficult to achieve.

An example of culture clash occurred with the merger of New York University (NYU) and Mount Sinai medical centers, both in New York City. The merger, which was intended to form an expansive hospital network combined with one of the country's leaders in medical education and research, was canceled in February 1997 reportedly because of irreconcilable cultural differences over the location of the combined medical school, issues of personnel policies and tenure, and bad feelings that developed over a report that ranked NYU's medical school significantly higher than Mount Sinai's in academic quality. Although the two medical centers eventually did merge, the medical schools did not.

Fortunately, culture clash tends to occur early in the process, before too much effort and resources are expended. Thus, when irreconcilable differences become apparent, the relationship usually can be ended without serious consequences.

A good way to mitigate or avoid culture clash is to proceed with the merger slowly and involve constituencies from both organizations in early planning processes. As a first step, for example, physicians at two merging medical centers, with the support of finance, should negotiate collectively with managed care companies and insurers to ensure that agreements benefit all parties.

Choosing the new IDS's leaders is a critical issue that should not be delayed too long. If the debate over who should be promoted is allowed to drag on, potential candidates from within the organization may be recruited by other organizations that can offer them a more certain future. Another risk in extended debate is that the candidate finally selected may be perceived to lack the full support of all the key decision makers.

Probably the only approach worse than delay is establishing temporary comanagement roles. This approach has no one really in charge, and may result in a situation where the comanagers put their own interest in eventually becoming the sole leader above a working relationship with each other, to the detriment of the organization.

Getting everyone in the merging organizations to adopt systems thinking after they have spent many years in a stand-alone hospital or community practice also poses a challenge. Leaders need to review every decision and statement to make sure they reflect the new mission and new environment. To promote systems thinking, the IDS leaders should develop and follow a set of guiding principles and assign a member of the executive team to represent each major constituency within the organization. These executives should be charged with ensuring that their constituences' perspectives are represented in all important decisions. The leadership also may consider hiring an executive or outside consultant who is steeped in systems thinking to raise awareness of how to avoid hospital-centered thinking and reinforce the integrated view of an IDS.

Everyone who has been through a merger admits to grossly underestimating the stress a merger places on staff. Top management may be aligned and excited about the new IDS's potential, but staff may feel a sense of loss for the old ways, the old boss, and the old relationships. People often keep score on the decisions, policies, and management roles that their once-separate organization wins. Because management tends to focus initially on strategic initiatives, such divisive behavior may go unaddressed. One solution is to hire outside counselors or team builders to help the staff through the transition. Another is to add temporary staff to work on the strategic initiatives, thereby freeing management to deal with staff issues.

Operational Integration

One of the first tasks of a new IDS is to integrate administrative and financial functions. In an IDS with fully integrated operations, redundant corporate services and functions are consolidated into a central process that addresses overall IDS performance. Budgeting and financial statements are consolidated around corporate product lines rather than individual care settings. The IDS sets and applies systemwide service performance standards, policies, and procedures governing operations.

Although this dimension of integration is challenging, it rarely brings conflicts that threaten the marriage. The need to consolidate duplicate administrative services normally is understood. Problems may arise, however, in initiating a single set of best practices throughout the organization. Operational integration can become difficult if departments resist consolidated measurement or common processes because they see nothing wrong with their practices. To avoid this problem, the IDS should start operational integration efforts in parts of the organization that are willing to change and demonstrate by example the benefits that can be achieved through this integration.

Clinical Integration

Clinical integration refers to the merging of clinical systems and functions. In clinically integrated IDSs, provider-developed care guidelines and protocols enforce one standard of care regardless of where patients are treated. Integration at this level allows IDSs to seamlessly coordinate patient care, track episodes of care, and determine care outcomes in all care settings, including contracted external sites.

One of the most common barriers to clinical integration is the reluctance of care providers to accept change. For example, physicians may resist the promulgation of a new standard of care throughout the enterprise. To address this problem, IDS leaders need to determine what is being resisted and recognize that physicians are trained and culturally acclimated to accept proven new clinical practices. Physicians who are resistant to a new protocol often can be convinced to accept the change if they see that it is medically sound and supported by the clinical literature - and, most important, their colleagues.

Informational Integration

Clinical integration also should be supported with an information system that provides a basis for implementing standards of care across the IDS. Accountability for managing information throughout the IDS should reside with a single department. Characteristics of a fully integrated IDS information system include:

* Data accessibility from anywhere in the IDS;

* Only one record per patient;

* Enterprisewide patient registration and scheduling coordination;

* Clinical and financial decision support tools available at the point of service;

* Seamless communication between care providers, even at remote locations;

* Service utilization analysis capabilities throughout the IDS and by discrete member populations; and

* Common patient statements and billing capabilities by patient and patient family.

Successful information integration is perhaps the most difficult area of IDS integration to achieve, and to date, no IDSs have achieved it. The resources required to implement new systems are huge, and implementation often must coincide with efforts to cut expenses. Without sufficient funding, none of the essential information support can be installed quickly. Moreover, to be of value, that information support must be integrated with the installed systems base, which also entails considerable expense.

Managing information integration processes in an IDS typically is the responsibility of the CIO. CIOs report that the critical success factors for achieving effective information integration are convincing the organization's executive decision makers that investing in information technology (IT) is worthwhile and minimizing the risks associated with the enabling technology and systems.(b)

Rather than relying on traditional cost-benefit analysis to assess the value of IT initiatives, healthcare executives should attempt to evaluate how the initiatives can improve financial, clinical, and administrative processes. For example, an IT initiative may be justified by its ability to reduce length of stay or increase contracting power by enhancing data availability, reducing variation in care, and improving clinical outcomes.

Another problem that prevents IDSs from quickly achieving informational integration is the lack of reliable, well-tested support technology and software in the marketplace. One way to mitigate the risk associated with systems is to form a risk-sharing relationship with the vendor, with significant penalties if the systems fail to perform as promised.

A number of other potential problem areas associated with information integration also should be considered. First, it requires considerable political skill to manage the wishes of multiple departments when implementing a common system. Second, although managing the scope of information integration projects can be difficult, it is extremely important to keep the focus of information integration projects narrow at first, addressing only those such issues the IDS regards as critical. Finally, any change in the scope of a project should be agreed upon by all affected parties, and corresponding changes in the implementation plan should be clearly communicated.

Prenuptial Agreements

Even when merging organizations do everything possible to promote a successful marriage, the merger still can fail due to unforeseen problems. A wise precaution, therefore, is to develop a prenuptial agreement.

One large West Coast IDS, for example, always includes an escape clause in its integration agreements. This IDS always performs a significant due-diligence process, in which it evaluates the clinical and operational components of the targeted institution to determine their compatibility with its own environment. It proceeds with a merger or acquisition only when it has determined there is a good chance of achieving organizational, operational, clinical, and eventually, informational integration. The IDS's escape clause allows the IDS to end the relationship if it finds information regarding potential barriers to successful integration was withheld during the due-diligence process.

Ending the relationship can pose a difficult challenge, however, if an IDS already has taken steps toward organizational, clinical, operational, or informational integration, since the once-separate organizations start to develop bonds that can be difficult to break.

For example, centralized laboratories, pharmacies, or administrative departments may have to be divided. Once these departments have been integrated, recreating separate departments will be costly. A solution that would mitigate this expense might be to develop a prenuptial agreement that specifies how the merged department resources should be divided should the IDS marriage fail. Another solution is to negotiate a joint operating agreement before the merger takes place as a potential fall-back strategy.

Another complicated issue in an IDS divorce is realigning relationships with affiliated or owned physician practices. The problem of resolving which primary care physicians or specialists should be retained by which organization can lead to considerable conflict. Including an escape clause in physician contracts may be the best way to anticipate this problem.

Furthermore, if an IDS has achieved significant informational integration, the issues of information-system and data ownership may become sources of conflict. Because neither party will be willing to relinquish existing IT implementation and support skills, the hardware, software licenses, and maintenance contracts will need to be split or duplicated, often at a significant cost.

One of the most complicated information-related problems associated with IDS divorces, however, is related to historical patient data. If a hospital withdraws from an IDS, it will want to reclaim its clinical data. Yet the IDS also will require these data to show the basis for past patient treatment. A prenuptial agreement, therefore, could be negotiated to determine data rights upon withdrawal or termination. If data are stored electronically, both parties may agree on a perpetual license to maintain the data, or any other system, or they may agree to grant the exiting party the rights to copy certain data.

Conclusion

When healthcare organizations merge to form IDSs, they should carefully consider the potential pitfalls associated with integration efforts. If integration agreements are arranged without appropriate due diligence, a dysfunctional marriage or divorce may result. Moreover, before proceeding with a merger, the merging organizations would be wise to negotiate a solid prenuptial agreement, addressing information systems, the data residing on those systems, the ownership of clinical practices, and operational resources. Such an agreement can prevent a simple divorce from turning into a "War of the Roses."

a. "Unmanaged care: One network's fall," Pittsburgh Business Times, Aug. 15-21, 1997, pp. 1,28.

b. "Assessment of Key Source Factors for Information Systems in Integrated Delivery Networks," First Consulting Group, March 1997.

Erica Drazen ScD, MS, is a vice president, First Consulting Group, Boston, Massachusetts.

Mark Kueber, MBA, is a manager, First Consulting Group, Detroit, Michigan.