Monday, March 11, 2013

Merger fever today. Fever tomorrow.

Here we go again.  The cyclic fads of health care are leading hospital boards and CEOs back into the merger game.  Stand-alone institutions are being acquired or are acquiring.  Single hospitals are becoming systems.  This is all driven by a belief that the payment system will change in a manner that will reward the ability of providers to manage the continuum of care, with a form of payment in which the risks of meeting some form of capitated annual budget will fall away from insurers and more to providers.

It is time for prudent people to ask whether mergers are the best way to set up health care systems that manage care under a capitated budget.  You've heard the arguments for this, of course.  Let me be the devil's advocate and offer some contrary views.  I'm going to put them in extreme form to make the points. If you like, you can tone them down a bit, but the underlying issues still arise.

1)  The people who run hospitals do not have the competence to run health care systems.  There is little in the training of people who have become CEOs of single hospitals to run groups of hospitals and associated physician practices.  By the time they (or their boards) figure out what they don't know, they have wasted millions and reduced the overall effectiveness of the component organizations within the system.

2)  There is no such thing as a merger. Every merger is a take-over of one institution by another.  "Cost savings" from this chimera are chimeras.*  A merger inevitably makes evident cultural differences and produces jealousies and alienation.  The business benefits that are supposed to emerge are often lost in the crush of overly aggressive and overly passive aggressive participants. McKinsey reports: "Anyone who has researched merger success rates knows that roughly 70 percent of mergers fail."  And they weren't just talking about hospitals!

3)  A merger offers little that cannot be accomplished by a strategic alliance between the parties.  In an alliance, you can still have the benefits of coordinated care and payment risk sharing.  You avoid, though, the cultural problems noted in number 2, above.  Indeed, you might be more successful achieving your common goals because each of your own constituencies feels a loyal commitment to success.

*  I've been wanting to use that word twice in a single sentence for years!  A chimera is an organism, organ, or part consisting of two or more tissues of different genetic composition, produced as a result of organ transplant, grafting, or genetic engineering.  It  is also a fanciful mental illusion or fabrication.


Beverly H Rogers said...

From Facebook:

Like the spread of a new medical technology (think robotic surgery and proton beams), I fear it's too late.

Shihwe said...

Nice word play! And your point about strategic alliances was enlightening - i've heard the rationale for merging of "we'll have a shared medical record," "it will improve care coordination," etc...however, it makes sense to make those improvements anyway!!!

Bob Coffield said...

From Facebook:

Very good post Paul. Definitely seeing this fever from my perspective. Feels like round 2 of managed care reform when everyone acquired physician practices and other providers to build out the network only to find that it didn't work. We then started through the unwind.

David Joyce MD said...

Two things, managing risk and providing care is in itself a conflict of interest. It has been done before and not well. Why do you think we all went back to fee for service after the great capitation movement in the early 1990s.
Second leaders need to be more mission sensitive, that is there job. If merging is consistent with the organizational mission it may work. Merging 2 hospitals of same mission has at least a chance. Yet mission is rarely the motivation for mergers as more than likely there is no mission sensitivity in either party. Big problem. Maybe they should first learn something about leadership.

Barry Carol said...

I can see the hospitals’ rationale for getting more control over the continuum of care to both better manage risk and allocate global payments to providers. The potential for culture clash that you mentioned is an important issue that managements of merging organizations need to be mindful of before the fact. I also fear that more hospital concentration leads to more local and regional market power and higher prices per service, test, procedure or case even if overall care is better coordinated and more efficient.

As a society, we could wind up paying even more for healthcare unless we figure out a way to create countervailing power on the payment side or resort to more heavy handed government imposed price controls. The latter approach could lead to undesirable unintended consequences if we wind up overpaying for some procedures and underpaying for others.

The biggest challenge to the ACO concept, I think, is getting physician buy-in. They’re the people who drive virtually all healthcare spending through their decisions to admit patients to the hospital, order tests, prescribe drugs, consult with patients and perform procedures themselves. Doctors prize independence and autonomy. For most of them, the team player concept is not part of their DNA. Moreover, if the ACO care model and global budgets take hold, it will probably mean lower income for highly paid surgeons and specialists over the long term which is not likely to inspire either cooperation or enthusiasm. Primary care doctors, by contrast, would likely be net better off both financially and in terms of job satisfaction under the ACO model. At least that’s my perception.

Anonymous said...

I so wish your blog post had been written prior to 2005. Culture is a tremendous barrier and I'm working in the midst of failure now. The alienation, passive-aggression, finger-pointing, and out-and-out fraud are grinding down even the best.

Anonymous said...


I hate to say it, but I think the sooner that physicians' and hospitals' interests are aligned, even if by the employment model, the better. For too long the two have been at loggerheads, to the detriment of clinical care. Although in the past i have advocated a balance of power, I now think that the result is a stalemate instead of progress. Although the current generation of doctors may or may not buy in, future generations will have to, whether by the ACO model or another one.
And, I also don't think that control over the continuum of care is a bad thing, speaking clinically. Certainly less fragmentation of care should result and, if done right, should be more efficient and therefore cheaper.
The real danger is what Paul points out - that this won't be done right, through mismanagement, ignorance, or other operational mistakes. (We have certainly seen that in other industries and Paul lived through it himself with the merger of BI and Deaconess).
Quite frankly I don't know how to avoid that except through experience. Paul, what other mechanism would you suggest that will accomplish the clinical advantages but overcome the dangers you point out?


Solomon A Degefe said...

Coordination can possible be achieved without the mergers (takeovers), but how the pie (global payment) will be split remains a thorny issue.

Barry Carol said...

nonlocal –

I would like to see the ACO model be successful in making care more efficient, better coordinated and less wasteful but I worry about hospitals’ growing market power as they continue to consolidate. If hospitals want doctors do reduce waste and errors through such strategies as consistently using checklists, timeouts in the OR and generally adhering to evidence based guidelines and protocols, they will probably need to be employees of the hospital system as opposed to independent contractors with admitting privileges.

The Kaiser model seems to work very well in Northern CA but it has flopped in some other markets. I note that Kaiser is a payer as well as a provider. No one approach will work equally well everywhere. The upper Midwest seems to have numerous organizations that achieve good outcomes with conservative practice patterns including Mayo Clinic, Gundersen-Lutheran Health System, Marshfield Clinic and Essentia Health. We know it can be done but there are huge national and regional variations in practice patterns. I’m even told that there can be significant practice pattern variations within the same hospital. Maybe we will have to wait for much of the current older generation of doctors to retire and the newer generation more receptive to the collaborative approach and adhering to evidence based guidelines and protocols to replace them.

I’m also quite certain that the transition from the fee for service payment model to global payments and provider risk sharing will be a difficult one but hopefully not impossible.

Bogdan said...

One theoretically can bring multiple former organizations in coordination using Enterprise Architecture (not IT) methodologies.
However, the bigger the organization, the slower the change and our times require faster and faster rates of it.
I would vote for collaboration versus mergers, as a solution better aligned with the governance principle of subsidiarity - empowering the units and centralizing a minimum.

Anonymous said...

Great blog post.

I would disagree with the comment "that being a team player is not in a Doctors DNA". I believe that being a team player is in Most doctors DNA There will alway be outliers,
what I believe is happening in todays health care climate is that administrators are essentially pitted against the physicians, no to mention 3 rd party payers. It appears they are competing for the same pool of money. The admin has the upper hand in policy management and hospital control. The physicians have control over the patients and where the health care dollars are spent. Until the two sides learn to play in the sand box together there will never be a truce.
Although I have never worked for Mayo clinic it appears they have a good model. It was built by physicians and mainly run by physicians. It appears to be growing and doing quite well while providing a excellent level of care. Maybe that is a model that should be reproduced? Not the banking model of todays hospitals.

biorbyt said...

This is an important note and statistic to remember:

'A famous Bain & Co research report issued in 2004 said the 70% of mergers fail to create shareholder value'.

Thanks for the informative article Paul.

Anonymous said...

Speaking of strategic alliances, is this what you had in mind?


Thomas Pane said...

This is a key post!

As yet, we have not figured out how to duplicate the Kaiser or Mayo/Cleveland Clinic models on a larger scale, or in the case of Kaiser, outside its core geography.

As you have noted previously, managing risk as an insurance company is a new and non-core skill of most hospital managements.

Also, management may need to get more involved in clinical decision-making than ever before depending on how well they can encourage the preferred clinical protocols.

Considering your point #1, I question whether it is easier to teach management to top clinicians or to teach medicine to top managers?

Paul Levy said...

How about teaching both to listen respectfully to the other?

Thomas Pane said...

That works too.

Also there are many examples of companies being well-led by incoming managers who were not experts in their new industries.

Having right people working together with the right support is so important as healthcare moves through this era.