As health care continues its rapid evolution toward value-based reimbursement, health system leaders face escalating pressure to reduce their cost structure and enhance their value propositions. For many, the solution is to join forces with another provider through a formal partnership agreement.
Last summer, the Camden Group began a series of articles on the new meaning of health care M&As — mergers and affiliations. Our colleagues looked at affiliation strategy and timing, the wide range of partnership and affiliation models and the factors that lead to partnership failure. But once a new partnership has cleared the planning hurdle and avoided early pitfalls, it still faces a big challenge. How do you make sure the combined system achieves the full benefits of operational integration?
Our experience with providers nationwide has indicated that successful health care partnerships rely on one indispensable tool — a business plan of operational efficiency. A detailed BPOE helps partnering organizations achieve the large-scale cost reductions necessary for value-based care and declining reimbursement.
The Business Plan of Operational Efficiency
A health system BPOE is a comprehensive, action-oriented system integration plan. It is designed by and for organizations that are forming a single corporate structure strategically and operationally. Simply defined, a BPOE is a road map for achieving the full benefits of an affiliation — operational efficiencies, cost savings and enhanced clinical value.
The most effective BPOEs are developed from the ground up. Departmental leaders identify detailed action items for aligning administrative, support, infrastructure and clinical functions. The key is to capitalize on the operational strengths of each organization and each department. A BPOE should:
- identify and quantify specific affiliation-related cost-saving opportunities within each department;
- identify barriers to achieving the efficiencies;
- identify the resource and time requirements necessary to implement the action plans;
- lay out a game plan for aligning specialty programs throughout the system;
- ensure accountability by specifying the individuals responsible for implementing the plan.
Ultimately, the goal is to develop a clear list of achievable and sustainable performance improvement initiatives that will enhance efficiency and reduce the underlying cost structure of the system.
When Should You Develop a BPOE?
Many partnering organizations craft a BPOE before any affiliation agreement is signed. This lets system leaders proactively identify savings opportunities after the transaction. A pre-transaction BPOE also might be required for regulatory approval by the state department of health, state attorney general, Federal Trade Commission or the Department of Justice.
An inherent limitation of a pre-transaction BPOE is that the prospective partners are unable to share competitively sensitive information before closing. This limits the specificity and detail of cost-saving opportunities and action plans. But provisional BPOEs developed before the transaction are directionally accurate; they can also ensure that the prospective partners are strategically and culturally compatible.
A BPOE can be developed or refined with specificity and clarity after the transaction, even if the merger or affiliation took place some time ago. Many systems that have merged or affiliated in recent years have yet to realize the full benefits of operational integration. If this is your situation, commission a multidisciplinary team to revisit previous efforts. The team should develop a BPOE that identifies redundant costs as well as new strategies for better integrating, standardizing and consolidating functions.
Four Reasons to Invest in a BPOE
Every affiliation, merger or acquisition is unique. Every health system's story — and how it came to exist in its current form, with its current culture — is unique. In the background are variations within the consumer and payer markets, differences in strategic and operational strengths and weaknesses, and cultural nuances. These factors drive the need for a customized integration plan for every new partnership. A well-designed BPOE offers four important benefits:
1. A clear leadership structure. The most contentious point in transactions often centers on a single question: Who will be in charge? While it is critical to clearly define the executive hierarchy for the system and its business units (e.g., hospital, physician group, post-acute), it is just as important to outline the cascading leadership structure throughout all departments within the system.
Effective BPOEs identify the leadership positions most appropriate for consolidation; they also establish centralized management for all administrative, support and infrastructure functions. This not only creates consistency in decision-making, it facilitates and streamlines integration efforts. Adopting matrix organizational and reporting structures also will foster standardization of system processes, while allowing for moderate variation when needed to account for distinct organizational variables. In addition, developing a centralized leadership structure as part of the BPOE will help middle managers align interdependent integration plans through multidisciplinary teams.
2. Clear ground-level integration plans. For most system integrations, success or failure occurs at the department level. Effective BPOEs use a ground-up planning process to develop detailed departmental action plans that identify specific opportunities, obstacles and accountabilities.
Department-level plans set clear goals that are consistent with the system's integrated vision. Objectives should include standardization of policies and procedures, optimization of staffing resources, alignment of contracted services, standardization of equipment and supplies, and cost reduction through joint purchasing. Departmental plans also should address specific resource requirements, interdependencies with other unit plans, implementation timelines and responsibilities, and specific cost-saving targets.
Departmental action plans provide a detailed implementation path that can be monitored and measured. This establishes a platform for consistent and timely communication about integration activities and milestones. Collectively, the departmental integration plans will lead to a more integrated and streamlined system.
3. Realistic and sustainable cost-saving targets. Carefully developed BPOEs can lead to annualized system cost savings between 4 and 7 percent. However, during the development of the departmental integration plans, all savings opportunities should be validated by both the responsible department and the financial team prior to inclusion in the plan.
BPOE action items should be incorporated into budgets and could require capital resource allocation for implementation, so it is critical to quantify and rigorously validate cost-reduction opportunities in administrative, support, infrastructure and clinical departments. Operational and financial leaders should assess each savings opportunity to ensure it is realistic, achievable and sustainable. This applies to both salary and non-salary savings opportunities.
Non-salary savings opportunities are often easier to implement culturally. Health systems can achieve significant early cost reductions by standardizing equipment and supplies and aligning contractual services. These savings are not only typically achievable in the short term, but are also sustainable.
Salary savings typically are realized over a longer period. While centralizing management leads to early savings, staffing integration and optimization can take time and resources to fully achieve.
4. A strong foundation for a system-oriented culture. Joining two disparate business entities within a single consolidated health system is inherently difficult, and effectively integrating long-standing legacy cultures is a critical hurdle that can cause a partnership to succeed or fail. Leaders must encourage a cultural transition that moves the organizational focus from business unit priorities to collective system goals and overall performance. A robust BPOE process can aid this cultural transition.
BPOE development uses a structured approach that includes a blend of objective quantitative analyses and key stakeholder engagement. Stakeholder meetings provide a thorough understanding of the existing cultures and organizational barriers to integration. This helps to engage key stakeholders in the process while grounding discussions and action plans in organizational realities. Ultimately, the BPOE process challenges the existing provider organizations individually and collectively to think beyond current practices and strive collaboratively to improve performance as a system.
Protection against Inaction
In a world that is becoming less hospital-centric, hospitals and health systems are trying to refashion themselves as care continuum organizations through strategic mergers and affiliations. But too often, good intentions fall by the wayside as inertia, politics and other obstacles prevent partnering organizations from realizing the opportunities of integration.
A well-designed business plan of operational efficiency guards against inertia by providing specific, achievable integration goals and action plans. Whether your organization is pursuing a new affiliation or is looking to maximize existing health system performance, a BPOE is an essential tool to achieving true system-level operational integration.
Brandon Klar, M.H.S.A., is a senior manager, and Gregory Shufelt, M.B.A., is a vice president at the Camden Group. They are based in the Boston and Chicago offices, respectively.