Many boards and executive teams have pursued an affiliation and undertaken the exhaustive due diligence process requisite in a merger, only to find that "softer" issues — cultural alignment, board members' compatibility and preferred business styles, physician willingness to combine clinically, or a lack of shared vision for the future — cause their newfound partnership to collapse. This article, part of a series by The Camden Group on the life cycle of a transaction, highlights the considerations executives must assess, acknowledge and address to ensure that the right deal doesn't fall apart for the wrong reasons. [Editor's note: Previous articles in this series were published in H&HN Daily on July 10, 2014, and Oct. 9, 2014.]
Evaluating Cultural Alignment
It's been said that culture eats strategy for lunch. Nowhere is this truer than in affiliations, mergers and acquisitions. When entire organizations are joining, their leaders must give thoughtful consideration to the cultural aspects of each organization. They must discuss the history and heritage of each organization, and evaluate the strength of their cultures. They also must factor in what type of organization each one is. It's likely easier to combine two organizations of similar mission and purpose than, for example, an academic medical center and a critical access hospital.
Cultural alignment matters not only at the board and executive team levels, but at all levels of employees within each entity. The past and current culture of clinical and nonclinical line staff, the presence of organized labor, the use of contracted services in one organization but not the other may require careful review to determine the influence of such subcultures in the proposed partnership and how any challenges may be mitigated.
Also, let's be honest: The personalities and egos of executives and other leaders in organizations looking to combine have scuttled more than a few hoped-for affiliations. These issues often come to the fore as decisions on structure, key position appointments and even titles enter the discussion. Boards are well-advised to address such issues early rather than leaving them until late in the process when it could be disruptive and damaging to the intended outcome.
Blending governing boards. All health care organizations have their preferred business styles, and so do the boards that oversee them. Blending the business styles of such boards can become particularly thorny. While one board might prefer robust agendas with ample time for lengthy deliberations, another may opt for consent agendas with a fast-paced, high-level review of topics. The balance of authority between the executive committee and the full board also can be a source of conflict. Bridging these differences and establishing a highly effective governing board must be an early priority for combining entities.
Joining the clinical engines. Hospitals and health systems have taken sometimes widely different approaches to establishing alignment with their medical staff members. In such cases, leaders need to reconcile the different approaches and develop a plan for the best combination of the physicians. Failure to do so will prevent the combining organizations from achieving their clinical, operational and marketplace potentials.
Developing a shared vision. Long before any deal is consummated, and even before an affiliation partner is selected from a list of potential candidates, leaders should have a thorough, candid and transparent discussion of the future entity's vision among the prospective parties.
Moreover, in this time of health care transition, each party to an affiliation must ensure that it can agree on the timing and risk tolerance associated with the shift to value-based care payment models. The risk is that a deal between two organizations addresses immediate and short-term needs and interests without giving full consideration to how the two entities will sustain their alignment two, five or 10 years into the future. Are the partner organizations heading in the same direction? Are the timing and preparedness to respond to market evolutions in sync?
An example of these factors playing out in affiliation discussions can be found in the failed merger between the Henry Ford Health System and Beaumont Health System. Henry Ford CEO Nancy Schlichting advised employees of her organization that the deal would not consummate, as quoted in Crain's Detroit Business (May 21, 2013): "This decision was made because it became apparent that two very different perspectives had emerged for the new organization between Henry Ford and Beaumont."
A similar perspective was shared by Beaumont CEO and president Gene Michalski, who wrote in a statement received by Crain's: "We have benefited greatly from our merger discussions and have great respect for our colleagues at Henry Ford. However, we found through our discussions that we are not aligned on how to achieve our vision for a model health system due to differences in our structures and business models."
Both of these statements were made by the prospective partners' leaders just seven months after the public declaration by Schlichting noting "the absolute ideal partner for us" was Beaumont (HealthLeaders Media, Nov. 6, 2012).
Additional factors noted in the media at the time included that the two health centers served very different patient populations — and had different physician compensation models — as well as the orientation of each system in its evolution from fee-for-service to fee-for-value payment models. In the end, the lack of a shared vision contributed significantly to the termination of merger discussions.
It should be noted that Beaumont continued to pursue other partnership affiliations. In September 2014, Beaumont announced the formation of a single health system by the affiliation of Oakwood Health Care Inc. and Botsford Health Care with the Beaumont Health System.
Another example illustrates the need to manage the communication associated with affiliation or merger discussions — both internally and outside the organizations. In the case of merger discussions between South Dakota-based Sanford Health and Fairview Health in Minnesota, three factors ultimately brought those negotiations to a close: community reaction, concerns voiced by state Attorney General Lori Swanson that Fairview would be controlled by an out-of-state company and an offer from a third player (University of Minnesota).
Following a public hearing organized by the attorney general, Sanford Health CEO Kelby K. Krabbenhoft announced that his organization would disengage from the partnership talks. According to Krabbenhoft in "Sanford Statement Regarding Merger Discussions with Fairview" (April 10, 2013): "Sanford Health has a philosophical policy of 'only going where we are invited,' and it seems as though the incredibly positive beginnings to discussions of the merger of Fairview Health and Sanford Health, has turned into a situation that finds us being unwelcome by some interested parties and key stakeholders of our proposed merger partner. It is inconceivable and unacceptable to me that we would ever propose a merger without the affirmation of these parties."
His statement captures why managing the message and considering community and political concerns, while tightly coordinating a thoughtful and careful due diligence process, are so important.
Covering All the Bases
Management of the transaction process, financial analysis and short-term market goals alone are insufficient to consummate and succeed in health care merger transactions. Much recent experience and coverage of failed merger discussions indicate that each party's leadership team needs to understand, plan for and manage considerable factors for the merger transaction to succeed. The key issues related to board alignment, cultural fit, understanding and addressing community anxiety, along with the need to integrate each organization under a new, shared vision, are critical to ensure that a merger doesn't become derailed for the wrong reason.
Stephen Gelineau, M.S., is a senior vice president and Graham Brown, M.P.H., is a vice president with The Camden Group, based in Boston and New York, respectively.