Mohammed Ahmed, MD, MBA, FACOG, Chief Operating Officer and Chief Medical Officer, Baystate Health Eastern Region - Speaker at the marcus evans National Healthcare CMO Summit 2016 held in Las Vegas, NV

1. M.S. Ahmed, MD, MBA, FACOG
Chief Operating Officer/ Chief Medical
Officer- Baystate Health Eastern Region
National Healthcare CMO Summit- March 7, 2016

2. Choluteca Bridge (Honduras)

3. Choluteca Bridge- before
Hurricane Mitch

4. Objectives
 Review background on merger and
acquisition (M&A) issues
 Review alignment models and basic
strategies
 Review “capabilities” approach to M&A
decisions
 Share case study
 Review success factors

5. A Changing Landscape
 Significant trend in the past decade-
Number of deals in 2012 topped 100,
compared to ~50 in 2009
 Decreased reimbursements  increased margin
pressure (government and commercial payors)
 Increased competition amongst providers to retain
market share
 Volume to Value plans are not easily transferrable
to current Fee for Service system- New capabilities
may be needed

6. A Changing Landscape (cont.)
 ACA/ State level changes may be challenges for
hospitals that have challenged operating margins
 Mix of larger systems looking to expand and
smaller facilities looking to “partner”
 2012 survey of hospitals showed that 87% were
considering alignment in their strategic plans 1
1 Media Intelligence, M&A: Hospitals Take Hold, Jan 2012

7. M&A- “Ideal” Outcomes
 Assistance with alignment/ employment strategies
with physicians
 Achieve “economies of scale”
 Potential for “new service lines” in different
markets
 Increasing revenue opportunity
 Access to capital – helps fund increasing IT
expenses and infrastructure needs
 Draw on partner’s unique clinical or managerial
strengths

8. M&A results…
 “Strategy&” survey of 219 hospital/ health
system M&A deals (1998-2008)-
Only 41% outperformed market peer group
(up to 2 yrs. after deal)
18% went into negative margins 2 yrs. after
deal
Unaffected by change in number of beds or
geographic proximity

9. Types of Alignment
 Affiliation-
 Flexible (strong vs. weak), Used to increase
“footprint,” minimal change in governance, may
improve economy of scale
 Joint Venture-
 Profit/ risk sharing element, can be used to
create a “new” limited activity, shared
governance
 Joint Operating Agreement-
 Virtual merger, new overarching board created
but independent boards remain, larger than JV
beyond one activity

10. Types of Alignment
 Merger-
 Absorb each other’s debts/ assets, leadership
can be combined or from outside, increases
market share
 Acquisition-
 Purchase of one entity by another, may
function semi-independently or transform to
match buying entity

11. Common Operating Model
Strategies
 Scaled Portfolio (ex. LifePoint Hospitals)-
 Portfolio of care delivery assets across broad
geographic footprint
 Shared Capabilities- EMR, revenue cycle, etc.
 Shared clinical best practices
 Geographic Cluster (ex. Steward Health Care)-
 Concentrate care delivery assets in contiguous
geography close to patients
 Value creation through enhanced market power
and physician relationships within network

12. Common Models (cont.)
 Hub and Spoke (Ex. Oschner Clinic)-
 Establish “feeder” system for tertiary/
quaternary care facility
 Benefit by maximizing utilization for all system
assets
 Learning curve benefits at hub (i.e. complex
procedures)
 Innovation systems (Ex. Cleveland Clinic)
 Deliver distinctive product or service
 Co-branding by codifying intellectual capital

13. Common Models (cont.)
 Location- based systems-
 Most common model – typically rural
community
 Channel demand from captive local population
 Need more cost-effective ways to deliver care
 May need to be part of other models when
market is outgrown

14. Case Study
 Geisinger Health System and Hershey
Medical Center(1997-1999)2
Penn State Geisinger Health System
Difficulty with understanding cultural
differences between both organizations
“Business as usual” was persistent leading to
separate and competing services- unable to
realize economy of scale
Leaders unable to gain buy-in from middle
managers and physicians
2 Sidorov J. Case Study of a Failed Merger of Hospital Systems.
Managed Care: Nov 2003

15. Case Study (cont.)
Theoretical cost savings failed to occur
Consolidation and cost cutting failed to deal
with inevitable “winners/losers”
Competitive advocacy emerged from any
attempts to make changes (academic vs.
non-academic)
Community physicians did not see the
advantage of the newly combined health plan
and sided with local community hospitals
Growing budget deficit heightened
consolidation efforts- “last straw” was
planned consolidation of microbiology away
from HMC campus

16. Case Study (cont.)
 Lessons Learned
Superior leadership needed for health system
mergers involving competing, tertiary care
programs
Cultural differences are underestimated
Health system mergers do not automatically
result in economies of scale (organizational
complexity can create further stress)
Not all stakeholders in the surrounding
community will welcome the merger (public
mistrust, increased regulatory scrutiny)

17. Focus on “Capabilities”
 Coherence is achieved by seamless alignment of
 Capabilities System (how value proposition is
delivered to customers)
 Market Position (distinctive way of serving
stakeholders)
 Lineup of products and services (clinical
offerings and targeted patient segments)
 Goes beyond a focus on merging assets (financial
and operational metric focused)

18. Capabilities (cont.)
 Capability “lens” permits organization to have a
clearer understanding of how capabilities can be
applied effectively in a given context
 Aims to prevent “unlike” mergers that can destroy
uniquely acquired capabilities
 End-state business model drives integration as
opposed to a focus on synergies

19. Strategies for success
 Facilitate a mutual understanding of the
transaction’s value- leadership teams and boards
must be ready
 Understand the nature of the operating model and
stay true to the choice
 When potentially facing acquisition, try to aim for
discussion before developing a “burning platform”
for change
 Differentiate between acquisition and merger –
clarity helps in planning pro-actively as opposed to
mixed messages for stakeholders

20. Success (cont.)
 Evolve capabilities deliberately, not
opportunistically
 Clear understanding of your own organization’s
capabilities
 Select markets that will thrive within your
capability system as opposed to pursuing
“attractive” targets

21. Success (cont.)
 When pursuing integration, do not destroy the
capabilities system at the core of long-term value
creation
 Acknowledge the winners and losers needed for
the ultimate benefit of the hospital
 Use appropriate governance model – risk of
separate governance bodies is risk of weakening
strategy

22. Success (cont.)
 Over-communicate to all stakeholders throughout
the process
 Do not assume that all physicians will be on board
with integration/ Understand the risks with moving
forward
 Take time to perform due diligence prior to signing
LOI
 ACKNOWLEDGE CULTURE!!
 ACKNOWLEDGE CULTURE!!
 ACKNOWLEDGE CULTURE!!

23. Personal learning…
 Baystate Health acquisition of Wing
Memorial Hospital from Umass Medical
Center

25. References
 Saxena S et al. Succeeding hospital and Health System M&A;
Why so many have failed, and how to succeed in the future.
Strategy&: 2013
 Yanci J et al. What hospital executives should be considering
in hospital mergers and acquisitions. DHG Healthcare: Winter
2013
 Myers C and Lineen J. Hospital consolidation outlook-
Surviving in a tough economy. Healthcare Financial
Management: Nov 2009
 Stybel L. 5 reasons to consider an acquisition over a merger.
Becker’s Hospital Review: Oct 2010
 Christenson C et al. The big idea: The new M&A playbook.
Harvard Business Review: March 2011