Hospitals may take financial hit following a merger

Healthcare costs rising
Mergers may not immediately pay off for hospital margins, according to HFMA and Deloitte. (Getty/jackaldu)

Hospitals may face a financial downturn immediately after a merger, according to a new analysis. 

report from Deloitte and the Healthcare Financial Management Association found that finances at acquired hospitals generally suffer in the two years after the merger. The organizations looked at financial data on 750 hospitals involved in merger and acquisition deals between 2004 and 2015. 

In the two years following a merger, acquired hospitals often saw a decrease in operating expenses but also saw a decrease in operating revenue, leading to a drop in operating margins, according to the report. 

Despite that finding, the downturns leveled off after two years for the most part, the analysis found. 

"That would imply that things were turning around and some of the efficiencies were beginning to take hold after that first lump of investments had been made," Chad Mulvany, director of healthcare finance policy, strategy and development, said in an announcement

RELATED: A look back at hospital mergers and acquisitions in 2016 

Healthcare "merger mania" continued at a brisk pace through the first half of this year, particularly among larger organizations. The first six months of 2017 included six transactions between organizations with revenues in the $1 billion range, and the second quarter of this year saw a 15% increase in M&A activity compared with the second quarter of 2016. 

Deloitte and HFMA's report also offered some lessons for hospital executives from the most successful mergers. Two key steps can make for a more effective combined operating model, according to the report: 

  1. Create a "strategic rationale" for the merger. Define what the health system needs from the acquired entity that it cannot do on its own and plan for values alignment when brining a new organization on board. Be aware of factors that may impact value creation.
  2. Test values drivers for the merger. Create a document that includes a list of activities required for the merger in the early stages. Through this process, executives can identify potential relationships that my need further evaluation, and can drive values alignment through the process. 

RELATED: The downside of hospital mergers—Bigger costs to patients 

Acquired hospitals were more likely to perform well after a merger when leaders had explicit goals, both financial and nonfinancial, and worked within a clear and strong strategic vision, according to the report. 

While increasing capital and market share are two primary drivers for M&A activity, mergers also increased care efficiency and improved some quality measures, the report found. Surgical patients at acquired hospitals were more likely to receive beta blockers than they were prior to the merger, for example, and readmission rates at some acquired hospitals decreased for joint replacements.