Featured Article M&A: A simple solution for the hospital sector?

The hospital sector is in the midst of a surge in merger-and-acquisition (M&A) activity. The average annual number of deals in 2011-2015 was 96, up from 56 for 2002-2010.

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The hospital sector is in the midst of a surge in merger-and-acquisition (M&A) activity. The average annual number of deals in 2011-2015 was 96, up from 56 for 2002-2010.

The hospital sector is in the midst of a surge in merger-and-acquisition (M&A) activity. The average annual number of deals in 2011-2015 was 96, up from 56 for 2002-2010.

View the Data: Greatest challenges in hospitals surrounding M&AOpens in new window  

Surprisingly, though, in the EIU survey of more than 300 hospital executives, just 12% indicated that in the next three years their organization expected to engage in M&A–or even in joint venture–deals. Those planning to become involved in direct mergers with–or takeovers of–other hospitals would be just a subset of this group, and therefore smaller still. What is going on?

The most likely explanation for survey respondents’ views is that M&A is not delivering on the promise of security through size. Dr. Kip Webb, North American Healthcare Provider Portfolio Lead at Accenture, notes that “Over the past few years, we have seen a flurry of M&A activity in healthcare. There is a great opportunity for healthcare providers to use these new alliances to achieve the so-called ‘Triple Aim’: better care for individuals, better health for populations and lower costs per capita.” However, he adds, recent M&A activities “haven’t always led to lowering the costs of healthcare or improvements in care. M&A can cover a multitude of sins.”

Instead of bending the cost curve or leading to better care, the inherent difficulties of mergers and acquisitions are becoming a major headache for hospitals. Forty-seven percent of respondents say managing M&As is a “very” or “critical issue” for their institutions.

As the above chart shows, the leading challenges surrounding M&A are optimizing talent needs, minimizing operating costs, and integrating legacy systems and structures. These problems, however, overlap significantly with the key difficulties facing US hospitals today, namely, talent management; the need for new, more integrated business models amid rising costs; and slow adoption of new IT. In other words, those who have engaged in M&A have found their most pressing challenges exacerbated rather than eased.

Is the wave of M&A likely to stop any time soon? Probably not. Clayton Christensen, Kim B. Clark Professor of Business Administration, Harvard Business School, says that M&A activity is consistent with an industry wrestling with substantial disruption, as the hospital sector certainly is. In such circumstances, “Little by little, the high end of the market starts to shrink and companies merge to buy the customers of the company they are acquiring.”

M&As will not solve the hospital sector’s underlying problems. Doing so will require hard work on business model change, talent strategy and the application of data-based technologies.

Footnotes

Disclaimer

This article was written by The Economist Intelligence Unit and sponsored by Prudential. For more information call Prudential Retirement® at 800-353-2847 or visit Healthcare.PrudentialRetirement.com.

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