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Capturing synergies in health system mergers and acquisitions

Hospitals could boost margins by addressing key value drivers.

Overview

US hospitals have been consolidating with enthusiasm. Bigger, however, does not automatically equate to better.

US hospitals have been consolidating with enthusiasm, but the average acquiring provider left nearly $25 million per target on the table in 2015—potential cost and revenue synergies that could have been invested to improve access and the total cost of care. If, however, they focused on key M&A value drivers hospitals could boost margins by as much as 22 percent per target.

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Key Findings

Health system M&A activity has been falling short of maximum value potential for some years.

Health system M&A activity has been falling short of maximum value potential for some years. Even some of the biggest recent deals have lost value post close.

  • Overall, acquiring health systems may be missing out on $4-$19 million in annual cost savings per hospital and losing revenue uplift of $2.5-$6 million per hospital per year.

  • When a $12.5 billion health system acquired another valued at more than $1 billion the combined entity’s operating margin declined from 4 percent to break even over four years, while supply expenses rose.

  • When a $16.5 billion health system acquired another valued at more than $4 billion, the combined entity’s margins declined from 7 percent to 5 percent over four years while labor expenses rose.

Recommendations

To capture more synergies health systems should:

  • Prioritize the value drivers that will enable improved performance and profitability

  • Reconfigure their operating models to fully support efficient and effective care delivery

  • Develop a post-close integration plan that also manages risk


For larger systems, five areas of value are especially critical:

Care management

Care management

Corporate services

Corporate services

Revenue cycle management

Revenue cycle management

Population health management

Population health management

Physician enterprise innovation

Physician enterprise innovation


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