Health system M&A: Value generation in a new era

Providers are experiencing massive transformation in the US healthcare economy. Many are turning to consolidation to navigate challenges like profit compression, talent shortages, new payer and customer dynamics and more.

But the traditional M&A playbook no longer applies.

With synergy realization so important to navigating disruption, providers need a new M&A mindset. They can find it in comparable industries that that are capturing more value post-merger by approaching M&A from a holistic perspective. This means abandoning the belief that healthcare is so unique that best practices from outside rarely apply.

Accelerating to nowhere

While health systems have embraced M&A in record numbers (see Figure 1), the results have largely been underwhelming.

• Impact on customers. Customers are losing in their experiences and wallets. Accenture research shows the average Net Promoter Score® (NPS®)¹ for providers remains just 28 out of 100, and that one in five customers switches providers because they do not receive good value for money.²
• Impact on pricing. The average price of a hospital stay rose between 11 and 54 percent in the years following mergers. Cost structures have not improved either. There has been a surprising 18 percent post-merger jump in supply chain costs, a functional area that is typically low-hanging fruit for cost savings.
• Impact on culture. Providers are missing the opportunity to use post-merger integration as a catalytic moment to create a culture of performance and excellence in the new organization.

Lessons from the outside

These disappointing outcomes are a stark contrast from what companies in other asset-heavy, service-oriented industries—such as telecommunications, financial services and hospitality—experience after consolidation (see Figure 2).

These industries have experienced M&A drivers and characteristics similar to what providers face today. Telecom had two decades of transactions driven by the need for vast networks, which fueled innovation and productivity. Financial services consolidated to pool resources to pursue high-risk product lines. More recently, hospitality players combined forces to compete with customer experience dynamos eating up market share.

The new value mindset

What do these industries do in M&A that providers should be doing too, to realize value? In addition to aligning the operating model, they approach M&A with a value mindset. Facing scrutiny from shareholders, analysts, regulators—and their own performance-focused boards—these newly-formed companies have no choice but to double-down on value.

This focus is alien to most providers. However, they can begin to infuse a value mindset into their M&A strategies by applying three keys to success from these other industries:

1. Win the customer. Before transaction close, merging entities in other industries often appoint a customer “maestro” to anticipate people’s concerns and orchestrate the new customer dynamic. In healthcare, M&A is a way for providers to address the customer access challenges that have plagued the industry and completely redefine customer experiences.
2. Embrace a zero base. Starting with a defined, aligned operating model, other industry acquirers capture cost synergies from a zero base to realize value from Day One (see Figure 3). They target big bets like third-party spend, IT and supply chain costs. Again, Wall Street expects nothing less than bold cost-savings ambition. No “sacred cows” allowed.
3. Rally around culture. Companies in other industries leverage integration more intentionally as an opportunity to multiply value by taking the best aspects of the two cultures and setting a new standard that elevates the combined culture. They understand culture as a source of competitive advantage that is infused in and reflective of all aspects of the business on a day-to-day basis.