Preserving the Quality of Care amidst Surging Hospital M&A


Over the past 18 months, the healthcare industry has experienced a tremendous uptick in the volume of hospital mergers and acquisitions. Since January, over 60 transactions have been announced, a 65% increase year over year. While the barrage of activity can be attributed to a number of structural changes stemming from healthcare reform (e.g. emergence of ACOs, reimbursement cuts, reporting requirements etc.), it is clear that non-profit hospitals under mounting financial pressure have become prime acquisition targets for for-profit hospitals and private equity investors.  Vanguard Health’s purchase of Detroit Medical Center and Steward Health’s purchase of Charitas Chrisiti in 2010 marked the beginning of a wave of acquisitions that will likely roll on through 2011 and into 2012.


We believe the hospital industry will continue to consolidate and undergo tremendous structural and organizational changes in the decade ahead. Perhaps Fortis offers a few key principals to emulate in order to ensure the preservation of high quality care. Nearly 80% of U.S. acute-care hospitals are non-profits and a significant portion of them failed to break-even in 2010. Amidst the financial crisis in 2008 and the subsequent sputtering of the U.S. economy, non-profit hospitals have been required to delay critical investments that could meaningfully enhance efficiency and profitability. Concurrently, revenue growth has been challenged by with both price and volume trends. In addition to cuts in Medicaid and Medicare, many Americans are electing to cut back on medical services and are forgoing elective surgeries, the most lucrative procedures for hospitals. With declining revenues and scarce resources for investment in modernized technologies, non-profit hospitals are seeking partnerships with competitors or other investors with much deeper pockets.Source: Ponder & Co. and Irving Levin Associates, Inc.

So what are the implications of this flurry of recent hospital M&A activity for you and me?

  • How will the quality of our care change, if at all?
  • Can the culture and mission of a non-profit hospital be integrated with that of a for-profit, often publically traded organization, and how can it affect coordination and communication across the continuum of care?
  • Let’s not forget about the reaction of the individuals providing us care. Can these mergers agitate the physicians and result in significant turnover?

While the rationale for many of these transactions makes sense, in theory, integration can be the most critical and challenging component of a transaction. A botched integration plan can have tremendous consequences on the quality of care.

Fortis Healthcare – A Mini Case Study in Consolidation

Although there is not a standard playbook that each hospital can follow, one hospital system has successfully architected an aggressive M&A strategy and may be a model other hospital systems can follow. Fortis Healthcare, one of India’s largest healthcare hospital systems, has experienced tremendous growth since its founding in 2001. Fortis now has 54 hospitals within its system, one-third of which were acquired. Over the past nine years, Fortis has grown its patient capacity and revenue at CAGRs of 40% and 70%, respectively, and has also enjoyed significant margin expansion. What is most remarkable is that this explosive growth has not come at the expense of quality. Fortis continues to deliver clinical outcomes that rival those of KaiserMass General and Mount Sinai.


Mortality (%)

Beth Israel Deaconess Medical Center, MA


Fortis Health Care, India


Brigham and Women’s Hospital, MA


Massachusetts General Hospital MA


Kaiser Foundation Hospital, CA


State of New York aggregate, NY


Mount Sinai Medical Center, FL


Source: Data excerpted from Regina Herzlinger and Pushwaz Virk, MD, “Fortis Healthcare (A),” HBS No 9-308-030 (Boston: Harvard Business School Publishing, 2008), p. 13

  • Shared Learnings. The target company should not always be forced into the acquirer’s model. The target company may possess superior “best-practices”, and the acquirer must be willing to accept and implement them into the combined organization.
  • Patient Care Delivery. Be mindful of all patient touch points from admittance to discharge. Develop support systems that will guarantee a repeatable, high-end service that exceeds the patient’s expectations.
  • Retain Top Talent. The acquirer should be prepared for cultural differences and implement the proper incentives and leadership development programs to retain the top talent. Effective leadership within a hospital system requires a delicate mix of senior clinicians and management professionals.
  • Efficient Systems. Measure and quantify clinical and non-clinical processes, identify areas of improvement and eliminate variability. Develop standardized processes that are both replicable and scalable.

Let us know what you think. Have a great week.

Jonathan Hill
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