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Healthcare mergers cause hospital finances to dip for up to 2 years, report says

Though the Deloitte and HFMA report says things settle down after that initial "breaking in" period.

Jeff Lagasse, Associate Editor

Despite the advantages of mergers and acquisitions, new research shows that hospital finances may take a dip immediately following a deal.

The analysis from Deloitte and the Healthcare Financial Management Association found that finances may struggle for up to two years following a hospital's acquisition. This is based on financial data from 750 hospitals that merged or were acquired by larger health systems between 2004 and 2015.

[Also: Running list: 2017 health IT mergers and acquisitions ]

Operating expenses tended to dip within that two-year window, but so did operating revenue. Overall, this led to thinner margins -- although things settled down after that initial "breaking in" period.

The implication is that it often takes time for those economy-of-scale efficiencies to take root after that initial investment.

[Also: 2017 healthcare mergers, acquisition activity set to outpace 2016, Kaufman Hall finds]

Luckily for the hospitals being acquired, many of these mergers proved to be ultimately successful, and this has resulted in some strategies for creating an effective combined operating model, the report said.

First, the acquiring health system should define what it needs from the acquired hospital that it can't already do, and make sure the organizations' values are aligned. The analysis dubbed this "strategic rationale."

Secondly, Deloitte and HFMA suggest creating a document that explicitly states what the merger needs to be successful, particularly in the early stages, as a means of driving value alignment.

The basis behind those suggestions is data indicating that a newly-acquired hospital generally performs better when the financial goals are starkly laid out on a cohesive strategic vision.

The report comes as healthcare mergers and acquisitions continue to rise. According to Kaufman, Hall and Associates, there were six transactions during the first six months of this year featuring organizations with roughly $1 billion in profits, with a 15 percent rise in M&A activity during the second quarter as compared to the second quarter of 2016.

Deloitte and HFMA found that, besides increased capital and market share, there were other advantages to consolidation -- such as readmission rates for joint replacements, which were lower at acquired hospitals.

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com

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