Post-Merger Analysis of Healthcare Industry - Essay Example

?Healthcare Industry: Post merger analysis Introduction Due to uncertain economic conditions and unfavourable regulatory environment in prevailing inthe healthcare industry today, the organizations have few choices but to opt for merger and acquisition to survive in business. Gamble (2012) stated “As hospitals continue to merge and affiliate, it presents a real concern whether independent hospitals can sustain their model and survive. Hospitals are merging or being bought and sold at a rate that continues to grow, driven by declining reimbursement, tight credit and the pursuit for more leverage with payors.” Under this scenario, it is important to understand the key financial drivers that cause health care organizations to merge, evaluate their financial performance and review the determinants of financial results of the merged entities with a view to improve the financial planning process in the post-merger phase. Consolidation in this industry is essential for its sustainable growth in the long run and to meet the emerging challenges in the industry in terms of huge investment and infrastructural facilities needed to cope up with the increased demand in the society for healthcare services. Evaluation of financial performance Study by Healy, Palepu & Ruback (1990) found that “The results indicate that merged firms have significant improvements in asset productivity relative to their industries after the merger, leading to higher post-merger operating cash flow returns.” The criteria for evaluating financial performance of the organizations post-merger are multifarious depending upon the type of organization and its objectives. However, in a typical company running on profit basis, return on investment post merger is an important criterion for evaluation of financial performance from the shareholders’ point of view. There are mergers also taking place between for profit and not for profit organizations. Financial and operating ratios as performance measures are adopted by the organizations for industry comparison as well as comparison with the historical performance. Of which, the following are the important ratios used for measuring performance in term of profitability. Return on assets : Net Income / Total Assets Return on equity : Net Income / Shareholders’ equity Return on capital employed : Earnings Before Interest and Tax (EBIT)/(Equity + Debt) Similarly, Earnings per Share (EPS), liquidity ratios, Cash flow ratios can be calculated for analysis and comparison. Budgetary analysis as a tool for evaluation will be effective as it reveals variances. This will enable the management to compare actual with the budgeted performance for exploring the reasons for variances and take corrective actions wherever necessary. Kumar (2012) stated “Between 1985 and 2007, 51 large companies in the industry consolidated into only 10 organizations… they are effective methods of cutting costs.” Reduction in number of employees post merger, legal expenses, management cost and marketing costs are some of the areas where cost cutting is possible in the merged entity. Determinants of financial results post-merger It is important to determine whether or not the merger generated favourable financial results for the organization post merger. Section of Antitrust Law (2003, p.7-8) states “The size of the geographic will determine the number of competitors in the market, their market shares, and the likelihood of anticompetitive effects. Geographic definition issues have determined the outcome of the majority of hospital merger decisions.” Apart from improvements in operational performance due to synergies created in merger and environmental factors, it is important to note that the method of accounting, for example, purchase or acquisition method adopted for merger or type of financing (equity or debt) the merger has significant impact on the results of the merged organization from investment angle. Therefore, instead of profitability ratios, adopting pretax cash flows and increase or decrease thereof, after taking into account the assets discarded and added after merger, for analysis would be appropriate for making comparisons with the premerger period. Key financial drivers that cause health care organizations to merge According to Norbeck (2012) “health care costs accounted for 17.9 percent of the nation’s GDP in 2010, or almost $2.6 trillion” and it is increasing year after year. Therefore, the growth of the industry over years offers good scope for huge investments in the country. “Profit, efficiency and effectiveness are among the primary factors driving the transforming changes” (Knaus & King). Synergy created in terms of size, volume and flexibility in the merged entity are considered the key factors for merger. Growing insurance industry and breathtaking technological developments that are taking place in the healthcare industry have necessitated huge investments in machineries and equipments to derive benefits associated with size and volumes. Efficient use of skilled labour and expert medical professionals in merged entity is another reason which prompts mergers. Technological developments in the areas of information and communication resulted in convergence of technology, and the expectations of the customers have increased phenomenally over years. Brimmer (2013) quoted Michael Allen, CFO of Winona Health in Winona, Minn as saying “You have to be just as good or better than everyone else and if you aren’t, you could find yourself in trouble. Our competitors have a lot of resources and that could be one of our biggest challenges.” These developments along with changes in environmental factors make the companies to reorient their strategies for sustainable growth and development. Constraints in capital formation to meet these expectations force the companies in the healthcare industry to embrace merger options. Key factors that drive the financial planning process in the post-merger phase Apart from the synergies created in the process of merger, changes in the external environment such as increase in population in the area, economic development of the people residing in the area, competition in the industry are the other important factors that form the basis for the financial planning in the post-merger phase for improved financial performance of merged entity. “The four segments that make a healthcare financial system work are (1) the original records (2) the information system (3) the accounting system (4) and the reporting system… The healthcare manager needs to know that these separate elements exist and they work together for an end results” (Baker & Baker 2011, p. 11) The financial planning process is of high value to a health care organization and the key components of the financial plan should be synchronised well for achieving the objectives of the organization. The planning process covers areas such as budgeting for revenue and expenses, reporting system in the organization, standardization, segregation of fixed and variable costs for controlling purposes, variance analysis for plugging the loopholes in the system, control over inventory, procedure for maintenance of machineries and equipments, orientation and training to staff and review of budget. Zweig (1995 observed “Good postmerger integration rarely makes a really bad deal work, but bad execution almost always wrecks one that might have had a shot.”  The impact of the factors both internal and external on financial planning process needs to be carefully assessed in the light of developments in the field of information and technology relating to the industry. These factors should be properly factored in the planning process for making the growth sustainable in the long run. “We contend that current healthcare applications are being used in a static manner; futuristic applications will need to be dynamic in nature and would call for the transfer of context-based healthcare information.” (Dwivedi et al., 2002) Mergers in some cases have failed simply because of poor assessments relating to the merger plan, differences in corporate cultures of the companies merged, lack of synergy between the entities proposed to merge, high valuations and lack of attention by the merged entity in unification process. This leads to inefficiency in administration and poor internal control procedures. Integrating the workforce, systems and culture of the two different companies in the merged company is very important for effective functioning. Integration is a painful process as it involves firing of employees, re-designation of the employees of the erstwhile companies and establishment of new standards with the acceptance of the employees. Acceptance of the employees to changes is very important for ensuring their cooperation in achieving the objectives of the company Financial stability of the health care industry in the future (5 Years) Economic growth of the country has stabilized considerably due to the effects of stimulus packages on economic development in the USA. This growth is expected to continue in the near future, say for 5 or 6 years to come. When income of the individuals rise, their first priority is to take care of their health and make arrangements for long postponed treatment or surgeries. The insurance coverage to people is expected to increase over years in tune with the government’s policy. Medical tourism in the developed countries have increased in the recent years and influx of patients from other countries for treatment is on rise during the recent years due to advanced treatment facilities available in the country. Research and developments in medicine and equipments in the recent years have paved way for reduction in cost of treatment and increased patient satisfaction. This is expected to continue due to economic growth that is expected to continue in the future. However, the mergers in healthcare industry will be successful only when the organization acts with corporate social responsibility (CSR) with service as its focus for a sustainable growth and development in the long run. According to Demers (2013) “Mergers cannot facilitate integrated care unless they are desired and unless they represent for all of the actors involved an appropriate way to deal with service organisation problems.” Conclusion The healthcare industry has become competitive in the recent years in the country. Scaling up of the operations in this industry is essential for sustainable growth and development in the long run. Consequently, acquisitions and mergers in healthcare industry are on rise to cope up with this developing need. It is in this backdrop evaluation of performance of the companies post merger assumes significance. The understanding of the determinants of financial results and key financial drivers that cause health care organizations to merge is very important for identifying the key factors that are important in the financial planning process in post-merger phase. Due to sustained economic growth foreseen in the country, the growth of the industry is fairly assured in the future for at least 5 to 6 years in the economic cycle. References Baker, J. J. & Baker, R. W. (2011). Health Care Finance: Basic Tools for Nonfinancial Managers. (3rd Ed.) Sadbury, MA: Jones and Bartlett Publishers. Brimmer (2013). To merge or not to merge. Healthcare Finance News, 17 June 2013. Retrieved from http://www.healthcarefinancenews.com/news/merge-or-not-merge?page=0 Demers, L. (2013) Mergers and integrated care: the Quebec experience. International Journal of Integrated Care, 22 February 2013. Vol. 13, Issue 1. Dwivedi, A., Bali, R.K., James, A.E., Naguib, R. N. G, & Johnston, D. (2012) Merger of knowledge management and information technology in healthcare: opportunities and challenges. Electrical and Computer Engineering. vol.2. pp.1194-1199. doi: 10.1109/CCECE.2002.1013118 Gamble, M. (2013) 12 Key Issues Hospitals Will Face in 2013. 22 October 2012. Becker’s Hospital Review. Retrieved from http://www.beckershospitalreview.com/hospital-management-administration/12-key-issues-hospitals-will-face-in-2013.html Healy, P. M. Palepu, K. G. & Ruback, R. S. (1990) Does Corporate Performance Improve after Mergers? Working Paper 3149-90. ALFRED P. SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY. Knaus, M. A. & King, C. R. (n.d.). HOW HEALTH CARE LEADERS CAN EFFECTIVELY LEAD STAFF IN TRANSFORMING HEALTH CARE. K & K Publishing. Winston-Salem, NC Retrieved from http://www.mikebeitler.com/freestuff/articles/transforming-health-care--knaus.pdf Kumar, B. R. (2012). Mega Mergers and Acquisitions: Case Studies from Key Industries. Hampshire: Palgrave Macmillan. Norbeck, T. B. (2012). Drivers of Health Care Costs A Physicians Foundation White Paper. 11 January 2012. The Physicians Foundation. Retrieved from http://www.physiciansfoundation.org/uploads/default/Drivers_of_Health_Care_Costs_-_November_2012.pdf Section of Antitrust Law (2003). Health Care Mergers and Acquisitions Handbook. Chicago: American Bar Association. Zweig, P.L. (1995). The case against mergers. Business Week. 29 October 1995. Retrieved from http://www.businessweek.com/stories/1995-10-29/the-case-against-mergers Read More