Merger of Two Central Pennsylvania Health Systems - Research Paper Example

Merger of Two Central Pennsylvania Health Systems Outline Introduction -Geisinger Health System and Penn Hershey Medical Center merged in 1997 -The merger was terminated three years after it began because management overlooked potential distrust from local care providers, overall inefficiencies poor cultural knowledge, and team leadership Why the merger failed -After consolidating general departments, there was no consensus on how to merge clinical departments -Bitter rivalry, corporate politics arose in board meetings and lower levels. -Operational inefficiencies continued due to poor communication and failed consolidation -Management failed to anticipate rivalry from local health providers -Corporate cultures were different as Geisinger was more commanding while Hershey was consultative -Business as physicians and leaders adopted usual approaches continued to maintain their partisan approaches Comparison with a successful merger -The North Shore – LIJ merger worked because of effective leadership that was flexible and willing to engage with physicians of hospitals. -The merger had a general direction and collective direction -They addressed operational efficiencies -The merged companies learnt from each others’ best practices and created standards -Affiliate institutions were allowed to customize best standrds Conclusion -Cultural differences are a critical component of successful mergers; -Health system stakeholders should consider the compatibility of their cultures before they merge -Companies must also work through implications of becoming bigger - Managers and administrators ought to anticipate resistance from local community health providers. -Strong leadership that uses collaboration rather than threats should exist Introduction Geisinger Health System and Penn State Hershey Medical Center merged in 1997 in order to enjoy benefits like getting support from academic health centers with financial challenges. They also came together in order to benefit from bigger capital and amalgamate managed - care principles within their delivery system. The two entities had not anticipated that their union would be as short-lived as it came to be; the merger was terminated three years after it began with little to show for its existence. Overall, it may be stated that the merger failed because management overlooked potential distrust from local care providers, it also did not focus on the overall inefficiencies as well as the market forces that come about during a merger. Furthermore, the new entity did not have cost-saving skills needed to keep the company a float after the merger; they combined this with poor cultural knowledge and team leadership needed to deal with losers and winners in the arrangement. Why the merger failed Pennsylvania witnessed what could potentially be their largest health system yet in the 7th month of 1997 through the creation of Penn State Geisinger Health System. At first, the new unit now had 1342 beds, 1000 physicians, 77 outpatient clinics, 3 hospitals, 1 drug treatment facility as well as patients from about 40 counties in central Pennsylvania (Sidorov, 2003). During the formation process, the two former organizations needed to decide upon executive leadership, so they came up with a methodology for creation of a new board. They took a 50-50 split between board members from both health systems; however, Geisinger got the upper hand in this regard because its representative was the chairperson. He had the power to break ties during votes and he contributed towards a higher ratio of members from his own company; this implies that executive decisions were now skewed towards the chairperson’s former organization. Not all the aspects of the two companies were dissolved as Pen State Hershey would be retaining control of the college of Medicine that was under Hershey Medical Center. Several changes took place throughout the organization; for instance, the Health Plan under Geisinger now became a joint plan whose name accommodated the new change. This had the advantage of increasing the customer base to about a million for the HMO and expanded the geographic regions from which consumers came. The merged unit still maintained the regional demarcations that had been used by Geisinger, and only added Penn state HMC as a forth region which would represent the southern region of the state. Management also decided that regional heads would be represented by a duo of vice presidents and physicians, but they would all work under the chair. The regional heads’ responsibility was to prioritize clinical matters, approve clinical programs, review clinical enterprise, and review program content (Mallon, 2003). Prior to completion of the merger, all stakeholders, including the media and other outsiders had high expectations for the combination. They believed that the merger would lead to cost reduction of about $105 million by 1999 and also deduced that access to treatment would be heightened (Sidorov, 2003). Participants in the Penn state-Geisinger health system also expected to increase medical service access as well as have greater advantage when negotiating with providers. It was also predicted that the initiative would become more competitive than other firms, which were largely for-profit as they would not be able to offer the low prices that Penn State-Geisinger were going to have. In the past, Geisinger and Hershey were competitors in more than one area of service provision, so coming together through a corporate merger implied that they no longer needed to compete. Instead, they could take advantage of each others’ resources and networks in order to become better versions of themselves; this would also lead to plenty of cost savings. Capital increases would also be forthcoming in this arrangement as Hershey Medical Center was in need of greater revenue. It had engaged in some constructions that had been completed in the 80s as well as the costs linked to postgraduate medical education; projected revenue was thus divided into various areas with one of them being the postgraduate program. Geisinger was also interested in working with an academic body as it had a research center, so Hershey appeared to be the natural choice for them. This union would also protect Penn State from having to spend so much on employee benefits as the new merged entity now had its own health insurance plan. Despite all the advantages of the merger that have been stated above, a series of failures overwhelmed the two organizations thus forcing them to dissolve after three years. First, it became apparent that there was a leadership problem in dealing with the winners and losers of the merger as this is an inevitable component. After consolidating general departments like marketing, public relations or finance, other clinical departments within two of the former tertiary care health hospitals failed to come to a consensus on what to merge. The most profitable clinical services were the main cause of disagreement as no clear decision had been made on who would eventually own them; cardiology, orthopedics and obstetrics were just some of the units that caused conflict between the two groups. Even postgraduate programs were a point of contention because the two entities did not decide on how residents would divide their time between two medical centers. This failure to decide on how clinical departments would be owned or divided let to bitter rivalry among members, and whenever a decision had to be made, most of the entities would divide themselves into two camps depending on where their former superiors were. They would then lobby the system leaders or CEO in order to get them to support their side; this was quite difficult for the leaders as they still had a lot to do in order to complete the merger process. The result was duplicate services especially in the tertiary care area in Hershey and Danville; middle managers were in a precarious position because they had divided loyalties. Most times, board meeting were marred by affiliations and disagreements between the two camps with decisions being made based on whether they would affect the former employers. These conflicts thus led to delays in decisions and service provision as response was quite slow; those with greater executive positions tended to bully others. Additionally, it was evident that passive resistance was the name of the game for those in lower ranks in the new organization; corporate politics would also be a typical strategy to utilize in this merger (Sidorov, 2003). Cost savings and operational inefficiencies were not well planned for or executed after the occurrence of the merger as there were several dynamics that affected the outcomes. First, as mentioned-earlier existence of conflict between the two groups created duplicate functions, which were cost ineffective. Furthermore, management failed to anticipate resistance from the marketplace, which felt that the existence of one HMO for Pennsylvania would not lead to reduction in prices for consumers. Additionally, the new firm had a series of disparate settings that needed customized solutions for operational settings; therefore, it was critical for them to look into other ways of providing those solutions. However, the organizations focused on a one-size fits all system that did little to address operational inefficiencies unique to each clinical setting. Fixed costs would always be the same, yet the new health system still had plenty of other financial obligations it needed to meet like patient care support as well as research and education (Mallon, 2003). These funds were simply not available for the organization, which meant that the anticipated or promised costs savings were not realized among clients; in fact the opposite was true as people began to brand the new system as the most expensive in the area. Cultural differences also came in the way of a successful merger as Hershey was used to cooperation and collective governance within its academic departments, yet Geisinger relied on a a more controlled management style of its physicians (Pellegrini, 2001). Geisinger administrators attacked Hershey Medical Center by claiming that their clinical practices did not yield sufficient profit to support them. This was a bitter pill to swallow from the Hershey side because most of the employees there were already preoccupied with securing funding for their projects and setting aside time for academic pursuits. Physicians from the Hershey side became angry at Geisinger when the latter demanded that they reduce operating times, clinic throughput, indirect cost, education and research costs, as well as billing practices. These incompatible cultures seemed like they put the two groups on a collision course for the length of time that the merger existed. Distrust among providers was a particularly pressing issue for the company as a new amorphous body had been formed in central Pennsylvania. Physicians who did not belong to the new Penn State-Geisinger system viewed it in a distrustful manner as they realized that it had the ability to leverage on services in a more robust way than ever before (Mallon, 2003). They refused to refer people to the new system since they felt that the real intention of the merger was to stifle local practices and minimize choice. This high level of distrust also arose because Hershey Medical Center already had a fragile association with local hospitals as few opportunities for cooperation existed (common supply purchases used to take place). However, after Hershey merged with Geisinger, these types of collaborations immediately ended; the organization was now on its own in terms of supply purchase. The merged organization was not able to consolidate efforts between itself and local communities so revenues fell short as well as referrals or even HMO memberships. Central and Northeastern Pennsylvania saw the Penn State-Geisinger network as a threat to them because it was only focused on high occupancy rates or high margin procedures. They felt that the organization would take patients away from them so local hospitals refused to join its network or would do so indirectly by offering unfair contracts (Sidorov, 2003). Too much autonomy prevailed within the clinical disciplines starting from the Hershey Medical Center; although the sign outside stated that the two former health systems were one, physicians continued to work independently. They did not learn or work cooperatively with members of the firm; managers and senior level executives also suffered from the same problem as they had additional bureaucracy to deal with yet their work had not reduced. Poor consolidation of microbiology labs and other areas of the organization meant that staff still needed to do extra work to deliver samples when there was an opportunity to merge. Therefore, economies of scale were not realized when organizational complexity increased and a business as usual attitude was maintained in the separate organization (Koleno, 1999). Comparison with a successful merger The above case study is a sharp contrast to what went on in another health system merger in New York; it was between Long Island Jewish Medical Center (LIJ) and North Shore Health system; the latter was in Manhattan while the former was in New Hyde Park. They came together in 1997, and created what is now known as North shore-LIJ; its ultimate intention was to have a clear and collective direction. From the above, statement, it can be seen that this merger differed from the Pennsylvania one because the participants had a collective sense of the direction that they wanted to take. Penn State-Geisinger participants were unwilling to sacrifice their individual autonomies as they distrusted each other and continued to maintain their individual identities. However, North Shore and LIJ were more than willing to ignore the trivial corporate politics that come with mergers by focusing on the benefits they could achieve from the outcome (Foderaro, 1999). One should note that these two New York health systems were previously competitive, so they were just like the Central Pennsylvania one prior to the merger. North shore and LIJ both had separate medical affiliations, corporate cultures as well as education and administrative heads. Even the presence of unions was not common to both; Long Island Jewish had them while North Shore did not. The merger also took place in the wake of fierce environmental factors like reduced insurance reimbursements as well as a heightened sense of managed care (Foderaro, 1999). Therefore, there was no shortage of problems or things that could go wrong between these healthcare care systems, but the two entities somehow found a way of working together. The first thing that North shore-LIJ did differently from the Hershey-Geisinger was how they related with providers that they had worked with. Together, the two New York systems had 40 insurance companies, so they took advantage of their bigger numbers to negotiate better reimbursements rates with them (Foderaro, 1999). Conversely, the Pennsylvania duo did not take advantage of their bigger numbers; in fact the bigger they became, the more distrustful their providers became of them. North shore-LIJ also became successful because they were willing to study methods of practice in each entity and use the lessons to create standards of care that would be applied across the merged unit (Molpus, 2010). The two health systems both had their advantages and best practices that could be shared and used to improve how New Yorkers access healthcare from both entities. However, this does not imply that the organization now had a one-size fits all approach; it created a standard of care that was deduced from what actually went on in the ground. Conversely, participants in the Hershey-Geisinger merger did not really study how clinical practices yield results, so they only imposed a one-size fits all approach out of a point of ignorance. Furthermore, staff members in the latter merger did not embrace these methods as they preferred to maintain the status quo; the opposite was true for North Shore-LIJ because they followed-through on their agreement, which was to implement best practices from both health systems. North shore-LIJ right from the beginning of the merger also realized operational efficiencies; the two companies were determined to eliminate duplicate work among each other. Therefore, they eradicated network development, processing and other areas that a partnership could easily solve; for instance, their preferred provider organizations started coming together (Molpus, 2010). Garnering support from physicians is also another reason why the New York merger was quite successful; the leaders from the new entity knew the power that physicians possessed in making a negotiation successful. Therefore, they made sure that all the 9,000 physicians under their wing were culturally-aligned and reading from the same script. In order to achieve this, they allowed their physicians to maintain the autonomy they wanted as only 1,600 members received salaries; however, leaders or administrators made a point of coming in contact with them in order to ensure that they were heading in the same direction. Contact did not involve dictating to physicians what to do but it was a consultation on the entire process of consolidation; this was ownership of the solutions created. Conversely, Penn State Hershey and Geisinger had an adversarial attitude towards its physicians; one side of the camp kept criticizing the other for being operationally inefficient. Instead of consulting them on what they needed to do in order to improve cost savings, they strove to impose their own rules on them. Geisinger’s failure to consult and negotiate with its physicians is what led to a business- as –usual approach, where the doctors continued to do things as they had done before the merger. The New York merger studied how their physicians used to function, their referral networks and their operational methods in order to integrate them effectively into the clinical programs (Molpus, 2010). Perhaps one of the most fundamental lessons that the Hershey-Geisinger system could have borrowed from the North Shore-LIJ merger is their flexibility. The New York system has a strong understanding of the performance and quality levels that were expected of them; however, once all hospitals understood their expectations, they were allowed to use local solutions to implement these standards. Management realized that resources, needs and local cultures were different, so giving the hospitals a degree of freedom was crucial. Lessons on leadership can also be deduced from this case study as executive leaders went to physicians and clinical staff within their normal environments in order to understand them and involve them (PWC, 2013). Conclusion A number of things can be learnt from the two case studies about mergers; cultural differences are a critical component of successful mergers; if this component is downplayed, then management style and conflict could arise. Health system stakeholders should consider the compatibility of their cultures before they merge as this could lead to polarization, distrust and failure. Companies must also work through implications of becoming bigger as organizational complexity can hamper success or create financial stressors. Managers and administrators ought to anticipate resistance from local community health providers, so they should make plans to include them in the merger. Strong leadership that uses collaboration rather than threats should exist; further, they should possess a high degree of flexibility when dealing with physicians and local institutions in general. References Foderaro, L. (1999). Two New York Health care giants form joint venture to reduce costs. The New York Times 10 March, A12. Koleno, C. (1999). Hershey to again be managed by the university. Psu. Retrieved from www.psu.edu/ur/archives/intercom_1999/Dec2/Hershey.html Mallon, W. (2003). The alchemists: A case study of a failed merger in academic medicine. Acad. Med., 78(11), 1090-104. Molpus, J. (2010). North Shore LIJ sets sights on care coordination. Health Leaders Media Breakthroughs, 20-26. Pellegrini, V. (2001). Mergers involving academic centers: a formidable challenge. Clin Orthop., 3, 288–296. PWC (2013). Why so many deals have failed and how to succeed in the future. NY: Booz and Compant. Sidorov, J. (2003). Case study of a failed merger of hospital systems. Managed care, 4, 56-70. Read More