Hospital mergers and acquisitions

Creating operational, strategic, and financial value

Hospital merger and acquisition (M&A) activity has increased significantly in the past decade, with buyers and sellers looking to create operational, strategic, and financial value. A main driver is the pursuit of economies of scale, the ability to decrease unit costs, or to improve productivity and outcomes through increased volumes.

The assumption is that through M&A, health system investments in technology, quality improvement, ancillary services, or shared services can be spread across a broader base post transaction. But does M&A actually achieve these outcomes? The answer: it can—with well-conceived strategic intent and thorough planning and execution.

Deloitte's Center for Health Solutions collaborated with the Healthcare Financial Management Association (HFMA) in 2017 to analyze how M&A impacts a hospital's performance—and to learn why some transactions have more favorable results than others. Overall, we learned that higher operating margins didn’t immediately follow M&A for acquired hospitals.

Once our analysis took into account market and hospital characteristics—including the fact that hospital margins in general improved over the analysis period—acquired hospitals, on average, experienced a post-transaction decline in operating margins, revenue, and expenses that typically lasted two years. We also saw no evidence that quality measures changed at an acquired hospital, though measure reporting lags the patient experience and survey respondents confirmed quality improvements.

However, the M&A experience varied a great deal among acquired hospitals. With proper integration planning and execution, some hospitals did experience higher operating margins following acquisition. Among a sample of transactions with better outcomes, executives reported spending more time on integration planning and execution than those from transactions that didn’t meet cost and quality goals.

In our survey, we also found other positive outcomes associated with mergers and acquisitions in the health care industry, including the ability to make capital investments and achieve cost efficiencies from economies of scale.

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Realizing post-transaction value

Hospital mergers and acquisitions show no signs of slowing down. Financial, market, competitive, and regulatory forces are likely to drive further consolidation. As hospital board members and executives contemplate participating in this trend—either as a buyer or a seller—they may benefit from lessons learned by those who preceded them.

Many hospital financial executives who have been involved in acquiring or merging hospitals admit to underestimating important cultural, competitive, and market differences of acquired organizations that may limit post-transaction value realization.

However, when acquirers employ a proactive, purposeful, and sustained approach to M&A—one that includes developing a strong strategic vision, setting explicit financial and non-financial goals, aligning executive and functional leadership, integrating cultures and the new entity into the organization, and leveraging project management and integration best practices—they increase the potential for every transaction to have valuable outcomes.

To learn more about the potential value of hospital mergers and acquisitions, download the full report .

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