Hospital execs: Beware unexpected costs in merger deals, Deloitte/HFMA report says

While the tide of merger and acquisition activity continues to rise, examinations of the deals after they've gone through shows unexpected costs and challenges can surface for hospitals, according to a joint preliminary report from the Deloitte Center for Health Solutions and the Healthcare Financial Management Association.

The two organizations invited chief financial officers from 15 hospitals and health systems to talk about their M&A experiences. The attendees represented health systems that had both acquired hospitals and been acquired.

First, while the acquiring system may have already made big investments in IT, it is often the case that the hospital being acquired is behind on theirs. As such, bringing the new hospital up to the same level of IT or shifting it to a new platform can spawn significant expense. One respondent recalled a recent acquisition deal wherein their IT spending doubled from pre-deal expected expenses to the actual expenses that arose post-deal, the report said.

"This increase was primarily due to temporary IT transition costs that declined in subsequent years. They were not planned by the acquirer and resulted in lower than anticipated financial results for the health system," Deloitte said.

[Also: Tracking 2017 mergers and acquisitions]

Staffing is also an area where unexpected financial challenges can pop up, as acquired hospitals tend to temporarily increase staff after an acquisition, rather than eliminate potentially duplicative positions.

They might have to boost staff to meet the acquiring system's patient safety and care-quality standards, and might also need to recruit new physicians or replace departing ones.

"A hospital that appears to be having financial problems might have had a difficult time recruiting prior to the acquisition. In addition, the acquiring health system might need to make financial investments to build or restore confidence in the community, and to convince medical staff that the merged entity is stronger," Deloitte said.

[Also: Hospital merger and acquisition activity spikes by 15% in second quarter, Kaufman Hall report says]

On the other hand, staff reductions can also happen, and compensation packages for employees who are leaving could mean additional costs.

Benefit packages can also mean challenges. Some systems might choose to offer whichever benefits are better, the original benefits offered by the acquired hospital or the acquiring system's package. While all that is being decided, the systems may have to run duplicate benefits programs and costs can add up.

Finally, additional investments are often needed for the acquired hospital to be on par with the parent system, like property, plant and equipment investments. A community hospital might be behind in updating IT and infrastructure or making aesthetic improvements, and it may be up to the system to get those done.

These challenges certainly aren't slowing the pace of M&A activity. However, hospital and system leaders need to be prepared for these types of costs and gauge expectations accordingly when setting short and long-term financial goals.

Twitter: @BethJSanborn