Reforecast: Organizational culture key to successful hospital mergers

Six months after merging to become the second-largest not-for-profit U.S. healthcare system, with $13 billion in operating revenue and more than $19 billion in assets, CHE Trinity Health is beginning to enjoy the strategic benefits promised by the union. Healthcare Finance News sat down with the CFOs who put the mammoth deal together to discuss their goals and due diligence, as well as how they are collaborating.

The key factor driving the strategic rationale of the merger and its swift completion was the shared culture of both enterprises. “First and foremost, we were both faith-based Catholic organizations,” said Jenny Barnett, former CFO at Catholic Health East and currently executive vice president and CFO at Livonia, Mich.-based CHE Trinity Health, composed of 82 hospitals in 21 states.

Both institutions determined that a merger was the optimal way to ensure the future of Catholic healthcare in the United States. “We felt that two very strong Catholic faith-based health organizations would have a stronger footprint together,” Barnett explained. “We did not geographically overlap each other. We could leverage each other’s skills and scale, and we could learn from our respective best practices to lower the cost of healthcare.”

Her colleague, Benjamin Carter, former CFO at Trinity Health and currently executive vice president, finance, at CHE Trinity Health, agreed: “We are simply stronger together.”

Lunchtime Patter
The seeds to merge were planted in late-2012, when the CEOs of both institutions dined together at lunch. They discussed the benefits of forming a shared services organization to reduce each entity’s unit costs of care by sharing such functional tasks as accounts payables and information technology (IT).

As these discussions evolved, the CEOs realized a full-blown merger would guide significant expense savings by combining other aspects of the organizations and learning from each other’s performance excellence. The challenge was persuading the many different orders of Catholic nuns that sponsored the various hospitals within each organization that a merger was in the best interests of their local ministries. As Barnett recalls these discussions, “It was a process in and of itself.”

[See also: Reforecast: New business models for hospitals buying medical practices.]

The nuns ultimately agreed the alignment was the best means of preserving Catholic healthcare, and gave the transaction the green light. By this point, both institutions had formed internal teams across all functional levels to begin the rigorous due diligence process. Different finance executives teamed up to discuss efficiencies and redundancies, as did individuals in HR, supply chain management, IT and other divisions. The teams’ chief goal was to identify ways to share services and thereby drive down costs.

Not all went smoothly. “One challenge was that each of us had different year-ends from a finance perspective,” said Carter. “A challenge was to adopt a common year-end, and then make all the changes necessary to start out with a new fiscal year. Obviously, one of us would win this argument. But, we always discussed what we all felt would be best for the new organization. That guided all our decisions, versus flipping a coin or arm wrestling over it.” June 30 is now the combined organization’s annual fiscal year-end.

Other issues like different holidays and paid time-off policies were similarly ironed out. More problematic was that Catholic Health East had frozen its defined benefit pension plan and migrated fully to a defined contribution plan, whereas Trinity Health still had both types of plans in place. Barnett viewed these differences as a “wonderful opportunity”, she says, “to evaluate the best structure for the combined organization.” It is now migrating towards a defined contribution plan.

The mutual objective of paring costs initially resulted in some very marginal post-merger downsizing (80 or so employees). CHE Trinity Health currently employs approximately 87,000 people, of which 4,100 are physicians. “The clear similarities in the culture of our organizations was the key to making this merger as seamless and beneficial as it has been,” Barnett said. “Before we ever put together our due diligence teams, we retained a third party consultant to reach down into all levels of both organizations to assess each institution’s values. They came back and said they were completely aligned.”

Unified Direction

The union is still in its infancy, meaning more employees are likely to be let go as redundancies and additional cost-efficiencies are identified, news reports indicate. A hiring freeze announced post-merger also has yet to thaw. “We’re still evaluating the portfolio from a strategic perspective,” Barnett acknowledged. But, the institution’s goal of trimming $300 million in expenses over three years will widen profit margins extensively, given the combined organization’s revenue of $13 billion.

[See also: Reforecast: The end of the budget.]

Looking back, both finance executives agreed that the changing landscape of U.S. healthcare compelled action, given the great number of hospitals struggling in the new era, especially small ones. “If you’re not part of a larger system, you simply won’t survive,” Barnett said.

Carter predicted more M&A activity in the sector, given the intense pressures to consolidate. “The regulatory demands on this industry are increasing all the time,” he explained. “Look at ICD-10, which is now going through its tenth revision. We have to be ready by October 2014 to again change the way we classify and code for various diseases, which then impacts our billing and collection processes. These changes are very capital intensive and put great stress on an organization, particularly if you’re on a soft foundation. Hooking up with someone else gives you greater scale and financial clout to address change.”

Asked if they have encountered any turf issues since combining their former finance roles and teams, Barnett laughed. “I would say that Ben and I pretty much finish each other’s sentences,” she said. “We’ve been in lockstep since `day one.’ There’s not a thing I don’t share with him and vice versa.”
“We have a common mindset,” Carter chimed in. “We also share the same values and vision for this great organization.”

Rather than divide up the work of finance, the executives tend to all tasks as a unit. Says Barnett, “This way no one is surprised.”