Issue link: https://beckershealthcare.uberflip.com/i/1007936
89 PRACTICE MANAGEMENT THOUGHT LEADERSHIP in administrative costs, IT expenditures and traditional supply chain management that are inherent to any well-executed merger. While cultivating economies of scale was the prima- ry focus of mergers past, and is still relevant today, this is just one component of this new class of deals. 2. Economies of structure. ough oen overlooked when systems consider a merger, certain core components of organizational structure can determine whether a merger will be a boom or a bust. Merger partners must complete an objective inventory of cur- rent operating competencies and identify best practices to standardize and adopt aer the merger is complete. ere should be a highly defined plan for performance expectations paired with a transparent and well-designed reporting system to support implementation. ese systems must be communicated across the newly formed entity to facilitate the iden- tification of market overlaps and understand how the strengths of a partner organization can change the ways individual hospitals and other operating divisions offer services. Leaders must evaluate the competencies of both organizations and commit to standard- izing core systems, such as employee man- agement and marketing apparatuses. As an example, if one system has highly effective ambulatory services but their partner does not, the newly formed organization must cre- ate a plan for rapid adoption of these ambu- latory competencies and plan how to roll out ambulatory capabilities across the entire sys- tem to bring these services to market quickly. e combination of economies of scale and structure should result in one best way to do things for the enterprise. By creating value through the sharing of best practices across the system, implementation will be accom- plished with greater speed and gain the re- quired value for the enterprise quickly. 3. Economies of scope. Economic focus on scope is perhaps the most difficult concept to grasp but the most important opportunity for mergers of the future. Economies of scope are typically grouped into three broad cate- gories. First, economies of scope help organizations maximize consumer centricity by providing the newly partnered organizations with the resources and technical systems to dedicate solely to advancing consumer relationships and improving integration with the custom- er. is consumer integration can be achieved through digitally enabled journeys, mobile initiatives or other strategies that touch cus- tomers in a genuine way. rough this uni- fied design, consumers will not be confused about how their care experience will change in the wake of a merger. Second, economies of scope maximize the value of market diversification. It is im- mensely valuable for health systems to di- versify their market presence into multiple geographic regions. If one market were to go into economic decline, the risk to the health system would not be as significant if its assets were dispersed into diverse markets. e third, and perhaps most vital, aspect of economies of scope is integrated delivery system competency. Most health systems op- erate some form of integrated care, whether it is an ACO, clinically integrated care net- work, episode of illness bundle or a full-risk health plan. In each of these models, the clin- ical components of the delivery system must work in concert with one another to coordi- nate care and manage clinical data. Typical- ly, this integrated delivery competency also requires organizations to assume some level of actuarial risk. Operating some form of a risk-based model in the future will likely be a defining strategic competency for an inte- grated health system. is competency does not happen through simple osmosis, but instead takes active work on the front-end by clinical, financial and ex- ecutive leaders. is economy of scope is of- ten enabled through mergers where the scale allows the partners to develop the infrastruc- ture and accumulate the lives necessary to assume the kinds of risk that make managing the total cost of care and actuarial revenues feasible. 4. Economies of skill. Merging to form a larger organization allows hospitals and health systems to recruit and retain top tal- ent. In a competitive job market, it is oen difficult for small hospitals and systems to compete with larger players to attract and retain the best leadership, clinical and tech- nical talent. Multi-market systems can ded- icate significant resources to the pursuit of talent, in addition to focusing on succession planning and talent development. Stand- alone hospitals rarely have the capabilities to identify upcoming talent shortages and oen scramble to fill these holes once they become apparent. Health systems are ultimately hu- man resource organizations driven by the quality of the people they employ. e more resources they are able to dedicate to people and talent, the more successful they can be. 5. Economies of risk. Tight margins at freestanding hospitals and smaller health systems leave no room for executives to take many financial risks. Leaders are forced to constantly evaluate ways they can lower costs and dedicating resources to innovative ideas is a luxury they cannot afford. Larger, diversified health systems are able to make measured risk-based decisions, and they can even afford to be wrong once in a while since they do not face as intense margin pressure as their smaller neighbors. It is only through this kind of experimentation that innovation is born, and only through strategically exe- cuted mergers can health systems obtain the financial leverage to innovate at the scale nec- essary to compete. Hospitals and health systems face a multi- tude of much larger competitors in adjacent industries that have access to extensive risk- based capital and are able to make risk-based investments in technology or other areas of innovation on a much larger scale. If we cannot keep pace, we will face serious risk of disruption in a variety of areas. Creation and deployment of risk-based capital in and among health systems is a vital strategy that we must develop if we are to be successful as an industry. n Some ideas in this article were drawn from a strategic plan developed in partnership be- tween Norfolk, Va.-based Sentara Healthcare and McKinsey & Company. "Hospitals and health systems face a multitude of much larger competitors in adjacent industries that have access to extensive risk-based capital and are able to make risk-based investments in technology or other areas of innovation on a much larger scale." — Howard Kern, President and CEO of Sentara Healthcare