Issue link: https://beckershealthcare.uberflip.com/i/534828
16 Financial Management Small meetings Although both parties' boards are involved in the development of the deal from the beginning, pre- liminary talks are relatively exclusive. Because of the sensitivity of the changes discussed — a new vision, purpose, changes to management and likely a new name — discussions during the early planning stages are kept confidential between a small group of board members and senior leaders from both entities, according to Mr. Blake. "These deals can only be done if kept to a small group initially so they can further vet one an- other and decide if they really want to come to- gether," says Mr. Blake. However, this period of due diligence is characterized by determining if the systems' goals and values are truly aligned, in addition to identifying any possible instances of noncompliance or other situations that could prevent a successful merger. It is not so much about determining differences in financial value to use as a negotiating chip. An added benefit of the confidential nature of these discussions and small number of people involved is fewer people knowing if one or both parties determine not to go through with the deal. "There is a perceived downside of a deal falling apart," says Mr. Blake. "Keeping it small allows more freedom to decide whether the deal is right or not, as opposed to being perceived as a failure if the two systems can't come together." In con- trast, publicizing talks of a merger too soon can be a disservice to the organizations if the deal falls through, as staff may lose confidence in leader- ship's decision-making and strategy. Pace There is no standard timeline for developing and implementing a merger of equals. While in some instances joining health systems hold weekly meet- ings to develop the deal, others will talk every month or even less often. However, once the key gating issues are addressed, it is important to keep focus and a forward momentum, which can be dif- ficult while trying to maintain daily operations. At the same time, neither party can be afraid of walking away at any point, regardless of timing. Like architects, both parties should maintain the attitude of "measure twice, cut once," because the consequences of two incompatible systems merg- ing are much worse than any impact of calling the deal off, according to Mr. Blake. A merger of equals comes with a unique set of challenges Unlike traditional acquisitions or mergers in which one party assumes a dominant role and takes over the other, equal consolidation deals can be much more complicated, especially when it comes to determining who will lead the new system. CEOs are instrumental in determining how their organizations will grow and change. Health sys- tem leaders' drive to do what is best for the com- munity, along with well-designed incentive pack- ages, mitigate individual CEOs' ambition or egos from blocking a deal, Mr. Shields says. In other words, it is unusual for a consolidation to be called off because neither CEO will agree to step down. Usually, the new system's execu- tive positions are determined very early on in the merger's planning stages in an amicable discus- sion between the CEOs and board leadership, according to Mr. Shields. This might mean both CEOs serve in senior management roles or that one steps down. However, in some cases, senior leaders' egos do play a role in the discussions. After all, people don't become CEOs without a healthy sense of confidence, according to Mr. Blake. If one CEO is close to retiring, possible tension around choos- ing a CEO for the new system can be avoided, but this is not always the case. The board's close involvement in planning the merger can prevent personal issues from threat- ening the deal, according to Mr. Blake. "Once [the board] realizes they've gotten past the key issues, the transaction will make sense and help the sys- tem be successful, save millions of dollars and cre- ate a successful strategy and vision — it realizes the new, transformational company is bigger than just one individual," he said. When coming together, every decision made for the new system must be evidence-based and fact- driven, according to Mr. Blake. This approach is more difficult when selecting a leader, but both parties must keep what is best for the combined system front-of-mind at all times. This could even mean selecting a new leader altogether. Culture as an obstacle Two combining entities must have a strong cul- tural affinity, according to Mr. Shields. Like the pieces of a jigsaw puzzle joining together to cre- ate a more complete whole, the combining health systems must offer one another complementary resources and value, but they must also have cul- tural similarities. Incompatible cultures can pose a major obstacle during a merger, and can even be a primary reason a merger is called off. This is why it is imperative for both health systems to gain a deep understanding of the other's culture in the very beginning of the process so they can identify any potential roadblocks. The January 2012 merger of St. Joseph Health System in Lexington, Ky., which was part of En- glewood, Colo.-based Catholic Health Initiatives, with Jewish Hospital & St. Mary's HealthCare in Louisville to create Louisville-based KentuckyO- ne Health, and the new system's subsequent part- nership with the University of Louisville Hospital, is a prime example of three systems with very dif- ferent cultures merging successfully. "You have to recognize the heritage of each [part- ner], what it means and how people experience that heritage… [And when combining the or- ganizations,] you have to ensure everyone sees themselves in the new purpose and value and mission statements," Ruth Brinkley, president and CEO of KentuckyOne Health, told the Catholic Health Association of the United States. KentuckyOne Health is comprised of a Catholic organization, a Jewish organization and an aca- demic medical center — three institutions with distinct heritages and cultures. Initially, individu- als from each organization were wary of the merg- er's impacts on their respective cultures. People at the Catholic facilities feared their heritage would be "diluted," while the Jewish and secular organi- zations "were afraid we'd put up crucifixes and a papal flag," Ms. Brinkley told the CHA. Further- more, when the University of Louisville Hospital was thrown into the mix, there was a lot of public scrutiny in relation to the separation of church and state. KentuckyOne Health has overcome each of its legacy organization's qualms by taking a deliber- ate approach to integrating the cultures. It began by surveying employees of each system to identify which aspects of their organizations' cultures they cared most to preserve, then drew insights from the surveys to write a new purpose, set of values and mission statement that effectively melded the top priorities of the three combining systems. Mergers between systems with distinct cultures, such as KentuckyOne Health, can be extremely challenging. However, having different cultures is not a surefire sign a merger won't be a success, it is just a signal the merger may have more culture- related difficulties and will require careful atten- tion to and planning of integration. On the other hand, many organizations are in need of a cultural makeover, and merging with another organization or working to instill a new culture altogether could be beneficial in some cases, according to Mr. Blake. For example, a sig- nificant cultural change is needed to support the transformation from a fee-for-service to value- based system of care. The industry-wide push to implement population health management also requires care teams to adopt a new outlook and approach to delivering care. While addressing the issue of culture, it is also im- portant to think of processes for how, as a newly combined system, people from the formerly sepa- rate entities will be able to voice their concerns and ideas up through the ranks to a larger se- nior leadership cohort, according to Mr. Jarrard. "That's why these kinds of mergers may take lon- ger — they are more political and require more conversation, but they can also be stronger." Finally, experience with traditional merger and acquisition deals can even be an impediment to a successful merger of equals, because the latter requires a completely different approach, which can be a difficult adjustment. "If you let the parties involved — lawyers, board members and other leaders — treat [the merger] just like an acquisition, they start initiating due diligence like it is an acquisition, which can be very challenging to the process," says Mr. Blake. n