Don’t ignore the emotional factors in M& A

The article “Independent hospitals hold their own on revenue growth” (ModernHealthcare.com, Oct. 25) was informative, but not surprising. It noted that revenue at independent hospitals grew at a faster pace than health system-owned hospitals, suggesting that returns may be diminishing on mergers and acquisitions.

As a former vice president of acquisitions for a major for-profit chain, I know that not all acquisitions are based on rational decisionmaking. Human emotions and motivations are always in play, although in theory they shouldn’t be.

Hospital system leaders, who are directly compensated on the basis of successful acquisitions, sometimes tend to be more optimistic in their financial projections than is warranted.

Also, a hospital system may want to reduce competition or acquire a hospital due to its reputation. For all these reasons, these acquisitions may take a while to be as profitable as predicted. Or they might never pan out.

As for economies of scale, there are two key aspects: supplies, pharmaceuticals and capital equipment; and personnel. With the rise of group purchasing organizations, even smaller hospitals can get excellent prices if they’re fully committed. As for staffing, many facilities are already relatively efficient compared with what they were decades ago. It’s just harder to squeeze out more overhead, especially related to patient care.

The bottom line for systems is to know why they are acquiring a facility and how it fits with the organization’s vision. And make sure that economic assumptions driving the break-even analysis are accurate and unemotional.

Jack Bernard Peachtree City, Ga.