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Hospital M&A Cost Boosted Significantly By Health IT Integration

Posted on August 18, 2014 I Written By

Anne Zieger is veteran healthcare consultant and analyst with 20 years of industry experience. Zieger formerly served as editor-in-chief of and her commentaries have appeared in dozens of international business publications, including Forbes, Business Week and Information Week. She has also contributed content to hundreds of healthcare and health IT organizations, including several Fortune 500 companies. Contact her at @ziegerhealth on Twitter or visit her site at Zieger Healthcare.

Most of the time, hospital M&A is sold as an exercise in saving money by reducing overhead and leveraging shared strengths. But new data from PricewaterhouseCoopers suggests that IT integration costs can undercut that goal substantially. (It also makes one wonder how ACOs can afford to merge their health IT infrastructure well enough to share risk, but that’s a story for another day.)

In any event, the cost of integrating the IT systems of hospitals that merge can add up to 2% to the annual operating costs of the facilities during the integration period, according to PricewaterhouseCoopers. That figure, which comes to $70,000 to $100,000 per bed over three to five years, is enough to reduce or even completely negate benefits of doing some deals. And it clearly forces merging hospitals to think through their respective IT strategies far more thoroughly than they might anticipated.

As if that stat isn’t bad enough, other experts feel that PwC is understating the case. According to Dwayne Gunter, president of Parallon Technology Solutions — who spoke to Hospitals & Health Networks magazine — IT integration costs can be much higher than those predicted by PwC’s estimate. “I think 2% being very generous,” Gunter told the magazine, “For example, if the purchased hospital’s IT infrastructure is in bad shape, the expense of replacing it will raise costs significantly.”

Of course, hospitals have always struggled to integrate systems when they merge, but as PwC research notes, there’s a lot more integrate these days, including not only core clinical and business operating systems but also EMRs, population health management tools and data analytics. (Given be extremely shaky state of cybersecurity in hospitals these days, merging partners had best feel out each others’ security systems very thoroughly as well, which obviously adds additional expenses.) And what if the merging hospitals use different enterprise EMR systems? Do you rip and replace, integrate and pray, or do some mix of the above?

On top of all that, working hospital systems have to make sure they have enough IT staffers available, or can contract with enough, to do a good job of the integration process. Given that in many hospitals, IT leaders barely have enough staff members to get the minimum done, the merger partners are likely costly consultants if they want to finish the process for the next millennium.

My best guess is that many mergers have failed to take this massive expense into account. The aftermath has got to be pretty ugly.

Is Hospital Consolidation Being Driven By HIT Issues?

Posted on April 27, 2011 I Written By

Katherine Rourke is a healthcare journalist who has written about the industry for 30 years. Her work has appeared in all of the leading healthcare industry publications, and she's served as editor in chief of several healthcare B2B sites.

As just about any reader would know, Community Health Systems is engaged in a $3 billion hostile bid to take over Tenet Healthcare Corp.  As I noted on another blog, this may or may not be a good idea, but hospital consolidation is clearly in the air.

Just look at the past year. Not only has CHS attempted to take over Tenet, Tenet moved to gobble up Australian hospital chain Healthscope, private equity firms have been  sinking big bucks into regional systems and local chains are merging with big ones.

All told, according to Irving Levin Associates, 77 hospital-related M&A deals took place during 2010, the highest number since 2001. We’re talking a monumental $12.6 billion in deals, according to Irving Levin research.

The question is, why last year as opposed to any other?  Commonly-cited factors include:

*  Attempts to batten down the hatches to prepare for health reform

*  Opportunistic buying by chains and venture firms, as hospitals continue to struggle with the aftermath of the 2008 market crash

* Hospital willingness to close or merge in the face of rapidly-changing times

What you don’t see mentioned often — in the mainstream business press at least — is the staggering cost of upgrading health IT infrastructure to the levels needed for enterprise-grade performance.

During the process of implementing an EMR, IT costs can shoot up 80 percent, according to Accenture, driving up hospital costs 200 basis points or more.

And that’s just the beginning.  Health IT leaders must address database management, workflow integration, upgrades to communication infrastructure and much, much more.

The bottom line is that if all of these systems don’t work together smoothly, hospitals won’t be able to collect the quality data they must produce to survive in the new era.

Given these pressures, it’s hardly surprising that hospitals and systems hope to stare down their massive IT costs by throwing their lot in with bigger partners.  Hey,  it’s certainly worth a try.