summarize the article titled “Case Study of a Failed Merger of Hospital Systems” listed under Section VI of the course outline on my syllabus. If you haven’t read it yet, you can access it by clicking here. Make sure you answer the question at the top of the first page of the article: “What went wrong between Penn State and Geisinger, and what lessons should be learned?”
What went wrong between Penn State and Geisinger, and what lessons
should be learned?
Case Study of a Failed Merger of Hospital Systems
JAAN SIDOROV, MD
Medical Director — Care Coordination at Geisinger Health Plan, Danville, Pa.
ABSTRACT
The failed merger between
Geisinger Health System and Hershey Medical Center is an instructive
case study. The advantages of merging include: 1) support of financially
threatened academic health centers,
2) access to greater capital, and 3) integration of managed care principles
in the delivery system. Nevertheless,
if the leadership of the new organization fails to deal effectively with the
inevitable winners and losers, underestimates the role of cultural differences, does not have the management
skills necessary to achieve cost savings
and address the operational inefficiencies resulting from a larger clinical enterprise, does not anticipate the
distrust of other local health care
providers, and fails to anticipate the
market forces that determine the success or failure of a managed health
care system, mergers can fail. Lessons
to be learned include: mergers involving health care systems with
Author correspondence:
Jaan Sidorov, MD
Medical Director —
Care Coordination
Geisinger Health Plan
Hughes Office Building North
Woodbine Lane
Danville PA 17821
Phone: (570) 271-8763
Fax: (570) 271-7860
E-mail:
jsidorov@thehealthplan.com
This paper has undergone peer
review by appropriate members
of MANAGED CARE’S Editorial
Advisory Board.
56
competing programs need to plan aggressively and execute carefully their
clinical consolidation; cultural differences and the impediments they
cause can be easily underestimated;
health system mergers do not automatically result in economies of scale;
and not all stakeholders in the surrounding community necessarily will
welcome a merger.
INTRODUCTION
In November 1999, the dissolution
of the merger between Hershey Medical Center (HMC) and Geisinger
Health System (Geisinger) was announced. Despite significant trends
in the delivery and financing of health
care, medical education, and research
favoring the merger, it ultimately
failed. What happened, and what can
be learned from this situation?
Anatomy of a merger
One of Pennsylvania’s largest
health care systems was created in
July 1997 when Penn State University
leased the HMC to the newly formed
Penn State Geisinger Health System.
HMC was combined with Geisinger,
yielding a single health care entity
with 1,342 hospital beds, three hospitals, a drug- and alcohol-treatment
facility, a managed care organization,
77 outpatient clinics, and more than
1,000 physicians scattered throughout 40 counties in northeastern and
central Pennsylvania. Two of the hospitals, Geisinger Medical Center in
Danville and HMC in Hershey, provided tertiary-care services within 70
miles of each other.
While the board of directors of the
newly created system was split evenly
between appointees from Penn State
MANAGED CARE / NOVEMBER 2003
University and the former Geisinger
system, the chairman of the board
was appointed by Geisinger and was
granted the power of a tie-breaking
vote. In addition, the membership of
the executive committee of the board
was weighted in favor of Geisinger
— 4:3. The CEO of the new system,
Stuart Heydt, MD, previously had
served as Geisinger’s CEO, while the
dean of the Penn State College of
Medicine, C. McCollister Evarts, MD,
retained his title but also served as
the new system’s president and chief
academic officer. Both had votes on
the board of directors. While the new
board of directors governed the clinical enterprise, Penn State University
retained control of the College of
Medicine, which remained attached
to HMC at the Hershey campus.
Geisinger Health Plan, an HMO
started by the Geisinger System in
1972, simultaneously was renamed
the Penn State Geisinger Health Plan
(PSGHP). It quickly was announced
that HMC was a participating
provider in PSGHP’s network, effectively giving the HMO new access to
south central Pennsylvania and a potential customer base of more than a
million people.
Day to day, the Penn State Geisinger Health System operated as four
geographic regions, modeled on the
original Geisinger style of management. Before the merger, there were
three geographic regions (east, central, and west), and HMC and its outpatient clinics were adopted operationally as a fourth, southern, region.
Each region was led cooperatively by
a pair of physician and administrator
regional vice presidents, each of
whom served with other senior ad-
CASE STUDY OF A FAILED HOSPITAL-SYSTEM MERGER
ministrators on a clinical practice
committee that was chaired by the
Penn State Geisinger CEO. The purpose of this committee was to approve new clinical programs, review
existing program content, determine
clinical priorities, and act as a forum
for ongoing review of the clinical enterprise. There was also a system operations committee focusing on legal
services, human resources, finance,
and facilities management.
The right step?
Tertiary care and academic health
centers were threatened. At the time
of the merger, HMC and Geisinger
were both financially healthy, yet
leaders of both institutions endorsed
predictions that local hospitals and
physician groups would aggregate
into large health care systems. They
surmised that in addition to dominating local markets, larger systems
would create economies of scale
through the efficient provision of services throughout the care continuum.
Newspapers reported at the time
that the new Penn State Geisinger
Health System was expected to
broaden medical services and expand
access to treatment while concurrently reducing costs by $105 million
over the course of three years. Greater
leverage in negotiating prices combined with lower costs were intended
to ensure that HMC and Geisinger
would survive in a marketplace increasingly penetrated by for-profit
providers and managed care insurance plans.
According to Heydt, the Penn State
Geisinger CEO, the Penn State University leadership also had little confidence that it would be able to lead
HMC through an increasingly tumultuous health care market and
“wanted to get out of the health care
business.” Penn State welcomed
Geisinger’s national reputation for
health care management as a solution to HMC’s increasing vulnerability.
Geisinger and Hershey no longer
had to compete. Geisinger officials
were quoted in local news reports as
stating that the two health care
groups would generate significant
savings by not competing with each
other and by sharing resources.
HMC and the medical school
needed access to greater revenue and
more capital. During the late 1980s,
HMC undertook significant construction while also supporting the
considerable costs of postgraduate
and medical education with revenue
from clinical operations. Administrators there surmised that the capital markets would find the broader financial base of the newly merged
system better able to support the future servicing of debt. In addition, an
academic support formula was created, based on a percentage of revenue in excess of expenses, to tap into
the more than a billion dollars in projected revenue and thus guarantee the
financial health of the medical school
and postgraduate education programs for the foreseeable future.
Geisinger wanted the luster of an
affiliation with an academic health
center. Geisinger had a longstanding
if smaller commitment to research
and education in the form of its graduate education programs. Geisinger’s
Weis Center for Research was incorporated into the medical school, and
it was expected that the system’s medical and postgraduate educational
programs would become fully integrated.
Penn State’s health insurance and
education costs were considerable.
At the time of the merger, Penn State
spent approximately $75 million per
year on health care benefits for its
more than 16,000 employees who
were not students. Large numbers of
Penn State University and HMC employees signed up with PSGHP
within a matter of months, and consideration was given to ultimately
making PSGHP the exclusive employee-benefit option at both institutions. In addition, given that Penn
State traditionally offered tuition dis-
counts to employees and families, the
removal of HMC employees from
Penn State’s books also was expected
to benefit the university’s bottom
line.
HMC regarded Geisinger Health
Plan as an attractive asset. Though
HMC had little reason to welcome
any HMO’s contracting style and utilization management, Geisinger
Health Plan was a not-for-profit revenue center owned by a health system
and led by physicians. It was expected
that the HMO would grow considerably, and that the expansion of
PSGHP into the areas surrounding
HMC would not only achieve additional premium revenue for the bottom line, but would also fuel patient
referrals to Hershey.
Why did the merger fail?
Consolidation and cutting costs
failed to deal effectively with the inevitable winners and losers. The
process of consolidation generated
few problems in nonclinical departments (e.g., finance, marketing, and
public relations); it stalled, however,
when clinical departments at each of
the two tertiary-care hospitals began
to tackle leadership, ownership of tertiary or highly profitable clinical services (e.g., bone marrow transplant,
invasive cardiology services, tertiarylevel children’s hospital care, highrisk obstetrics, and orthopedics), and
merging of postgraduate educational
programs (i.e., how would residents
split their time between two medical
centers?).
Whenever a disagreement developed, two camps — based on historical affiliations with either Geisinger
or HMC — quickly emerged. The
CEO, chief academic officer, and
other system leaders then found
themselves being lobbied by opposing constituencies. Because completing the merger also preoccupied the
system’s leaders, unresolved disagreements and ongoing debate enabled duplicative tertiary-care services to linger. Attempts to mediate
NOVEMBER 2003 / MANAGED CARE
57
CASE STUDY OF A FAILED HOSPITAL-SYSTEM MERGER
clinical program consolidation from
the bottom up deteriorated into competitive advocacy. Overall system versus local work-unit conflicts of interest played out in meetings, memos,
and appeals to higher levels of authority, including the board of directors and — if there were implications
for either the academic mission or
the medical school — the president of
Penn State University.
Lacking consensus, the two tertiary-care medical centers in Danville
and Hershey continued to offer separate and competing services. This
dynamic was felt acutely by middle
managers, many of whom responded
with hardened loyalty to their immediate superiors. Long after the merger
failed, there is still no shortage of unflattering anecdotes about delay, gaming, passive resistance, demeaning
colleagues, bullying opponents, and
failing to address conflicts of interest
in a setting that was supposed to be
dedicated to healing and service.
Theoretical cost savings never occurred and did not translate meaningfully into lower rates for health
care purchasers or a better bottom
line for the system. It was assumed
that economies of scale would occur
as a result of the merger. Health care
delivery throughout the system’s service area remained a highly localized
enterprise, however, involving individualized encounters between one
practitioner and one patient in the
clinic, catheterization lab, operating
room, or delivery suite.
As the system promoted a onesize-fits-all approach to disparate settings across its wide service area, operational inefficiencies persisted and
fixed costs remained. Due to the often
contentious competition for resources among various departments
and regions in the two camps noted
above, there was minimal incentive to
reduce costs. The continuously expanding appetite for revenue and
capital to support patient care, education, and research cemented
Geisinger’s and HMC’s reputations
58
as expensive tertiary-care facilities.
Lacking any visible fulfillment of the
savings promised at the time of the
merger, which was to be accomplished with reduced service charges,
the system failed to convince the local
marketplace that its high cost structure was good for health care. At the
same time, the Pennsylvania attorney
general responded to local sentiment
that a monopoly in tertiary care in
central Pennsylvania combined with
an exclusive relationship with a single
HMO was unlikely to result in lower
prices for consumers, and withheld
final approval of the merger.
The cultures of the two merged
systems were extremely different.
While Graham Spanier, the president
of Penn State had been quoted in
news reports as saying,“The similarity of cultures between Penn State
and Geisinger is another strength in
the relationship we are proposing,”
his optimism quickly dissipated.
HMC’s style of collective governance
by cooperating with independent and
strong academic departments clashed
with Geisinger’s style of managing
full time, salaried physicians in a multispecialty group practice.
As Geisinger-pedigreed administrators descended on HMC, academic physicians already struggling to
secure grant support for research and
to find time for teaching were confronted by management expectations
that their clinical practices must be
profitably self-supporting. Consternation turned to anger when HMC
physicians were asked to examine
their billing practices, outpatient
clinic throughput, operating-room
times, support-staffing procedures,
market-driven measures of physician
compensation, indirect costs, the expense of medical education, and unfunded research activities.
In south central Pennsylvania,
there was a lack of communityprovider support. There was also
practitioner distrust, particularly
with respect to Geisinger and
Geisinger’s HMO. Physicians in
MANAGED CARE / NOVEMBER 2003
northeastern and central Pennsylvania who were not associated with
PSGHP suddenly were confronted
with the presence of a large and powerful system that was intended to
leverage services and contracts favorable to its own interests. These physicians viewed this as an alarming expansion of both Geisinger and HMC
into new areas of the state, with serious implications for local independent practices and hospitals. They
quickly assumed that the real purpose of the merger was to secure profits and restrict choice, and resisted
any expectation to refer patients to
PSGHP or to participate in its HMO.
Previously existing fragile relationships between HMC and some
local community hospitals — which
included the joint purchasing of supplies — were dissolved quickly, and
other hospitals’ animosity toward
HMC and Geisinger increased. The
distrust also resonated among the
nonphysician employees of HMC,
complicating the contentious negotiations between the union representing the nurses (who had watched
their tuition benefit evaporate) and
the newly constituted administration
of the HMC in the fall of 1997.
PSGHP could not deliver: Already
suspicious of HMC’s hunger for
high-margin procedures and high occupancy rates, hospitals in surrounding locales such as York, Lancaster, Harrisburg, and Lebanon
viewed PSGHP as an HMO with one
purpose: to funnel patients away
from them and to Hershey. Accordingly, they saw little advantage to participating in PSGHP’s network and
either delayed negotiating for as long
as possible or offered unacceptable
contracting terms. Despite the predictions about the statewide aggregation of health care entities, area
community hospitals remained
fiercely independent and continued
to enjoy local physician and patient
loyalty. Since PSGHP failed to develop an adequate area-delivery network, most employer-purchasers of
CASE STUDY OF A FAILED HOSPITAL-SYSTEM MERGER
health insurance in the areas surrounding HMC effectively sided with
their area’s community hospitals and
refused to offer PSGHP to their employees. Accordingly, projected HMO
membership, premium revenues, and
patient referrals fell far short of expectations.
The final straw
By the fall of 1999, Penn State
Geisinger Health System chairs had
been appointed for each of the major
clinical disciplines, but clinical departments at HMC continued to have
significant autonomy. One southern
regional vice president was quoted as
having said that he viewed his role as
being akin to running a “health care
mall” for independent merchants,
while each original Geisinger region
was tightly administered by the regional vice presidents.
At the same time, academic chairs
were appointed to oversee the various
teaching and research programs. As a
result, none of the senior leaders in
place prior to the merger experienced
any decrease in their level of responsibility, while at the same time additional layers of administration were
added. Given the complex chain of
command and the daunting challenge of managing a large health care
system, attempts by clinical leaders
to promote integration or consolidation of programs and reduce costs
languished. Frustration mounted,
and disaffection with the merger
began to be shared at the highest levels. Moreover, the board of directors
became polarized.
Below the senior level of management, the Penn State Geisinger
Health System functionally comprised two affiliated yet distinct
groups, identified as either Geisinger
or HMC. Physicians from either side
were familiar with each other but
failed to systematically study or embrace each other’s practice efficiencies, management styles, or patientcare patterns. Except for a different
sign outside, individual providers and
support personnel in the clinics and
hospitals saw no change in day-today operations, and business continued as usual. At the same time, projected revenue from clinical
operations and cost efficiencies failed
to materialize, and increasingly negative actual-vs.-projected budget gaps
began to develop in all four regions.
In the year following the merger,
each region failed to achieve targeted
budget projections, and the deficit
reached $30 million. As a result, during the second year of the merger,
clinical program consolidation and
cost management received heightened urgency, and acrimony increased.
The attempt to consolidate the
Geisinger and Hershey microbiology
laboratories was the final straw. Vans
already were transporting laboratory
specimens throughout each of the
four regions from the outpatient clinics to each of the hospitals, and consolidating the two laboratories would
have meant having the vans drive in
one direction with no impact on clinical quality. Given that having one
microbiology laboratory would have
reduced overhead as well as the number of employees, a significant savings
opportunity existed for the cost-pertest in an important revenue center.
Because administrative leaders at
both medical centers did not value
microbiology to the same degree as
highly visible tertiary-care services
such as open-heart surgery, the business plan for microbiology consolidation slowly advanced intact
through the multiple layers of administration. Additionally, because
Geisinger Medical Center appeared
to have the most attractive cost structure, a major academic health center
with an on-site medical school was
about to go without an on-site microbiology laboratory.
When stakeholder physicians in
microbiology at HMC learned of the
plan, they publicly expressed grave
reservations about the consolidation.
The stakeholders included members
of the pathology department as well
as the infectious disease section of
the department of medicine. The argument quickly turned away from the
already-settled issues of savings, layoffs, or overhead, and focused on the
educational implications for the Hershey Pathology Residency and Infectious Disease Fellowship Programs, as
well as the teaching of medical students. Offers to develop information
technology solutions, distance learning, or even transport or living
arrangements for on-site training at
Geisinger Medical Center failed to
take root, and rumors began to circulate that the residents and fellows
were going to refuse to travel to the
Geisinger campus.
The chief academic officer (who
still served as dean of the medical
school) wavered in his support of the
consolidation plan, and the stakeholder physicians appealed to the
president of Penn State University.
When the president of Penn State and
the Penn State Geisinger CEO failed
to agree on the plan for consolidation
of microbiology, consensus to undo
the merger gained momentum. Dissolution of Penn State Geisinger was
announced in November 1999.
Lessons to be learned
Superior leadership and management are necessary for mergers involving health systems with previously competing and tertiary-care
programs. Other writers on the topic
of mergers have observed that if the
merger is based on cutting costs, the
failure to quickly and effectively identify the winners and losers in program consolidation will give champions for duplicative programs time
to promote business as usual. Moreover, the longer the delay, the harder
and more dysfunctional the process
becomes (Blecher 1998, Weil 2000).
Executing a successful merger involving previously separate and competing health care entities necessitates not only strong leadership, but
also committed and nimble manage-
NOVEMBER 2003 / MANAGED CARE
59
CASE STUDY OF A FAILED HOSPITAL-SYSTEM MERGER
ment. If either of these attributes are
lacking, success is threatened; if both
are missing, it is doomed.
Cultural differences and the impediments they cause can be underestimated easily. Any organization
possesses unique and immeasurable
history, informal yet important relational networks, management styles,
local opinion leaders, and institutional pride that can be easily underestimated in business plans but may
act as powerful determinants of the
success or failure of any merger
(Baskin 2000; Pelligrini 2001).
In this instance, lingering differences in culture — independent academics committed to education and
research on one side and full-time
practicing clinicians deferring to centralized leadership on the other —
effectively resulted in the inefficient
persistence of two separate clinical
organizations. These persisted in a
single system, ironically named Penn
State Geisinger. A corollary lesson
may be that senior leaders caught up
in the heady enthusiasm of a potential merger may be less able to objectively assess the suitability of their respective organizations’ cultures.
Health system mergers do not automatically result in economies of
scale. Greater organizational complexity superimposed on the same
workforce and overhead will lead to
expanded management challenges.
At the patient level, health care remains a highly individual process,
and simply aggregating it into a single organization does not lead to
heightened efficiency. Further, greater
organizational complexity combined
with business-as-usual patient care
does not yield greater revenue nor
will it lower cost and risks. It may, in
fact, lead to even greater financial
stressors.
Not all stakeholders in the surrounding community will necessarily welcome a merger. While health
system administrators may assume
that anything that further enables
their organization’s missions of pa-
60
tient care, education, or research is
laudable, local health care and government stakeholders are more likely
to discern that health systems mergers have more to do with reducing
competition, increasing market share,
and enhancing negotiating power.
Despite predictions of their certain demise, many local hospitals and
physician practices have remained
quite independent (Bellandi 1995).
Accordingly, depending on the marketplace and the number and types of
leverage options, they can undercut
the success of the merger by, for example, foregoing any previously existing collaborative agreements, altering referral patterns, and not
cooperating with health insurance
arrangements. The result may be
community distrust, polarization of
local health care providers, and increased regulatory scrutiny.
CONCLUSION
Merging two completely different
health systems would be difficult
under any circumstances. In the case
of Penn State Geisinger, it was assumed that underlying market forces
would favor a larger system comprising a large clinic, three hospitals, and
an HMO with service-area dominance, greater revenue, lower costs,
more capital, and increased patient
referrals. Not only were the goals of
this systems merger not attained, but
also distinct cultural differences between the systems and a lack of buyin from local health care providers
created additional challenges.
Leadership failed to convince internal stakeholders of the merits of the
merger while management continued
with business as usual, allowing duplicative programs to linger. Even the
ownership of an HMO could not
overcome the local health care
providers’ reaction to the threat to
their market share. Furthermore,“education and research” had little value
outside the newly formed system.
As the nation’s health care system
continues to evolve, it remains to be
MANAGED CARE / NOVEMBER 2003
seen if large dominant health care
systems will emerge. On the basis of
what occurred with Penn State
Geisinger, health care leaders may
wish to review the lessons that have
emerged: Bigger does not mean better, current leadership may not be up
to the task of overcoming cultural
differences, usual management may
not be up to achieving higher efficiencies, and resistance among internal and external stakeholders can
coalesce quickly.
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