case study of a failed merger of hospital systems

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Case Study of a Failed Merger of Hospital Systems

The Case Study of a Failed Merger of Hospital Systems discusses the primary factors in the failure of the merger between Geisinger Health System and Penn State University Hershey Medical Center. Merging in 1997 to create Penn State Geisinger Health System (PSGHS), the two organizations split apart in 1999. Understanding what went wrong in the Geisinger/Hershey merger provides a valuable resource in designing strategies for successful healthcare mergers and preventing unsuccessful ones.

The alchemists: a case study of a failed merger in academic medicine

Affiliation.

• 1 Organization and Management Studies, Association of American Medical Colleges, Washington, DC 20037-1127, USA. [email protected]
• PMID: 14604867
• DOI: 10.1097/00001888-200311000-00005

The changing environment in health care delivery and reimbursement in the United States in the late 1980s and 1990s caused a massive overhaul in the organizational structure of health care institutions. Hospital mergers were commonplace. Physician practices were bought and sold. Once stand-alone institutions developed integrated delivery systems. The academic medical community investigated and pursued a number of strategies to address changes in the marketplace, including streamlining and reengineering business practices; centralizing and integrating operations and decision making; creating separate clinical enterprises; creating new public authorities or nonprofit corporations to govern hospitals; building networks of providers; and acquiring physician practices. Perhaps the most hyped strategy was consolidation. In 1997, Pennsylvania State University's Hershey Medical Center and Geisinger Health System in Danville, Pennsylvania, announced plans to merge into one large clinical enterprise. The merger unwound three years later. Based on extensive interviews and document analysis, this case study examines six aspects of the merger and de-merger between Pennsylvania State University and Geisinger: (1) the environment and historical context that preceded the merger; (2) the reasons for the merger; (3) the structure of the merged system; (4) the outcomes for the new organization; (5) the reasons for the dissolution; and (6) the lessons learned from this series of events.

• Academic Medical Centers / organization & administration*
• Decision Making
• Delivery of Health Care / trends
• Health Facility Merger*
• Organizational Case Studies
• Organizational Culture
• Pennsylvania

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The Anatomy of a Failed Hospital Merger

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It was Gerhard Casper who finally pulled the plug. After months of dismal financial reports, Stanford's president called late last fall for a breakup of the two-year-old merger of the medical centers at Stanford and UC-San Francisco. "With great anguish I have concluded that, in our efforts to find bold solutions to the problems of academic medical centers, we have taken on too much," Casper wrote in an October 28 letter to University of California President Richard Atkinson.

The unprecedented merger of private and public university medical centers was supposed to help the two schools weather the financial pressures of managed care. By pooling resources and increasing bargaining power, UCSF Stanford Health Care was projected to save $256 million by 2000. But instead the company, which was set up in November 1997, lost $86 million last fiscal year. As the two medical centers prepare to formally split up, Stanford looks at why the merger failed:

Separate Staffs The venture's biggest downfall may have been that it never managed to bind the two institutions together with a common culture. Most professors continued to identify almost exclusively with their home campus. A September 1, 1999, deadline for consolidating clinical services came and went with little action. With the exception of pediatrics, doctors didn't combine their practices, share risks or pool revenue as the merger's architects had hoped they would. "We did not fully grasp the complexity of integrating two very different institutions," Casper said in an interview the month before he called off the union.

Revenue Shortfalls The economic pressures that led to the merger only increased as the new corporation got on its feet. Managed care companies continued to cut payments to hospitals while, at the same time, the state and federal government trimmed reimbursements. At the federal level, the 1997 U.S. Balanced Budget Act resulted in a $10 million drop in Medicare payouts to the hospitals. Meanwhile, the state's Medi-Cal program cut payments, making it clear that academic medical centers would have to shoulder an increasing share of the cost of treating the poor. All told, UCSF Stanford Health Care provided more than $100 million in unreimbursed care last year.

Higher Costs On top of those problems, the company's officials faced the unexpectedly daunting costs of the merger itself. For example, integrating computer systems at the two schools cost $126 million, five times what was expected. And the payroll ballooned. A state audit of the company released in August said 1,000 employees were brought on board after the merger. Proponents of the venture had projected only 200 new hires.

The Unexpected "There were a lot of surprises about the financials of the two institutions, particularly the seriousness of the financial difficulties on the [San Francisco] campus," says Larry Lewin, founder of The Lewin Group, a health care consulting firm. Lewin facilitated early discussions between the two schools but was not involved in the audits that preceded the merger. One shocker was how much money UCSF's Mount Zion Hospital was losing. Three-quarters of the $86 million in losses during the last fiscal year came at UCSF facilities. Mount Zion alone lost nearly $60 million. The hospital, which served many of San Francisco's low-income residents and was the subject of vocal support from state and local politicians, shut its doors in November.

The total price tag for the merger -- $79 million -- may pale in comparison to what it costs to unravel the two medical centers. Each school will take back the resources it brought to the marriage (Stanford put in assets valued at $458 million; UCSF put in $415 million), and then the losses are to be divided 50-50. But by the middle of November, the two sides had drawn up a seven-page memo detailing issues that still needed to be resolved. Officials hope the two centers will be separated by March 1. But it won't be easy or cheap. As Lee Goldman, UCSF's acting vice chancellor for medical affairs, quipped: "Have you ever seen a divorce that was cheaper than the wedding?"

In the end, Stanford may emerge without much injury. Although Stanford's medical services (including Lucile Packard Children's Hospital) lost $20 million last year, they are expected to make $15 million this year. UCSF's are projected to lose money at least until 2001. "It's hard to unscramble the egg," says Lewin. "It's going to be costly, but I think Stanford will come out okay."

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