By Monica Oss, Chief Executive Officer, OPEN MINDS

Provider organization mergers, acquisitions, and affiliations in health and human services show no signs of abating in the near term. The laser focus of these provider organizations is on the right strategy in evaluating affiliation opportunities, selecting the right partners, and implementing effectively. But where do consumers fit into the planning for mergers or other partnership models? What consumer risks are associated with implementing these partnerships?

There are three causes of compromised consumer care—(1) providing new services to new consumer populations, (2) changes to service delivery infrastructure, and (3) changes in the roles of clinical professionals.  With mergers come new service lines that serve new populations. Suddenly executives are responsible for programs with which they have no or limited experience—or are addressing financial issues through program consolidation, serving disparate groups of consumers in the same location.

The service delivery infrastructure issues are readily apparent—new buildings, new equipment, and new procedures add new complications. But the infrastructure issue of greatest concern is the information infrastructure. Multiple electronic health record (EHR) systems, consumer portals, e-prescription systems, reporting systems, and more. How do executive teams keep on top of organizational performance when the “data collection” system is disrupted? Lastly, consolidation typically means reassignment of clinical professionals—to serve new populations, cover staff shortages in other locations, assume new roles, and work with new teams.

The statistic often quoted is that the failure rate of mergers and acquisitions is somewhere between 70% and 90% (see The Big Idea: The New M&A Playbook), though I’m not exactly sure how “failure” is defined across these analyses. But, even if the failure rate is half of that, the question for executives of any organization that is, or is planning to be, part of consolidation is: what are the “best practices” to increase the odds of success both of the merger and of preserving quality of care?

Certainly, the right strategy and the selection of the right organization for merger or acquisition is fundamental. But assuming the consolidation is a fait accompli, what do executives do to bring together two organizations in the post-merger phase? From talking with our clients and our team leading dozens of mergers over the years, I’ve compiled a “merger integration checklists” to list the common best practices:

1. Have an integration plan developed by the time you close the deal
2. Align performance expectations around the reason for the merger—set quantifiable performance goals for the consolidated information and track them
3. Commit to one culture
4. Resolve power and people issues quickly—pick the team with enthusiasm for the new vision
5. Develop detailed implementation plans for every aspect of the business operation—with realistic expectations of the pace of each change (finance, tech, branding, web site, marketing, service line definitions, HR, physical plant decisions, etc.)
6. Have a designated integration project manager to coordinate the many moving parts (this is parallel to the project manager for a new tech implementation)—and pick a select group of executive sponsors for the integration team
7. Employ change management best practices to win “hearts and mind” of the staff on both sides—communicate a consistent vision
8. If you plan to do more mergers, develop a “repeatable” implementation model

With this checklist in mind, provider organization executive teams are better prepared to address their merger planning and to reduce the likelihood of compromised consumer care.

By Joe McNaughton-Travers, Ed.M., Senior Associate and Executive Editor, Management Newsletter, OPEN MINDS

Once two provider organizations have decided to merge, the planning process is extensive—decisions and tasks that need to be accomplished before the actual merger date and the detailed plans for post-merger integration. In this article, I detail the key tasks and opportunities for the first component—the merger preparation phase. Keep in mind that while each merger has its own unique factors (some say that when you’ve seen one merger, you’ve just seen one merger), there really is a defined process for planning and executing it successfully.

Roadmap To Merger Day: Pre-Merger Tasks

Let’s begin with the pre-merger tasks. These are the decisions and tasks that must take place before the actual date of the legal merger. You should also be planning for the merger integration phase before the actual merger, which I’ll cover in Making Mergers Work: Key Components of an Effective Post-Merger Integration Plan. For simplicity’s sake, let’s assume this is a merger where one provider organization is acquiring a second provider organization and that the acquired organization will cease to exist over some period. (As I described in last month’s article, When Thinking Merger & Acquisition, First Think Strategy: A Best-Practice Approach, there are several provider collaboration and merger legal models, but the pre- and post-transaction tasks are much the same.)

But before diving into the details about the pre-merger phase, it helps to understand the likely timetable. How long should the pre-merger phase take?

First, let’s assume you’ve taken the best-practice approach I described last month and have completed the due diligence process (including financial feasibility) and have made a formal decision to merge. If so, assume that the pre-merger phase of the process will take six months or less. Longer than that is almost always unnecessary, and experienced “acquirers” can move from the decision date to the acquisition date in about three months. While very rapid acquisitions with timelines of less than two months do occur (most often with experienced for-profit entities acquiring small provider organizations), I typically recommend a four-to-six-month time frame. In many cases, the pre-merger timeline is impacted by a decision to execute the merger at the beginning of a calendar year or fiscal year or quarter.

The pre-merger phase includes decisions and tasks in ten principal areas:

1. Corporate and Legal
2. Brand Decisions
3. Board of Directors
4. Organizational Licenses and Operating Agreements, Payer Contracts, and Accreditations
5. Real Estate, Other Assets and Intellectual Property, Leases, Insurance, and Other Contracts
6. Executive Organizational Chart and Interim Transitions
7. Purchase Terms and Agreements
8. Payroll, Taxes, and Benefits
9. Communication Plan
10. Merger Day Plan

Let’s walk through each of these in more detail.

1. Corporate & Legal—It is essential that you engage legal counsel before and throughout the merger process. Theoretically, you’ve already engaged a legal team who is experienced in provider organization partnerships, mergers, and acquisitions during the due diligence process—however, this legal team may not be the same legal counsel you are currently using for the rest of your legal needs. The decisions and tasks here commonly fall into two areas:

• Legal Documents—Your experienced legal counsel will tell you what these are, what decisions need to be made, and when they should occur. The terms and requirements for an acquisition transaction vary from state-to-state, but the principal acquisition agreements are usually merger agreements, stock purchase agreements, and/or asset purchase agreements. There may be several other additional legal agreement requirements—disclosure schedules, third-party consents, anti-trust requirements, etc. Simply follow the advice of your legal counsel, seeking additional legal opinions if needed when more than one option is available.
• Operational & Integration Legal Requirements—Secondly, your legal counsel can provide guidance on other legal requirements throughout the pre- and post-merger phases (e.g., regarding corporate contracts, human resource issues, employment agreements, board requirements, etc.). Additionally, if one or both organizations have employee unions, there will be specific legal requirements that need to be addressed as part of the merger process.

2. Brand Decisions—The decision about the surviving brand name for the merged organization should have been made during the due diligence process. (It can be a deal-breaker.) Will only one of the brand names be used? A new one? A family-branding model? And when will this change occur—at the time of the merger or later? Will there be one website or two? These decisions are essential as the two organizations prepare to develop a communication plan for the merger.

3. Board Of Directors—The composition of the board of directors of the merged organization is another hot topic that should have been addressed during the due diligence process. Usually there is one surviving governing board where the number of directors has already been agreed upon. Decisions include determining how many board members from each of the two merging organizations’ boards will be on the new board as well as which individuals will take on leadership positions. There may be legal requirements to meet as well as by-law changes to be made prior to the merger date. Additionally, some organizations use a merger as an opportunity to create an advisory board as well as a governing board—differentiating between a desire for a board for local community and stakeholder input from a separate governing board with members with expertise in business and clinical arenas.

4. Organizational Licenses & Operating Agreements, Payer Contracts & Accreditations—Next, you’ll need to tackle all the issues related to licenses, operating agreements, payer contracts, group provider numbers, accreditations, and other organizational credentials and privileges. Begin by developing a list for both provider organizations and then determining what steps to take to retain all of these in the surviving organization. This area of planning is often overlooked. The key focus is on the attributes of the corporate entity that will not survive in the long run. Does it have licenses or provider numbers that will no longer be usable if not transferred to the surviving provider organization? Are there payer contracts and rates that are impacted and need to be addressed? Can organizational accreditations be moved to the surviving company? Are there other state or local operating agreements or contracts that need to be addressed or approved?

5. Real Estate, Other Assets & Intellectual Property, Leases, Insurance & Other Contracts—Once you’ve tackled the big contract and licensing issues covered in the previous section, you need to build a list of all the other ownership and contractual issues to be addressed. Some changes in these may need to occur prior to the merger date, and others may be able to wait until after. Are there real estate and other fixed assets that are part of the acquisition that need to be transferred? Intellectual property owned by the organization being acquired? What leases and other agreements are in place and need to be changed? (This can range from copiers and printers to leased office space.) What insurance changes (property, liability, etc.) need to occur? Are there any employee contracts or agreements that need to be addressed?

6. Executive Organizational Chart & Interim Transitions—While it is unlikely that you will develop a complete organizational chart for the merged organization prior to the actual merger date, it is critical that you have determined the best executive structure—meaning positions, not individuals—for the organization going forward. You’ll only need one of each of the top leadership positions in the long run—chief executive officer (CEO), chief operational officers (COO), chief financial officer (CFO), etc.—but the executive chart may be more complex for larger organizations, particularly if your merged service areas and/or service lines are large. You may choose to have a regional executive model, with centralized administrative oversight and clinical leadership. (This is my preferred approach because it brings greater efficiencies.) You could opt for greater control and/or more administrative operations locally versus centrally, or some variation of these two common approaches. The merger may also be the opportunity to add executive level positions that you’ve previously lacked but needed—such as chief development officer, chief clinical officer, or chief information officer.

Once you determine the ideal executive organizational chart for long-term success, you need to deal with the people and the timelines. You’ve probably already decided on the top leadership positions—who will become CEO, COO, and CFO—but you may have different or new executive positions in the restructured organizational chart. Which individuals do the merging organizations have now that have the right talent for the larger, merged organization? Which no longer have a place? Which positions will you need to recruit for? Once you’ve sorted through all of this, determine the timeline transition to the new structure so that you have the right talent in each executive position. You may also be retaining an executive for a time period as part of the agreement. (For example, one of the two CEOs may be retained for a year to aid in the transition prior to his or her retirement.) In the end, you should have a plan for the new executive organizational chart and a transition plan to get there with individuals in each executive position by a target date.

7. For-Profit Purchase Terms & Agreements—If you are buying another organization, you will need to hammer out any remaining details about the purchase terms and agreement. This will include terms about payments and performance earn-outs, assets, and/or owner and executive compensation and agreements.

What are the terms of payment—cash, leveraged buy-out, performance-based earn-out, combination/consolidation of assets, etc.? What other agreements need to be finalized before the acquisition can occur?

8. Payroll, Taxes & Benefits—With regards to payroll, taxes, and benefits, there are two major issues to address. The first is planning for a single payroll system and benefits package. You’ll need to standardize benefit packages, including holidays, vacations, and other paid time off, health insurance options and employer contribution, the retirement account model and employer contribution, and any other benefits. If payroll cycles are different from one organization to another (e.g., with one organization issuing payroll every two weeks and the other twice a month), you’ll have to select the desired payroll cycle and plan the transition to it.

The second issue to address in this area is the timing of these changes. Will you issue payroll from a single software system on the first day of the merger, or will you run separate systems for a period? Will you move to a single benefit package all at once or transition over time? Or perhaps you’ll honor the benefits in place for current employees of both organizations but use a new one for new hires. What is your current health insurance renewal cycle (most commonly occurring on January 1^st) and when can you change insurance options? Is a self-insured option attractive now for the larger, merged organization?

Lastly, you will need a plan to ensure that payroll taxes and employer reporting occur when required, even if you are operating two separate systems for a period. Similarly, you’ll need to plan for how to address corporate tax and reporting filing. Both areas typically require extra labor until the first fiscal or calendar year as a merged organization occurs.

9. Communication Plans—Planning and executing an effective communication plan are critical components of the pre-merger planning process. Start by identifying key external and internal stakeholders, including the following:

• Consumers and families
• Referral sources
• Payers and other funders
• State and local government entities and key leadership positions
• Employees
• The public

Craft a communication message about the merger for each of these audiences and determine the communication timeline. Is the merger going to be kept a secret from some internal or external stakeholder groups for some period? Are there stakeholder groups that should be informed before others? As more individuals know about the planned merger, it becomes challenging to keep the plans confidential, so your timeline should address this as well as the possibility of the information leaking out before intended. Ideally, your plan will have formal communications time press releases, letters to select stakeholders, web site announcements, etc.—as well as carefully crafted talking points for executives and managers to use when discussing the merger plans. Do not underestimate the need for continuous internal communication to your employees.

10. Merger Day Plans—Your pre-merger plan should also include addressing any tasks that are made on day one of the merger. Are you going to lay-off some employees on day one? Do employees need to answer the phones with a new welcome or are incoming calls going to be routed differently? Is there a new web site that will be unveiled on day one? Do some current consumers need to sign new consent agreements or other administrative documents? What other changes must be planned and made on day one to ensure that operations continue smoothly?

Putting It All Together: Teams & Timelines

The last step in the merger preparation process is to pull together all the tasks into a single project plan. Put together a merger planning team and assign the tasks to individuals with clear deadlines for completion. Monitor the project plan and begin daily project review meetings at least 30 days before the actual merger date to ensure that everything is on track. Usually, there are some hiccups in the pre-merger phase but with a detailed plan and project team, you will be able to be successful in getting through the merger itself. After that it’s time to move on to the merger integration phase. I’ll cover that in detail in Making Mergers Work: Key Components of an Effective Post-Merger Integration Plan.