The current circumstances around healthcare are forcing hospitals to take a hard look at consolidation, maybe more than ever before.
Matt Heywood, CEO of Aspirus Health, is aware of that as much as anyone as the leader of a health system that just closed its own merger. Earlier this month, the Wausau, Wisconsin-based operator combined with Duluth, Minnesota-based St. Luke’s to create a 19-hospital organization that serves the systems’ two home states, as well as parts of Michigan.
The motivation behind a merger will differ depending on the health system, but Heywood believes that organizations should have a consistent approach to partnering if they want to get the most out of it—one that doesn’t over-leverage while also enabling a sense of urgency.
For Aspirus, the opportunity to combine with St. Luke’s allows the system to especially benefit on two fronts, Heywood told HealthLeaders.
“We knew as we were growing so fast that if we continue to make sure we held our company at a strong operating level, that we were able to look at other contiguous partners that would then help provide another tertiary center for us,” Heywood said. “We needed that other tertiary center because it would give us an ability to transfer patients within our service area somewhere else other than Wausau, which was already starting to get bottlenecked, and it would give some redundancy.”
The other area Heywood highlighted as benefiting from the merger is back-office capabilities, which he said will become more cost effective, safer, and more efficient. With the types of challenges facing hospitals these days, from financial stressors to cybersecurity, having stronger back-office functions can make all the difference on operating margins.
“We saw a lot of back-office synergies that we could provide by working with St. Lukes as well,” Heywood said. “So we’re excited that by putting the two together, we can get that decompression of Wausau, we can get that back office, and we can improve the care for all our communities by being there for them when they need us.”
Matt Heywood, CEO, Aspirus Health.
In the case of many other health systems right now, financial distress is the catalyst for seeking out mergers. According to a recent report by Kaufman Hall, 28% of the 65 transactions announced in 2023 featured a partner under financial pressure, compared to 15% in 2022.
“What we’re finding is that there are a lot of ‘have’ and ‘have-nots’,” Heywood said. “It was always there a little bit, but it’s now really starting to separate. The people doing well are going to continue to do well and the ones not doing well will either have to make some tough choices to turn it around and some of them may or may not be able to do that, or be willing to do that, and the ones who can’t are going to have to look at other alternatives and that might be a potential partner. This environment is going to create a potential increase in mergers over time.”
Making deals for the sake of dealmaking, however, isn’t a viable solution. The margin for error in transactions is decreasing, according to a recent report by Bain & Company, forcing organizations to consider whether potential deals are demonstrating enough value.
Proactively identifying the right partner is critical, Heywood stated. Even after finding one, the deal should be a fit for what you want to achieve.
“Don’t just merge to merge,” he said. “You have to be willing to walk away from something that doesn’t make sense.”
As a CEO, the job of carrying out a merger is far from finished once the deal is completed. Then comes the transition period, which is vital for getting your organization on track to be as efficient and effective as possible, as soon as possible.
“You have to actually get something from the merger and very fast,” Heywood said. “You can’t do what a lot of companies do, which is merge, try to soft pedal, and tell everybody, ‘You know what, we don’t want to change too much right now. We don’t want to rock your world.’ You don’t have that luxury, especially if the merger is a merger of individuals that may not be doing so well financially.
“You have to move fast to get the accretive value of a merger and you can’t do what you used to do, which is just merge, take your time, and slowly do it. You have to be careful. You have to be thoughtful. But you have to be decisive and have some speed.”
CEOs should be all about purposeful action when it comes to M&A right now.
With that approach, dealmaking can be a fruitful strategy for both the ‘haves’ and ‘have-nots’ in the fight against tight margins.
Jay Asser is the contributing editor for strategy at HealthLeaders.