How and why supply chain must prepare and be ready when confronted with hospital M&A

Having witnessed more than 35 merger, member substitution or asset sale transactions involving hospitals and health systems, one thing seems clear to me: For better or for worse, the supply chain and purchasing will be a top-five focus area for savings and efficiencies immediately following a close.

Every transaction involving the merger or affiliation of competitors is in part based on the premise that the combination will drive cost savings and other efficiencies that enable affordable healthcare and, presumably, reduce the prices charged by the new entity. Savings generated through aggregation of the combined entities purchasing power and other techniques are relied on to reduce the cost of equipment, products, supplies and services.

In short, the supply chain and purchasing function becomes, overnight, one of just a few “engines” that justify the economic benefits of an affiliation transaction. It might not be as prominent as enhanced geographic coverage, expansion of services, recruitment of medical staff, or access to capital, but it is unmistakably important.

You’re never fully prepared since the merger or affiliation transaction will open the door for a host of unknowns. The post-closing circumstances for an acquiring hospital may be very different than for the target; the financial position of the target may cause greater or less urgency around big cost-saving moves. A bias or preference (e.g., a group purchasing organization (GPO) alliance preference) may become an issue depending on the party that controls the supply chain. These and similar factors cannot be controlled in planning and preparation, but that doesn’t mean the only option is to “wait and see.”

Following are some ways to prepare and be ready to offer value in the supply chain immediately following closing of an affiliation transaction.

Accept change: Being open to change will be beneficial. Looking for opportunity around every corner is expected. Whether or not your health system is in the market for a partner, acceptance of change and consideration of viable alternative approaches to supply chain management should be embedded in the supply chain’s DNA. There needs to be comfort with the concept “course correction.” The supply chain team must be willing to properly evaluate options and not view discovery of savings opportunities as a reflection of prior poor performance.

Get ready to do things differently: Accepting change means building a record of success in adopting new approaches to cost savings and pursuing opportunities outside the standard fare. Outsourcing services to third-party vendors, purchasing through regional aggregation groups, evaluating and participating in commitment or market share purchasing agreements in nontraditional areas are all excellent ways to demonstrate readiness. Learning to work with the various constituencies in the hospital ecosystem on savings initiatives can enhance success in an environment experiencing change.

Evaluate opportunity through the lens of patient-care and the consumer: Strengthen the analytic capabilities within the supply chain and garner experience in evaluating savings initiatives from the patient’s perspective as a consumer. Some questions to consider:

·   What about your cost reduction or other plans will improve care or make the patient experience better?

·   Has your supply chain team been trained properly in evaluating purchasing decisions from the patient care or consumers perspective?

·   Do you have the data or know where to get it?

·   What measure do you use to compare the impact of a change on the patient?  Have you applied this exercise for the past five savings initiatives sponsored by the supply chain team?

·   Have you identified ways to make it better?

Training your team to make purchasing and other decisions with the consumer in mind is valuable, especially in the face of institutional change.

Initiate research and development: A big part of healthcare product and technology development is R&D. But, do you have the same focus on the hospital supply chain as you expect of vendors and suppliers – and should you? I would argue that having an ongoing list of five to 10 supply chain areas under scrutiny at any time is meaningful and would identify true value in the post-affiliation environment. Also, looking back on a quarterly basis to evaluate results and plan change is useful and will benefit the parties to a combination.

Identify and work on weaknesses: While every health system’s supply chain could benefit from improvements, the limiting factors are time, money and expertise. That said, knowing where the weaknesses are and how to address them is expected of any well-run operation and important to the target and the acquirer in the event of a combination. In many cases, these issues are identified as part of due diligence. 

Exhaust the resources available through your GPO: Assuming your hospital or health system participates in a GPO, you need to ask if your materials management department has taken advantage of every resource, technology, contracting program or consulting offering. Are you prepared to defend how you have used and benefited from your GPO relationship? It is no excuse to simply say that your GPO membership provides little value. If that is the case, you need to defend the effort to address it, fix it or move on to other options.

Be ready and be prepared on each of these fronts. Your materials management department function is driving part of the rationale for a combination. Be ready to show the good work you do and be prepared to deliver value on the first day of integration.

Editor’s note: In case you missed it, visit the HPN blog for Neil Olderman’s first installment of this two-part series “Hospital M&A today: What we’re seeing, where we’re going.” 

Neil Olderman, a Chicago-based partner with law firm Drinker Biddle & Reath, advises healthcare providers, medical device manufacturers, healthcare technology companies, and service providers in the healthcare industry. His practice focuses on licensing, strategic affiliations, merger and acquisition transactions, channel partnerships, outsourcing, and joint venture agreements.