M&A Success Depends on Thorough Diligence, Well-Planned Integration

In several posts, Tom Ewers and Munzoor Shaikh of West Monroe Partners discuss the dynamics of health care payer mergers. Here, they describe the need for comprehensive operational and IT diligence.

Success in health care mergers and acquisitions begins with getting the right people on the right teams.

If coordinating M&A transactions is not a common occurrence, then the chances of successfully completing a profitable transaction are slim. Studies show that most M&A transactions fail exactly for this reason.

Construct both a diligence team and an integration team. Why? The skills involved are different.

Diligence requires understanding of the rationale for investment and applying that to each aspect of the transaction. Diligence teams focus on short-term, intense analysis. They convert abstract detailed processes into meaningful, strategic insights.

Integration teams, on the other hand, take a longer view. They must be detail-oriented, understand the strategy, and execute day-to-day processes using that strategy.

Staff both teams with the right people. Poor diligence will lead to a bad design; poor implementation won’t help even the most brilliant strategic plan.

Targeted operational diligence

Why operations? As referenced in our first post, whether conducting a leverage business model (LBM) or a reinvent business model (RBM) (Clayton M. Christensen, Richard Alton, Curtis Rising and Andrew Waldeck. The New M&A Playbook, Harvard Business Review, March 2011), begin by determining the new operating model. Even in the case of LBM, the current operating model will be affected and may need modifications. Operations require thorough analysis of potential disruptions to the existing or the newly acquired customer base. Analyzing the specifics of operations can:

  • Identify risks and mitigations
  • Quantify timing and synergies
  • Weigh the effect of the merger on employees

The operations review also provides insight into:

  • Customer engagement: How will existing and new customers be engaged throughout the business cycle, from sales and marketing to underwriting? Which processes will remain and which will change (again, depending on your integration approach)? How do sales, marketing and actuarial assumptions change?
  • Population health: How will physician and provider relationships be affected? How will the management of provider networks be affected? Will there simply be more work or will there be a fundamental change of the current processes?
  • Core operations: How will the core business processes be affected, from enrollment to claims processing and billing? How will reports be generated across two businesses? Are there efficiencies of scale in billing?

Operational diligence will help identify the following financial elements, which will help to quantify and categorize different types of profitable collaborations.

  • Cost to integrate processes in the combined company
  • Expected revenue increase (if any) from the merger
  • Expected ongoing cost of running the combined business
  • In the case of a horizontal acquisition, where the acquirer absorbs another payer, its member base, and its provider network, the following options are possible:
  • People and team synergy: Cost reductions gained from the consolidation of common teams and people.
  • Provider contract synergy: Overlapping providers create the opportunity to consolidate contracts and eliminate superfluous costs.
  • Employer group synergy: For fully insured and administrative-services-only (ASO) groups, overlapping contracts can be consolidated to boost revenues.
  • Claims processing synergy: The combined company can ultimately spend much less on managed maintenance by selecting a single claims platform.

An operational review can be performed at a qualitative and quantitative level — both are valuable. Depending on the accessibility and time to close, however, doing a full quantitative analysis can be difficult without the right data.

Despite those challenges, interviewing key management, supervisors, and subject matter experts who oversee each function can result in a comprehensive perspective. In the absence of quantitative data, this anecdotal context can still support original integration calculations, identify the areas in which to reduce costs, estimate integration costs, and formulate initiative priorities for the 100-days after closing.

Invest in comprehensive IT diligence

Information technology is a core of payer operations. Claims processing systems, member portals, provider portals, eligibility verifications, EDI transactions, actuarial analysis, and advanced analytics are key aspects of a payer’s business. It is critical to understand how each will be affected after the merger.

The IT systems diligence follows the same structure as the operational diligence, showing how each IT system supports each unit of operation. Here are some standard questions that would be answered by the IT diligence:

  • How mature is each IT system?
  • How well do IT systems support operations and where are the gaps?
  • What are the current levels of risk in the IT systems?
  • What specific changes need to occur?

What is the cost and timeframe to implement the changes required to achieve the business objectives of the merger?

This will include IT systems consolidation, data migration, system migration, reporting, and analytics.

What is the cost and timeframe for IT improvements beyond the immediate goals of the merger?

Sales and marketing tools such as customer relationship management (CRM) systems are critical because they contain employer account history and contact information in both companies. Also product inception, actuarial review, quoting, sales, and administration will probably be an established system for the parent company. The workflow systems of the parent and target companies would need to be technologically integrated. Network and credential management systems would need to be combined alongside the care management systems. If the target in the acquisition is a provider organization, this care coordination challenge can become complex.

The core claims system needs to prepared to incorporate the target’s business. These functions include enrollment, eligibility loads, and EDI claims processing. When consolidating claims platforms, there is ample opportunity for vendor consolidation related to claims intake, claims data entry, and quality control.

The physical infrastructure activities that need to be performed, such as consolidating networks, phone systems, e-mail, and data centers, can take an unexpected amount of time and effort. Unfortunately, they are often overlooked or oversimplified. Because of this, a merger can result in delayed call center migrations, or worse, faulty call center operations that disrupt everyday business. Without proper IT diligence in regard to discovery and planning for these activities, they can act impede realization of the merger’s goals and can be an unanticipated cost.

A coming article in this series on mergers will cover the ins and outs of pre-close integration


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