7 leading practices to enable IT integration in provider M&A
Rising pressure for combining organizations to produce quick benefits makes IT analysis critical in the earliest plans for consolidation.
7 leading practice to enable IT integration in provider M&A
IT needs a close look as healthcare organizations join through merger and acquisition. Combinations no longer involve a “holding company” approach, where the parts of the whole function independently with their own IT organizations, and then they only integrate where needed. That model isn’t adequate for today’s market, contends the writers of a research paper for The Chartis Group, a consultancy specializing in healthcare.
“Numerous market demands and internal, enterprise requirements for IT—including digital health and IT’s role in advancing strategic imperatives and cost containment—often require integrating the IT platform of acquired entities,” say writers Mike Crow, associate principal, and Kent Gray, principal. Now, “it is more critical than ever to consider IT in early stages of M&A due diligence. Assessing the IT landscape and costs is a key step in getting the deal’s financial model right and setting the course for successful integration.”
Chartis highlights three market demands—digital health, advancing strategic imperatives and cost containment—require tight integration of IT platforms.
Consumer adoption of virtual care services has grown to 53 percent from 28 percent in the past three years. They now expect consistent, efficient and superior customer experience. Because virtual competition is increasing and the costs for consumers to switch providers is dropping, those managing mergers and acquisitions must consider both alignment of technology platforms and IT services with their overall digital strategy. And they must take into account the potential impact of the disruption of digital health services. The acquiring company must integrate—and wherever possible, standardize—IT services.
Advancing strategic imperatives
Health systems face high-stakes expectations to realize the full benefits of integration, and IT’s impact on the success of an acquisition is huge. It’s not unusual for more than 75 percent of an organization’s strategic initiatives to have direct IT requirements. Thus, IT is imperative to achieving the intended benefits of a transaction and positioning the combined enterprise for true value creation, such as driving growth, improving affordability and access or advancing value-based care, among others. As a result, operations and IT must work together from the earliest phases of a merger or acquisition to identify target benefits and map out the operational readiness plan to achieve them.
The true IT costs and potential savings opportunities that could be unlocked by the partnership must be considered in developing the definitive agreement. So, developing an IT cost model and associated IT budget early in the acquisition process is crucial to understand the total cost of the acquisition, and it can materially impact the value and success of the deal. Some deals have tanked because the time and cost required to integrate information systems such as EHRs and ERP solutions. Divestitures involve added complexity, because an acquirer must fully understand the cost implications of continuing to pay for IT support from the divestor during the post-close IT transition period.
Seven leading practices to make an acquisition a success
The Chartis Group’s Crow and Gray say it’s “mission critical for the full executive suite to know the key IT areas during due diligence to dramatically reduce acquisition costs, risks and time to completion.” These seven leading practices are important during due diligence to give an acquisition the best chance for success.
1. Plan for rapid transition to a common integrated IT service platform
Set expectations and lay the strategic groundwork with key stakeholders from both entities during due diligence to convert to a standard set of IT tools and services once—and as quickly as possible—to maximize integration benefits. This usually requires a small IT team to review IT expectations, major system upgrades and enhancements of major systems, and leadership commitment to supplement IT staffing to quickly transition. The team should conduct an application review and a high-level roadmap with a consolidated approach and budget. Some systems—such as human resources, finance and supply chain, among others—must be consolidated and integrated on Day One or soon thereafter. Clinical and revenue cycle system transitions are complex, and typically require six to 12 months post-close to integrate. Remaining systems could take as long as two years to transition or decommission. Workforce retraining also needs to be factored in for an expedited transition.
2. Know the data part of the deal
An acquiring company may assume that all information on patients, insurers, physicians and general operations are part of the transaction—and that may be true if the acquisition involves an independent entity. However, a target’s parent company may think you will receive only what legal statutes mandate. For the acquirer, it’s critical to assess what information exists, where it is kept, what is the relative data quality, and what is needed to collect and transform that data for the acquired organization. Key questions in due diligence include, What happens with the original data? How will co-mingled data be addressed and migrated? Is the data secure? Is it kept in the cloud or on site? What are the legal, financial, quality of care and overall customer service implications?
3. Understand IT staffing and contractual obligations
It’s essential to model a pro forma along the rest of the deal, the Chartis Group paper advises. IT staffing accounts for the largest cost driver in IT, typically accounting for more than 40 percent of IT operating costs. Understanding the organizational structure, IT staffing costs and shadow IT staffing costs is important to understanding the overall IT portfolio investment and go-forward potential implications. Similarly, properly assessing IT contract obligations in due diligence can reduce near-term IT cost exposure by 20 percent or more. Contracts are usually the second largest IT operating expense after salaries and are difficult to analyze. Also, IT contracts are often managed by the IT department instead of purchasing and as a result, are often overlooked. Establishing educated positions on major IT contracts early—with a focus on terminations—can lead to substantial savings.
4. Solidify IT transition terms as part of the overall divestiture agreement
Most transactions that involve acquiring an entity from a larger parent company will require material IT transition assistance and continued access to the target’s IT services for as long as a year or more after close. Many health systems underestimate the effort required from the divesting entity after Day One and address IT transition support only after the overall agreement is reached. In divestiture deals, create a formal IT TSA that outlines the divesting entity’s responsibilities for providing appropriate IT services pre- and post-close and the costs for those services. Insist on defined service levels (with financial penalties if not met) and include all vendor expenses and key transition commitments.
5. Review recent cybersecurity audit findings and insist on a follow-up audit
The fact that many healthcare acquisition targets are financially distressed also means they are likely to have underinvested in IT and preventive cybersecurity measures. So, it’s important to review cybersecurity audits to identify compromised IT assets included in the deal, and the remediation and preventive maintenance programs in place. To mitigate risks, adjust the acquisition value or include cybersecurity remediation requirements in the definitive agreement. Also, insist on a follow-up third-party audit just before deal closing.
6. Understand your facility IT
Creating a common patient and employee experience and brand across the integrated organizations requires common “smart” building technology such as building access, digital signage, wayfinding kiosks and smart patient rooms. If you expect employees to work across merged facilities, integrated building access, timecard devices and security monitoring becomes critical. Key site and physical plant assessments should answer key questions like, Is the physical communication network sufficient (if not, it can take six months and more than $200 per device? Can the facility equipment “talk” to each other? Can employees use badges across facilities? Is asset tracking in place?
7. Plan for IT and operations to work side by side
Operations and IT must be in lockstep to ensure the due diligence accurately reflects the operational and IT implications to valuation and realizes the intended organizational and community benefit from the deal. Clinical and corporate functions leadership will set the overall system strategic vision and operational and clinical direction. Operations and IT must work together to determine the risk, high-level operational transition timelines and the IT implications and constraints—and, importantly, plan for how to ready the organization for the changes.
The Chartis Group report can be found here.