Suggest the key financial drivers that most likely will cause health care organizations to merge. Provide support for your rationale.

The future of the health care industry is dominated by many uncertainties as it is feeling the heat on both regulatory and economic fronts. The health care industry is one of the most regulated in the United States and organizations are required to comply with a number of federal and state laws and regulations. In turn, these regulations have increased health care costs to unsustainable levels (Horner and Basu, 2012). From an economic standpoint, the health care industry has been facing deep cuts with a decline in per-patient revenue that pose a great risk to the industry. There has also been an increase in the regulatory pressures in terms of developments and pricing fronts. The big players in the market often have greater access to more resources that allow them to combat the negative forces to a certain extent. However, smaller health care entities may find it difficult to fight against these situations and thus consolidation in the industry is seen as one of the ways for survival. Many health care service providers are taking on mergers and acquisitions in order to improve operational efficiency, patient care and lower their costs. Some of the reasons behind consolidation in the industry are: 1) seeking economies of scale, 2) drawing on a partner’s unique clinical or managerial strengths, 3) gaining geographic strength to better serve patient and community needs, 4) improved access to capital and 5) better leverage in payer negotiations.
In 2011, there were 86 hospital merger and acquisition deals, up from 77 in 2010, and 107 physician group merger and acquisition deals, up from 67 in 2010, according to Irving Levin Associates, Inc. (Ellis and Razavi, 2012).
There are many financial drivers to look for in a merger. Some are direct and some are indirect as discussed below: 1. Higher Patient Volumes at Lower Reimbursement Rates – With the introduction of the ACA (Affordable Care Act), insurance premium rates will be reduced to a large extent. Although this law will help in making health insurance affordable to uninsured Americans, it will take a large bite out of the revenue of the health care industry. Smaller organizations will not be able to survive in such a situation. A merger will help in doubling the volume (as customer base will increase), thereby compensating for the decrease in per patient revenue. 2. Increase in expenses – A new technology is introduced every day in the field of health care. New diseases lead to new areas of expertise. State of the art technology and an updated expertise/ knowledge pool is required for health care organizations to survive amongst stiff competition. It increases expenses with no significant increase in income. A merger will help in pooling expertise and technology to reduce costs. Mergers help in taking the advantage of “Economies of Scale.” 3. Capital infusion - A large amount of capital is required to improve the health care infrastructure in developing nations. Healthcare players in these nations are therefore more likely to engage in M&A activity or joint ventures with other players and/or seek capital injections from private equity firms (M&A International Inc, 2012). It is easier to raise more capital when a health care organization is large. Therefore, this can be a key financial driver for nationwide and/or international mergers and acquisitions. 4. Minimize ongoing losses – Many health care organizations are under tremendous pressure of losses. Merging into another profit making company will help in minimizing losses to a large extent. 5. Borrowing costs – One of the methods of raising capital is by way of issuing bonds. Research has shown that larger health care organizations benefit from more favorable bond ratings and lower borrowing costs. (Dixon Hughes Goodman, 2013). This also helps in reducing the overall cost of capital. 6. Increase in value of business - In 2011, North America saw the highest level of health care merger and acquisition activity followed by Europe and Asia. At the country level, the U.S. witnessed the most deal making followed by the UK and Germany. There were 544 deals amounting to a total deal value of $15.2 billion dollars (based on 191 deals for which transaction values were available). (M&A International Inc, 2012). Mergers create value. It is always believed that the value of the merged institution is always higher than the sum of the two individual institutions. This is more popularly known as the “synergy effect.” 7. Accounts Receivable and Inventory balance. These balances indicate the quantum of capital locked in circulation. The lower these balances are the better they are for the organization. They indicate the ability to convert into cash quickly also known as “liquidity”
Assuming that two (2) health care organizations have merged. Determine the evaluation criteria that a financial analyst would use to evaluate the financial performance of the organization post-merger, and identify the determinants that the analyst would use to decide whether or not the merger generated favorable financial results for the organization. Provide support for your evaluation.
The following are some criteria to evaluate financial performance of the organization post merger: * Economies of scale – How much has the company reduced its costs post merger? How has the company combined the common activities and catered to a larger set of patients, thereby taking advantage of economies of scale? * Reduction in working capital – have inventory, accounts receivable and other current assets been reduced to an optimum level? * Increase in revenue – the most obvious evaluation criteria is whether there is a significant increase in revenue based on increase in volume. * Increase in value of the merged organization – is the value of the merged organization more than what it was previously? Ideally in the post merger situation, 1+1 should be greater than 2. The extra value is due to synergy in operations! * Reduced cost of capital – has the combined cost of capital reduced to an acceptable level?
Determine the key factors that will drive the financial planning process for most organizations in the post-merger phase, and examine the related impact to the organization process. Provide support for your rationale
For a merger to be successful, integration is very important. A merger is nothing but two different organizations combining into a new organization. It is the fusion of two unique mindsets, cultures and horizons. Thus, changes in the cultural, structural and operational dimensions are inevitable. * Cultural Differences: * Customs and practices are different in various cultures * Work ethics could also vary from one culture to another * Structural Differences: * Reporting to new bosses * Changing the working style to suit the requirements of the new seniors * Operational Differences: * Adopting new procedures * Adapting to the changed policies and methods * Changing from a labor-driven environment to a technology-driven environment
An organization has to overcome these differences in order to make a smooth transition during the process of the merger. The above differences have a direct relation to financial planning in the post merger phase.
Some of the examples of the effect on financial planning process are as below: * Changing from a labor-driven to technology-driven environment calls for increase in the capital expenditure. * There would be a dynamic change in the human resources. Employee turnover would be at its peak during the post merger phase. * Newer doctors/ specialists would have to be employed.
Thus, all these factors have to be considered while performing the financial planning process in the post-merger phase.
To have a successful financial planning process in place post-merger, there should be a finance integration team which will play a key role (Kurkurudza, 2012).
The activities of such a team will be as follows: * Define the structure of the sub-teams and their responsibilities * Review whether synergies as agreed at the time of due diligence have been achieved * Re-evaluating solutions if targeted synergies are not being achieved * Suggesting changes to be made to the operating model to achieve the targeted savings after merger * Collaborating with the various functions across the entity like the IT, HR, Legal departments, etc. to facilitate changes in the operating model
Create an argument to assert that the financial planning process is of high value to a health care organization. Provide support for your argument.
An organization’s backbone is the financial process, which has a substantial impact on the organizational process as a whole. That effort for a given finance process will vary greatly by maturity of the process and the industry. During a merger, the varying processes and ideologies from one organization need to be matched to the proficiency level of the other. Furthermore, a financial process that is managed on an existing platform will be less costly than implementing something new. Every new initiative and/or new idea involves money.
A good financial planning process is required to be in place for the following reasons: * Finance is the heart and soul of an organization * Employee retention and turnover is based on the compensation paid to them. It costs a lot to hire professionals and to build a good high quality knowledge base. * To keep up with the state of the art technology, finance is required * On the other hand, the sources of finance are limited * An effective budgeting and control process should be in place
Predict the financial stability of the health care industry over the next five (5) years. Provide support for your prediction. Throughout 2012, health care industry mergers and acquisition activity was hindered by the uncertainty of the presidential election. Now with a near-certain implementation of the Affordable Care Act (ACA) and its sweeping reforms impacting business models, Price Waterhouse Cooper expects 2013 to be a banner year for merger and acquisition activity across the health care industry. For health care providers, this momentum will be buoyed by economic pressure to accept lower reimbursement rates and as this pressure mounts, margin compression on single-site or inefficient operators will force divestiture or partnering strategies. Consistent with the last few years, continued acceleration of deals involving financially struggling providers seeking lifelines from larger, healthier systems is likely to continue. In addition to provider-to-provider deals, 2013 may see the trend of providers partnering or merging with payers continue (Starr, 2013). The introduction of new legislation has paved the way not only for mergers but also for better patient care. The reality is that healthcare providers are moving to a consumer-oriented approach for care. The consumer-oriented model — convenient access — is really a retail model in terms of placement of services (Roney, 2012).
Sources and research as stated above indicate a potentially good financial performance by the health care industry in the future, provided health care organizations make strategic mergers and effective operational changes.

REFERENCES
Dixon Hughes Goodman (2013). What hospital executives should be considering in hospital mergers and acquisitions. Retrieved September 1, 2013 from http://www.dhgllp.com/res_pubs/Hospital-Mergers-and-Acquisitions.pdf
Ellis, J. and Razavi, A. (2012, February 8). 3 reasons why hospital mergers are advantageous. Healthcare Finance News.
Horner, P and Basu, A. (2012, January 25). Analytics and the future of healthcare. Analytics, January/February 2012.
Kurkurudza, O. (2012, September 11). Putting the right people in place: Integrating finance after a merger. Retrieved August 31, 2013 from http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Putting-Right-People-Place-Finance-Merger.pdf
M&A International Inc. (2012). Hospitals and clinics M&A outlook: What’s the prognosis for deal making? Retrieved August 31, 2013 from http://mergers.net/fileadmin/MAI/public_documents/MAI_Healthcare.Report_2012.pdf
Roney, K. (2012, April 13). 3 Predictions for the future of U.S. healthcare: Retail models, population health & service line acquisitions. Beckner’s Hospital Review.
Starr, R. (2013, January 12). PwC: Fundamentals are strong for U.S mergers & acquisitions activity in 2013. Retrieved September 2, 2013 from http://www.big4.com/pricewaterhousecoopers/pwc-fundamentals-are-strong-for-u-s-mergers-acquisitions-activity-in-2013/