The economic uncertainty, the increasing regulatory pressure from the government and other entities as well as the rising competition leads to the escalation of merger and acquisition in the health care industry. In recent years, the health care industry has been affected by new federal and state laws that aims to improve health care services. While new health care policies and regulations has become beneficial to patients, it has caused a great economic strain, especially among smaller health care entities. This leads to the decision among many hospitals and health care institutions to align with other health care system. Merger and acquisition are considered as a smart option for institutions that aims to enhance their financial operations, and health care services.
1. The Key Financial Drivers that Caused Mergers
a. Seeking Economies of Scale
The economies of scale is referred to as the cost benefit that is derived from an increased output and lower fixed and variable costs. The concept behind seeking economies of scale is based on the premise that the growth of companies leads to greater production, and this result to the possibility of decreasing costs. Consequently, many medical institutions realize the benefits that can be derived from the alignment with larger health care entities. The pressure to pursue mergers is founded on the logical assumption that “larger units improve patient outcomes by increasing average volumes of activity by clinicians” (Posnett, 1999). Further, a study on the economies of scale in some medical institutions showed that there are cost savings that “amount to a two percent reduction in pre-merger costs and that hospitals experience these costs savings almost immediately” (Maki, 2014). Empirical evidence indicated an improved performance in hospital operations such as reduced costs, increased patient population and improved revenue.
b. To Draw on a Larger Entity’s Clinical and Managerial Strengths
Hospital administrators believed that mergers helps in the improvement of operational efficiency and access to quality health care, thus a large number of medical institutions are encouraged to consolidate. This is because smaller hospitals will be able to take advantage of the better funded and equipped hospital systems. It was pointed out that patients from smaller medical institutions will benefit from hospitals alignment with larger entities because of ready access to health specialists and advanced medical equipments. That is, services have been added after mergers, as in the case in Grand Island, Nebraska where “a skilled nursing facility was opened and outpatient services were expanded, including radiation therapy, radioactive implants, hemodialysis, and cardiac catherization” (Kusserow, 1991).
c. To Gain Geographic Strength
In line with the concept of economies of scale, there is a need for medical institution to broaden the scope of their operation. There is a need for hospitals to expand the population that they serve and this involves covering a wider geographical expanse. Moreover, the larger number of patients will not only help with cost absorption, but will also allow further learning that helps in the development of better strategic decisions for better health care. Physicians will also be able to improve their knowledge as they can draw from the experience of other healthcare professionals, in addition to that, the larger patient population is helpful in coming up with more conclusive diagnosis and effective treatments.
2. Evaluation Criteria for Post-Merger Performance
As pointed out by many financial analysts, merger is one among the better ways by which small business organizations can achieve financial progress. As a means to evaluate post-merger financial performance, analyst must first analyze the financial statements of both parties. There is a need for both medical institutions to present their financial statements before the initial stage of the merger. While this criterion may not be able to provide a full picture of the financial operations of the two businesses, the information derived from these statements will be helpful in determining improvements in the financial performance of the entity. The elements contained in the financial statements of the merging health care institutions are useful in coming up with important details of business operation such as average returns and debt to equity ratio.
Consequently, there are different determinants to help financial analyst in the determination of whether the merger resulted in a positive or favorable financial performance. The financial statements that include the income statement, the balance sheet and statement of cash flows are vital determinants that communicate whether the merger resulted in better operational performance. For example, the income statement will show how the merged institutions fared in terms of cost reduction and income maximization.
3. Key Factors that Drive the Process of Financial Planning
There are various reasons and factors that drive the financial planning of medical institutions. One such factor is the rising costs in operational expenses, such as medical technology, drugs and labor costs. While most hospitals aim to provide lower health care costs, the rising costs in major hospital expenses obstruct the decision to reduce costs. There is therefore a need for to re-evaluate its operation to determine areas where cost reduction is possible without the need to sacrifice quality.
Another factor that motivates financial planning among hospitals are the government policies that impacts the health care industry. For example, the enactment of the Red Flag Rule, which mandates the implementation of identity theft prevention program, prompts healthcare organizations to plan a smooth operation at minimal cost to patients (Gasper, 2010).
3. Importance of Financial Planning
Financial planning is important for every business, and this is especially so in the health care industry because they are likely to be affected by the promulgation of government laws and policies. One example of these policies that largely impacted the operation of medical institutions is the recent Affordable Care Act. Moreover, there is a need for health care providers to have a financial management plan in order to help, not only in the establishment and maintenance of sound revenue and costs system, but also to aid management in procurement decisions. Further, financial planning serves as a vital part of the health care industry as a means to establish and meet financial goals. This means that financial planning is a tool that links the current state of operation to that of the desired results in the future.
4. The financial stability of the health care industry
With the promulgation of laws and policies that impacts the operation of health care industries, one can predict an optimistic future of the health care industry in the next five years. Health care will become more affordable, yet medical institutions will be more equipped and funded to meet the needs of the population. Further, technology will play a vital role in working outpatient and physician relationship, so that it would be less costly for patients to acquire the needed treatment. New health care policies, coupled with advanced medical technology will help in supporting the stability of the health care industry. Despite the numerous challenges, the health care industry will be flexible enough as it remains to be supported by favorable factors such as the economic growth and the existence of cost and expense strategies. Financial experts will be able to provide effective planning measures to support the financial operation of health care organizations.
References
Gasper, P. (2010). The Impact of Federal Regulations on Health Care Operations. 19 Annals Health L. 249
Kusserow, J. (1991). The effects of hospital mergers on the availability of services. Department of Health and Human Services. Retrieved from http://oig.hhs.gov/oei/reports/oei-04-90-02400.pdf
Maki, J. (2014). Hospital realignment: Merger offers significant patient and community benefits. Center for Healthcare Economics and Policy.
Posnett, J. (1999). Is bigger better? Concentration in the provision of secondary care. British Medical Journal, 319, 1063-1065.
