Reference no: EM132169767

The Merger of Two Competing Hospitals—Case for Chapters 5, 2, and 12

Mary Anne Franklin, Dale Mapes, Audrey McDow, and Karin Mithamo

This case highlights the process of merging two fully accredited hospitals, both of which have a full complement of state-of-the-art diagnostic technology, including MRI and CAT scanners, 24-hour physician-staffed emergency care centers, and specialized women’s centers. Both of these facilities are located in a community of 60,000 in the southeastern part of Idaho.

The success of the merger hinges on the timely resolution of several issues that the executive staff implemented, mutually enhancing solutions in the areas of: (1) leadership, (2) culture adaptation, (3) human resource management, (4) staffing, and (5) benefit issues.

Overview

Hospital A: Porter Regional Medical Center (PRMC)

Located on the east side of town, Porter Regional Medical Center (PRMC) was a for-profit hospital, consisting of 110 hospital beds, 8 of which were reserved for transitional care. PRMC was a privately owned facility. Mountain Health Care (MHC), a large healthcare organization in the Rocky Mountain region, owned the facility. Built in 1990, the facility was designed to efficiently handle patient flow from the emergency room to the pharmacy and to be a point of referral for more complicated patient conditions. PRMC services consisted of general and same-day surgery and full-service rehabilitation and radiology departments. Other services included a kidney dialysis center, on-site retail pharmacy, a regional Red Cross blood bank, 24-hour laboratory, home health, Infusion/Home IV, and a women’s center, including obstetrics and numerous other amenities.

Other assets owned by PRMC were the adjacent medical office buildings, a day care center, the land on which an assisted living center was located adjacent to the hospital, and the sports medicine complex adjacent to the state university’s arena. These assets represented 188,000 square feet of facility space housed on 63 acres. The hospital employed 450 personnel.

Last year, the hospital’s operating budget was $34 million. However, in the same year, the hospital experienced a $1 million loss, and a projected $500,000 loss was anticipated for the following year. After three years of red ink, PRMC decided to liquidate.

Hospital B: Banner Regional Medical Center (BRMC) and Turner Geriatric Center

Built in 1951, Banner Regional Medical Center (BRMC), a county-owned hospital, was located on the west side of town. The hospital structure included 154 inpatient beds and a geriatric healthcare center that consisted of 100–106 beds, 13 transitional care beds, and 7 rehabilitation beds. A medical office

building with a parking structure was located adjacent to the hospital. The campus consisted of 561, 366 square feet of building space, housed on 6 acres. The hospital’s operating budget for last year was $79 million. BRMC had a reserve fund of $20 million earmarked for major renovations to the existing facility’s emergency room and intensive care unit. BRMC’s services included the Herman Cancer Center, Family Centered Care (Ob/Gyn), a newborn intensive care unit, a women’s center, Life Flight (mobile intensive care), a regional pediatric unit, a geriatric center, and a sports/industrial medicine clinic. The hospital had a staff of 914 employees.

While the majority of the services were housed at BRMC, the home health administrative offices and the physical therapy departments were housed at different locations in the same town. For strategic planning purposes, management knew that the hospital’s viability depended on the necessary action to expand and renovate the facility to meet the needs of its current market.

The stage was set for the consolidation of the two competing hospitals: PRMC, crippled with three years of losses, and BRMC, struggling with aging facilities. The process would take the next three years to complete the merger and create a new facility. BRMC’s board of directors offered the facility to the county, so as not to let an outside organization compete for its resources and patients. The county would pay $25 million, to be paid in increments of $15 million at the time of purchase and $10 million over the next two to three years, interest free. The CEOs of PRMC and BRMC, Pat Herman, MHA, FACHE, and Scott Johns, MBA, had applied for the single hospital management slot. A consulting firm from Seattle was hired to review the resumes, experiences, and job performances of both men. In the end, the commissioners voted to hire Herman, who had more than 20 years as an administrator for a Catholic institution and had been the chief communication officer for a military academy.

Consolidation

In the fall, the chairs of each hospital’s board met to discuss options for cutting healthcare costs, addressing the shortage of healthcare personnel, and improving the delivery of health care in the community. The following spring, a letter of intent to consolidate was sent from BRMC to MHC. Three months later, an agreement was solidified with the following requirements:

1. The consolidated hospital would have a new name; and

2. A transitional team, including the previous CEO of PRMC, would be assembled to deal with management changes and employee benefit packages.

Other requirements included a new mission statement, a policy that no workers would be laid off as a result of the merger, and a newly elected 15-member hospital board, comprised of 10 BMRC board members and 5 PMRC members. Public meetings were held by board members and hospital administrators to answer questions and explain the merger process. During the meetings, the public voiced concerns that consolidation would destroy competition in the area, leading to an increase in healthcare costs and a decrease in services and quality. In preliminary employee meetings, the staff expressed concerns over seniority, job placement, compensation, and benefit packages.

Leadership

Leadership style at BMRC could be characterized as participative, autonomous, and selfgoverning. As CEO of BRMC, Pat Herman’s initial job was to rebuild the executive team that had been depleted by the

retirement of the outgoing CEO, the serious illness of the director of nursing services, and the departure of the vice president of human resources.

PRMC operated as a subsidiary of MHC, whose corporate office made all policy and strategic management decisions. Lower-level managers were not highly involved in the decision-making processes at MHC. Management, therefore, was highly structured and centralized. Consequently, the management team at PRMC relied on the corporate office for the day-to-day operations of the hospital.

To embrace the new entity, the community decided to name the consolidated hospital Portsmith Regional Medical Center. At the time of the merger, there was a combined staff of more than 1,400 employees. The staff at both PRMC and BRMC in duplicate management positions had to compete for their jobs. Approximately 90 employees decided to retire. By the conclusion of streamlining positions, 1,200 employees were part of the new organization.

Herman conducted 30 to 40 meetings with the staff and met weekly with the managers to answer their questions and concerns. The employees were encouraged to express their feelings. Employees were given access to the EAP program, social workers, and one employee relations person to help cope with their fears and apprehensions.

Culture Adaptation

Cultures in organizations are manifested in language, physical settings, values, symbols, and formal procedures. As a single entity, BRMC had developed an autonomous, independent, self-directed culture. PRMC’s culture was much less independent and relied heavily on the corporate office for its decision making, policy development, and operating procedures. These factors greatly influenced the culture of each organization and the final impact on the consolidation of the new entity.

PRMC and BRMC referred to each other in competitive language. There were many references to “them” versus “us” within the organizations. The language was indicative of the entrenched processes, cultures, loyalty, and systems that had to be addressed in the consolidation.

Both organizations had symbols that represented their cultures. Each organization had a logo that symbolized who they were and what they represented. PRMC had a vision and mission statement developed and defined by the corporate office, while BRMC, on the other hand, did not have a clearly defined mission and vision statement. Although BRMC’s board and Pat Herman had determined their vision and mission statements for the future, these statements were not clearly defined and were not communicated to the staff.

Human Resource Management

A year after the merger, a new vice president of human resources, Dale Miller, was recruited from a Catholic healthcare system in Kentucky to handle the newly merged hospital. Miller had extensive experience in mergers and acquisitions. Soon, he realized that the merger included more than the consolidation of duplicated services. The merger also brought together two different hospital boards, two separate groups of physicians and staff, and two different benefit packages.

Staffing

There were several major staffing concerns for the consolidated hospital. Six months prior to consolidation, PRMC and BRMC had to develop a joint medical structure that included leadership, credentialing, bylaws, rules and regulations, and peer review. Both hospitals had three medical staff leadership positions: chief of staff, vice-chief, and secretary, for a total of six physicians. A process was developed to consolidate these six positions to four. Four of the existing physicians’ names were recommended to the medical staff, and subsequently, the staff voted to retain all four to lead the new, consolidated medical staff. BRMC’s Dr. Gene Roberts became the new chief of staff of Portsmith Regional Medical Center.

The next step required evaluating the different bylaws, rules, and regulations for each medical staff at PRMC and BRMC. Through a ballot, the two medical staffs decided to adopt bylaws, rules, and regulations that reflected their joint decision-making efforts. Credentialing the two medical staffs required interventions by a legal team. Since every physician must be credentialed every two years, both hospitals had to develop a timeline that would meet The Joint Commission’s standards that would keep physicians’ credentials current with the time of consolidation. For example, if a physician’s time for credentialing would put him/her out of compliance, then the credentialing timeline had to move to the shortest time in order to maintain his/her current license. Since each hospital had different peer review/quality standards, the newly elected medical executive team and staff voted to modify and adopt PRMC’s more stringent, well-documented standards. By the time of consolidation, 160 physicians at PRMC and 180 medical staff at BRMC had completed a smooth transition with only five physicians choosing to leave.

Another staffing issue was with the nursing department. An analysis of the combined workforce revealed that in nursing services, the ratio of RNs to LPNs was disproportionate (70% LPN to 30% RN). This ratio was opposite what was needed for the planned high-tech services to be offered by the merged organization, which included cardiovascular, open heart, heart cauterization labs, cancer centers, and four call centers of excellence. These centers of excellence required a higher level of specialty nursing than was needed previously. The nursing staff ratio needed to be changed to a 60:40 RN to LPN ratio as rapidly as possible.

In addition, the staff analysis revealed that the skill levels of other existing staff needed to be developed rapidly in order to perform in a more technically advanced environment that included picture archiving computerization systems, electronic medical records, and new patient systems technology.

Benefits

Each hospital offered its employees benefits that included sick leave, paid time off, health insurance, life insurance, and retirement plans. Paid time off and sick leave were accrued at different rates at each hospital. BRMC was self-insured, while PRMC offered its employees a fully insured healthcare plan. In addition, healthcare coverage, deductibles, premiums, and out-of-pocket costs varied between the hospitals. PRMC employees feared that they would lose benefits if they moved to the BRMC retirement system. In the end, 90 BRMC employees opted to leave the organization for fear of losing their benefits. Another group opted to stay in order to obtain a better benefit package.

Two months later, the newly formed board and executives, including Herman and Miller, met at a planning retreat in Jackson, Wyoming, to decide how to best resolve leadership, culture adaptation, human resource management, staffing, and benefits issues. create a presentation addressing the merger and how you feel some of the difficult situations need to be handled. 75 words per 1,2,3 please type labeling 1,2,3.

Given the diversity of cultures embedded in the merged organization, what the management team needs to do to facilitate an actual working culture in the new organization (which is often more difficult than simply writing a new mission and vision statement)

How the duplication of services and departments should be handled

How the board and administrators can calm the fears of the staff before, during, and after the consolidation (think creatively)