Healthcare M&A: Focus on Synergies, Not the Pain Points

Mergers & Acquisitions have altered the healthcare landscape dramatically over the past decade, and the activity continues to accelerate and evolve. M&A in healthcare has become an essential reality with the transition to value-based care, and Supply Chain plays an integral part in executing the strategy and capitalizing on the newly created value related to contracting and purchasing power.

During my career, I was fortunate to work as a Purchasing Director for a national eye care organization. When I began my tenure, we operated around 40 locations from coast to coast, ranging from surgery centers to optometry offices and everything in between. Within a year of my joining the organization, we had more than doubled our footprint, with over 100 locations organized into regional hubs. I became quite familiar with M&A and the challenges that came along with the territory.

I had been a consultant for several years prior to taking on this new challenge, and I felt I was now ready to lead Purchasing efforts for a healthcare organization for the first time. I thought it meant I would spend every day negotiating with suppliers and doing my best to save us money on everything we purchased. However, I quickly discovered that negotiating wasn’t our primary pain point. As we grew rapidly, our primary pain points were:

  1. Integrating new acquisitions
  2. Measuring the impact of the integrations

The challenge wasn’t building competitive leverage as I thought it would be. It was capitalizing on synergies that had been inherently created.

Eye care is a new frontier for M&A activity, but hospitals have been undergoing rapid consolidation for some time now — and the stakes are even higher.

Although an oversimplification, M&A activities can be segmented into a couple of phases that present unique challenges for the supply chain: the diligence phase and the post-close phase.

Diligence Phase

The diligence phase takes place prior to the acquisition and represents the time during which the acquiring company is evaluating an organization with the intent to acquire it.

During the diligence phase, supply chain’s challenges include:

  1. Assessing the acquisition target’s contracts and measuring the synergy that is expected by converting them to the acquiring company’s contracts. Because the acquiring healthcare organization boasts much larger volume and is likely receiving more favorable pricing, there is potential to save money for the organization being acquired.
  2. Evaluating risks associated with the target’s contracts, which may include lengthy contract durations, penalties for terminating, and minimum volume commitments.
  3. Collecting as much data as possible to ensure that the impact of the acquisition is understood and can be projected appropriately. This can be a challenge, as some contracts may be considered confidential.

Post-Close Phase

Once the transaction closes, the process enters the post-close phase and the real work begins.

During the post-close phase, supply chain’s challenges include:

  1. Converting the acquired organization’s contracts and minimizing the amount of time to integrate them into the established corporate contracts. At this point, it is important to minimize the amount of time between the transaction closing and converting the contracts so that the acquired organization can begin experiencing the benefits as soon as possible.
  2. Measuring the impact of the conversion and performing audits to ensure that the suppliers are adhering to the new contracts and the facilities are utilizing the products and services as expected.
  3. Enforcing standards related to purchasing processes and supplier base. The idea of standardizing contracts is to minimize risk by managing fewer contracts with fewer suppliers. This can be very difficult because the acquired organization was recently operating on its own. So, established processes and suppliers must be altered to overcome this challenge.
  4. Leveraging new volume to continually enhance contracts. For organizations that are in rapid-growth mode, it is important to continually renegotiate contracts to take advantage of the leverage created by increased volume.

At TractManager, we recognize and understand the challenges arising from Mergers & Acquisitions, and we have services specifically designed to ease the burdens described above. TractManager’s Contract Audit Services ease the challenges of comparing contracts during the diligence phase and performing audits post-close to ensure that no value is left on the table. This minimizes the labor burden on supply chain in performing these extremely tedious tasks and allows contracts to be compared objectively rather than relying on assumptions.

Supply chain’s role in Mergers & Acquisitions is vital, and the challenges can seem overwhelming. TractManager is here to help.

Eric Slimp, Purchased Services Director

Eric Slimp joined MD Buyline in 2013, left in October 2017, and rejoined the company in June 2018.