3 Reasons to Prioritize Capital Equipment Planning During Healthcare System Mergers
From 1998 to 2015, over 1,400 hospital mergers have transpired in the U.S. They’ve been increasing nearly every year, especially since the ACA was enacted in 2010. Healthcare systems are consolidating for both financial and strategic reasons; these challenging and complex transactions bring growth opportunities as well as risks.
An article found on CIO called: “What is merger and acquisition due diligence?”, written on June 9th, 2015 by Dewey E. Ray, explains the 4 areas of due diligence to focus on:
- “Strategic Position
- Financial Data
- Operational Assets
- Legal Matters”
Operational assets are a major aspect of M&A planning and implementation. Effectively dealing with the capital equipment involved in a transaction takes consideration, strategy, and organizational software tools. In this regard, let’s discuss 3 reasons to prioritize capital equipment planning during healthcare system mergers.
Definition of Capital Equipment
Equipment that costs over $1,000 or $5,000 (depending on the size of the organization) and isn’t consumable within a year is generally classified as capital equipment. This doesn’t include supplies or the building structure itself. From a $1,200 defibrillator to a $1 million MRI machine, capital equipment is the expensive equipment used to serve patients.
Great Opportunity to Reduce Costs
“… (1) purchasing redundant, expensive medical equipment and generating excess demand…” is one of the 3 ways: “Hospitals have contributed to the cost hike in recent decades…”, according to a Forbes’ article called: “Why Major Hospitals Are Losing Money By The Millions”, written on November 7th, 2017 by Robert Pearl, M.D.
Spending on durable and non-durable medical equipment amounted to 4% (2% each) of the $3 trillion in revenue for the healthcare industry in 2014 (data from CMS). Basically, purchasing capital equipment is a multi-billion dollar expenditure for healthcare organizations as a whole.
The exact total value of the capital equipment involved in merger transactions will vary depending on the size and type of healthcare organizations involved, yet is always a significant amount. The large amounts of money involved in mergers and the physical nature of most capital equipment creates opportunities for managers to save money and increase workflow efficiencies.
An article found on U.S. News called: “Hospitals Waste Billions of Dollars in Medical Supplies”, written on March 9th, 2017 by Anzish Mirza, explains:
“Medical supplies that are in perfect, usable condition are often put out in the trash by healthcare facilities, ProPublica reported. And it adds up to an estimated $765 billion a year, according to a 2012 report by the National Academy of Medicine.”
The article includes capital equipment in the definition of supplies, as it goes on to explain the type of waste involved includes ultrasound machines costing $25,000.
Essentially, capital equipment planning during M&A processes can be used to discover and resolve waste issues, as well as to assess, consolidate, streamline, and organize capital equipment assets. After a thorough audit and due diligence are accomplished, healthcare systems can pinpoint opportune areas and implement profitable resolutions.
Streamlines Operational Workflows
Effective capital equipment planning has the potential to streamline operational workflows when mergers are completed; the capital equipment and infrastructure involved in delivering care to patients largely determines the efficiency and effectiveness of that healthcare organization’s services.
Replacing outdated equipment, phasing out equipment, selling used equipment, and consolidating equipment from mergers, are all processes that can be optimized for profitable capital equipment ownership and use. Essentially, organizations want to maximize the potential of existing capital equipment while being resourceful and strategic with upgrades, integrations, and liquidations.
Capital equipment planning is only one of the four areas of focus for due diligence, yet holds the key for healthcare systems to streamline operational workflows. The equipment itself is what powers and facilitates everyday workflows; when this equipment is optimized for streamlined efficiency, organizations will be empowered and serve their patients more effectively.
Gives Organizations a Chance to Assess Strategic Capabilities
Capital equipment planning gives healthcare organizations a chance to assess their strategic capabilities when it comes to the expensive equipment involved in the delivery of care. Mergers shake up healthcare organizations and challenge them to change and integrate with new healthcare systems; this period of change gives planners an excellent opportunity to assess their strategic capabilities.
The combined capital equipment of all healthcare systems being merged in a transaction represents the expanded extent of the consolidated system’s capital equipment capabilities. Essentially, the capital equipment acquired in a merger will expand operational and strategic capabilities; capital equipment planning can assess this expansion to develop strategic goals with marketing, operations, budgeting, etc.
The reasons mergers happen in the first place are strategic, whether to resolve financial issues or form strategic partnerships to increase capabilities and efficiencies. By prioritizing capital equipment planning during the merger process, healthcare systems can realize their strategic goals and effectively utilize acquired capital equipment resources.
Assessing strategic capabilities concerning acquired capital equipment from mergers is important, especially considering the transactions are of such high value, as an article found on Healthcare Finance called: “Hospital mergers up 13%, says Kaufman Hall”, written on January 9th, 2018 by Jeff Lagasse, explains:
“There were 115 hospital and health system mergers in 2017, enough for a 13 percent increase, according to a new report from consulting firm Kaufman Hall and Associates.
Of those transactions, 11 involved organizations with at least $1 billion in annual revenue.”
He then explains the reasons for the increase:
“One of the biggest drivers of this increased M&A activity is that hospitals and health systems are trying to compete with national insurers and outpatient medical care providers by achieving scale and competing for market share.”
As for implementing strategy into the M&A process, an article on H&HNcalled: “A Business Plan of Operational Efficiency for Merging Health Systems”, written on March 10th, 2015 by Brandon Klar, explains:
“A health system BPOE [Business Plan of Operational Efficiency] is a comprehensive, action-oriented system integration plan. It is designed by and for organizations that are forming a single corporate structure strategically and operationally. Simply defined, a BPOE is a road map for achieving the full benefits of an affiliation — operational efficiencies, cost savings and enhanced clinical value.”
Prioritizing capital equipment planning will help healthcare systems strategically develop and understand their holistic objectives for the completed merger transaction outcome.
There are many complexities involved in healthcare system mergers, including dealing with capital equipment efficiently and effectively. By prioritizing capital equipment planning, health organizations can reduce costs, streamline workflows, and enhance their strategic capabilities.
In order to reach these objectives, healthcare organizations can utilize cloud-based capital equipment planning software to develop, organize, and implement strategic merger roadmaps; these innovative management solutions are key for streamlining and organizing the complexities involved with healthcare system mergers.
Originally published at Business and Society Articles Aug. 12, 2018