Creating Resilience
Harnessing the Power of Health System Integration
June 29, 2023
As health systems face mounting financial challenges, many turn to mergers and acquisitions (M&A) in the hope that additional scale will help their profitability. But often their aspirations are dashed as organizations sometimes struggle to harness the synergies of these newly formed relationships.
CBRE Healthcare recently hosted a FOCUS Forum, Harnessing the Power of System Integration…Building a Strong Bottom Line, highlighting opportunities for M&A to create value. Given the continued stream of M&A activity in the healthcare sector, system integration is viewed as a central strategy for improving clinical outcomes, market growth and financial performance while mitigating the effects of increasing labor costs and inflation. This article highlights insights from leading healthcare operators and industry experts who have succeeded in realizing the benefit of effective health system integration.
Has the Bottom Line Hit Bottom?
Health systems have historically been challenged by eroding margins and pressures to provide the highest-quality care at the lowest cost. But, as a CEO of a multi-specialty surgical group commented, today’s financial pressures “have to be the most challenging time in my 40-year career.” Although systems are learning to navigate the current economic landscape, the numbers reflect these pressures with March 2023 operating margins down 27% compared to the same period in 2020 (Kaufman Hall Survey).
According to Boston Consulting Group's Dr. Sanjay Saxena, these economic challenges are driven in large part by the following:
- Significant increase in labor cost due to labor shortages
- Decreasing clinical volumes because of insufficient staffing for procedures
- Continuing shift from inpatient care to lower-cost/lower-margin outpatient settings
In response to mounting financial pressures, health systems have heightened their scrutiny of the largest driver of their cost pressure, labor, resulting in significant staff reductions. And while reductions in labor can help stem financial losses, most agree that significant structural improvements that result in sustainable and systemic solutions are required. Examples include these 10 high-impact moves, along with a renewed focused on harnessing the value of health system integration.
As Dr. Saxena pointed out, “Traditional cost levers are insufficient to counter unprecedented challenges facing health systems. Instead, let’s look at a fundamental rethinking of clinical operations to reduce costs, establishing benchmark-derived spend-reduction targets for selling, general, and administrative functions (SG&A) and optimizing a facility’s footprint.”
Identifying M&A Synergies
Dr. Saxena observed that “over 67% of hospitals have affiliated with other hospitals to improve delivery of clinical service and bolster their financial positions. Through these M&A activities, the combined healthcare organizations are seeking to improve cost synergies gained through delivery system synergies (e.g., shared labor pools, clinical pathways), performance synergies (contracting, claims processing, population health capabilities) and capital market fundamentals (balance sheet strength, credit ratings, access to capital) as well as growth synergies gained through strategic opportunities.”
However, Dr. Saxena points out that although these synergy opportunities exist, healthcare organizations that have gone through an M&A event have typically realized a modest 2%-5% benefit. This can be due to a lack of “organizational courage” to make the difficult choices such as consolidation of administrative functions or shedding of duplicate services.
An Early M&A Success Story
In 2022, SCL Health and Intermountain Healthcare joined together as a single healthcare provider. Intermountain Healthcare Regional CFO Sean Fadden shared, “Post-merger, we adopted Intermountain Healthcare’s internal operating model, which helped structure what key fundamentals the organization would focus on. These fundamentals are now consistent across all regions and drive clarity and alignment.”
Intermountain also has a focus on keeping up with care-delivery changes happening in the industry. They are targeting projects that meet the needs of today and tomorrow. One example is outpatient imaging, often found in acute-care hospitals. Shifting this service to an ambulatory setting lowers cost of care for the patient without tying up Intermountain’s acute-care assets.
Fadden points out that systems are experiencing capital constraints, and he urges an assessment of alternatives before making a capital request. This includes asking how systems can operationalize and maximize efficiencies and how systems can become leaner. Intermountain has created a standardized footprint for their primary care medical group in their Colorado and Montana markets. Every primary care clinic is developed with the same square footage and layout, ultimately leading to faster execution. The layout not only creates an efficient workflow but also delivers the same patient experience at every location.
The World Health Organization defines health system integration as “the organization and management of health services so that people get the care they need, when they need it, in ways that are user-friendly, achieve the desired results and provide value for money.”
Health System Integration and the Built Environment
Health system integration brings significant value in both cost and growth synergies, with a direct impact on the delivery of corporate real estate (CRE), facilities management (FM) and project management (PM) services by:
- Reducing costs through scale and facility supplies purchasing power; improving staffing efficiency by reducing duplicative roles and technology efficiency by leveraging common technology platforms
- Simplifying operations through consistency of services and outcomes, common design and operating standards; benchmarking performance between sites and teams, deploying special-skill teams for routine large-system maintenance
- Reducing risk through improved coordination of compliance activities, leveraging expertise and surveyor resources, shared learning and improved recoding and measurement
- Advancing strategy by connecting system enterprise strategy with local hospital strategic initiatives; improving deployment of capital through a system-wide view of capital needs
- Increasing agility through a portfolio view that allows for greater optimization of services, consolidation of administrative services and great fluidity of workforce deployment, with a system-wide view of administrative locations
Where Are We Today?
In a survey of over 100 health systems conducted by CBRE and International Facilities Management Association (IFMA) for the Healthcare Design Conference, 85% of respondents stated that “working as a system is a major priority of our leadership.” Given the value of and the mandate for health system integration, how are real estate, project management and facility services currently responding to the call for centralization and integration?
The same CBRE/IFMA study reviewed 14 administrative or shared services typically provided for a health system and evaluated the degree of centralization for each function (Figures 1 and 2).
Building Management/Engineering and Construction Project Management were among the least integrated functions within a health system set of administrative/shared service functions. Real estate was slightly more centralized in comparison to other functions such as payroll, IT and HR.
Figure 1: Support Services Integration
Source: IFMA Healthcare Institute Study, 2022.
The study provided a detailed list of activities within CRE/FM/PM and their degree of centralization, providing greater insight into how these groups flex between centralized and decentralized operating practices (Figure 2).
Figure 2: CRE/FM/PM Decentralization and Centralization of Services
Source: IFMA Healthcare Institute Study, 2022.
This breakdown of CRE/FM/PM suggests that activities that involve setting strategic direction or selecting systemwide third-party partners are more centralized, while the tactical delivery of services at a specific site are more decentralized. This split between strategic activities (more centralized) and tactical delivery of services (more decentralized) illustrates the need for significant coordination and communications between central and local CRE/FM/PM teams to ensure the effective delivery of services.
The Integration Playbook—A Best Practice
Given the complexity of integrating new additions to a portfolio, Northwestern Medicine’s Colleen Schmiege shared an approach that has become a best practice within the healthcare industry. Northwestern sees integration as important to their overall system, and they have a dedicated team leading the system’s approach. Every system or corporate function has a playbook on how they integrate across all activities, people, policies and procedures. Onboarding teams and portfolios into Northwestern’s systems is key to ensuring there is no lag time in operations. By making this onboarding a top priority, ordering systems, AP systems and building management standards are all integrated immediately. From there, bulk ordering or cost savings can be leveraged.
Schmiege points out, however, that a system approach is not always practical. Some services need to remain regional. For instance, snow removal and landscaping contractors don’t often have the bandwidth to cover all a system’s geographical regions. This regional approach to the deployment of tactical services aligns with the findings from the CBRE/IFMA study.
Explore our deal stages guide for M&A real estate strategy.
The Integration Roadmap
The journey toward effective integration of CRE/FM/PM services may appear overwhelming; however, a well-built plan paired with the support of experienced integration partners will serve as the foundation for a successful integration. Figure 3 demonstrates the approach that CBRE Healthcare uses when working with health systems to integrate facilities management functions. Each step along the journey requires collaboration, the use of best practices and the significant engagement of all levels within the health system organization. This disciplined, mission-driven approach ensures that an appropriate level of stakeholder engagement results in the effective delivery of FM services.
Figure 3: The Facility Integration Process
Source: CBRE, June 2023.
See how health systems can create a strategy to accelerate value realization across service lines.
A Healthy Bottom Line
With most health systems facing financial challenges, the smart and practical integration of CRE/FM/PM activities can significantly improve a health system’s bottom line. As DaVita’s Prince Reed shared, “DaVita’s approach to cost reduction looks at centralized pricing and services. By utilizing CBRE’s Provider Network, DaVita has experienced price protection through rate cards by trade and state. Additionally, deploying a technician workforce that is familiar with the system’s buildings and understands the work that needs to be done saves time when the work is of critical importance and therefore reduces costs of downtime.
While each health system’s cost reduction and system integration journey will be different, all aspire to the World Health Organization’s vision for health system integration, “that people get the care they need, when they need it, in ways that are user-friendly, achieve the desired results and provide value for money.”
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