Chapter 1 - Introduction
Chapter 2 - Consolidation in general
Chapter 3 - Advantages of Consolidation of Hospitals
Chapter 4 - Disadvantages of Consolidation of Hospitals
Chapter 5 - Conclusion
Chapter 1 Introduction
Increasing cost pressure, shortage of staff, investment backlog – more and more hospitals need to merge with others to survive. Apart from the decreasing capital investments of the federal states, especially the implementation of DRGs (Monopolkommission 2008, 313) and the possibility of integrated health care lead to an enormous cost pressure.
In Germany, there is a dual hospital funding. The costs of operation are beared by payments of health insurance funds. Investment costs for new buildings or the replacement of capital goods are payed by the federal states. However, these allowances of investment are on the decrease for years, which leads to investment backlogs in hospital (Augurzky et al. 2009, 93). This implies that hospitals are supposed to invest, but their funds are too small to do so. In the long run, the economic efficiency suffers because it cannot compete with other hospitals regarding the technological progress (Augurzky et al. 2009, 13). The introduction of DRGs [Diagnosis Related Groups], the basis of calculation for hospitals, lead to an increasing pressure of working economically. In the old system, every day of a patient’s stay in the hospital was refunded based on same-day hospital and nursing charges. In the new system, only occupant days within a predetermined period of hospitalization. The preterm discharge or a discharge exceeding the period of hospitalization results in discounts in payments, which often do not allow cost recovery (Eveslage 2006, 37-39). Accordingly, hospitals are under pressure to treat their patients fast and discharge them within the preset period. This requires efficient and economical operations. An additional burden is the growing competition in the sector of ambulatory care. As a result of the strong medical progress, more and more operations, which were formerly bound to be performed in hospital, can nowadays be done ambulant. Another innovation in the German health care system are medical service centers [Medizinische Versorgungszentren]. They will soon be capable to take over the primary health care in rural areas and replace major hospitals there, because they are able to work more economic (Augurzky et al. 2009, 162). On the whole, the pressure on hospitals increased steadily in the past years. Many hospitals are not capable to assert themselves on the market under today’s conditions solitary. 12 per cent of the economically weak hospitals are expected to shut down by 2020. (Augurzky et al. 2009, 124). This is, apart from the already mentioned reasons, a consequence of increasing overcapacities. Many hospitals try to consolidate in order to avoid a closure. These attempts often fail, but if they are successful, a consolidation leads to decreasing costs and increasing quality. In the following paper, there is a general consideration of consolidation conditions and possibilities and especially a close look at the advantages and disadvantages of consolidations regarding cost savings and quality improvement.
Chapter 2 Consolidation in general
Consolidation can be defined as the “Combining [of] two or more firms through purchase, merger, or ownership transfer to form a new firm” (Business Dictionary, 2011). In addition to all rights, assets and debts are also transferred to the newly merged venture (Greulich 2005, 108). The development of a consolidation averages one year from the first concrete idea to the signing of a contract (Steffen and Offermanns 2011, 4). The entire integration takes one to three years on average (Steffen and Offermanns 2011, 6).
The principal aim of many consolidations is the achievement of an economical size of the company. (Steffen and Offermanns 2011, 4).
Additional aims are primarily limited to the divisions market, resources and costs. The secondary aims market expansion, quality intensification and the control of the patients’ flow are to improve the competitive situation at the market. Common use of resources, increased productivity and profitability as well as the exchange of experiences and quality intensification shall lead to an improved access to resources. The aim of decreased personal and material costs can be reached through the downsizing of infrastructure, staff savings, reorganisation of processes and the elimination of constructional problems (Rippmann, 5-7).
According to Konrad Rippmann the process of consolidation can be divided into four phases (2007, 11-17). The preliminary decision takes three months on average. In the first instance, the decision of general principle is made. There are two possibilities: two companies merge and form a new company or one company buys another one out. In the following step, the positioning, a valuation of the own business culture is worked out. Besides the actual culture, there is also a desired value of how the culture should be. The criteria for the business culture are innovation and the readiness to assume a risk, customer orientation, costs orientation, preciseness and classification, focus on results, autonomy of employees, team orientation and the willingness to cooperate with other companies. Afterwards, the consolidation partner is examined through a well-structured battery of questions, which is divided into four category groups with three questions each.
The four categories are cooperation, own job profile, external job profile and intrinsic motivation. In the first category cooperation the stumbling blocks of cooperation, the general goals and the specific goals are identified. The own job profile contains three questions: 1. What do I like to do? 2. What am I good at? 3. What do others cherish me for? The third category external job profile deals with the questions ‘What does Mr. X like to do?’, ‘What is Mr. X good at?’ and ‘What do I appreciate about Mr. X?’. The endmost category intrinsic motivation differentiates between ‘one third I enjoy to do’, ‘one third I accept’ and ‘one third I am glad to hand over’.
Thereafter, a framework is developed which is communicated at an early stage to the public. In the second phase, the consolidation, agreements of guidelines and framework requirements are made and measures and aims are exactly defined. Furthermore, the preliminary consolidated area of responsibility is set and the employees are instructed and qualified. In this stage, the conceptual framework is completed. In the realization phase, all fundamental practice-related steps are finalized. This includes the formation of an internal supervision team, the adoption of a human resources management, detection of data and the implementation of the strategy. The fourth phase is about optimization of processes. First, the actual status is captured. Then, it is examined if the stadium of the project work is completed and if the company organisation structure is established. As long as the requirements are fulfilled, the company turns back to its day-to-day business. During further progress of the optimization, rearrangements are communicated internal and external. The development of new business areas and products can be started.
Types of consolidation
There are three different types of consolidation: the horizontal, the vertical and the conglomerate consolidation. The horizontal consolidation deals with the merger of two companies which are on the same level of provision of services (Horzella 2010, 28). The consolidation partners can be hospitals and groups of clinics, but also health insurances. In the vertical consolidation, companies of different levels of provision of services merge to a new unit (Horzella 2010, 28). This can be the merger of a regular hospital for acute cases and a rehab hospital. Another example is the merger of an ambulant service provider and a hospital. The conglomerate consolidation takes place between companies of different branches of trade and of different levels of production and service. The aim is to open up new business portfolio (Horzella 2010, 28). An example for this case is the merger of a manufacturer of medical devices and a hospital service.