LESSONS LEARNED FROM A FAILED MERGER 1

The Case Study of a Failed Merger of Hospital Systems discusses the primary factors in

the failure of the merger between Geisinger Health System and Penn State University Hershey

Medical Center. Merging in 1997 to create Penn State Geisinger Health System (PSGHS), the

two organizations split apart in 1999. Understanding what went wrong in the Geisinger/Hershey

merger provides a valuable resource in designing strategies for successful healthcare mergers and

preventing unsuccessful ones.

Geisinger/Hershey Merger Problems

Geisinger “might represent both the best and worst of what may come of health care

partnerships” (Toland, 2011). At the time of the merger, Geisinger was admired for “its

electronic records infrastructure, standardization of care techniques and a willingness to test out

new payment models” (Toland, 2011). Following the end of the merger, they have become

popular example of what not to do in a healthcare merger. Contrasting Geisinger’s failure with

the successful merger of Vanderbilt University Medical Center (VUMC) and Meharry Medical

College in Tennessee, a British case study (Laszlo, 2013) identified four common factors in the

differing outcomes of the two mergers: an organizational narrative, business model development,

cultural differences and governance.

Narrative and Governance. Leadership from a “dysfunctional Board…which never

succeeded in generating a common vision or purpose for the new organization” meant Geisinger

was unable to “articulate the reasons for the merger, still less develop a compelling narrative that

would carry the new organization through its teething problems” (Laszlo, 2013). In their

research on failed hospital mergers, Blackstone & Fuhr (2013) noted that the Hershey-Geisinger

alliance lacked strong leadership “to reconcile and promote a unified mission for the newly

formed organization.”
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Business Plan. While the merger was projected to save $115 million, increase efficacy

and “gain greater bargaining power with MCOs and other payors” failure to integrate services in

a timely manner created “operating losses of $21 million and $25 million in fiscal years 1998

and 1999, respectively” (Blackstone & Fuhr, 2003).

Culture. Of all the factors contributing to Geisinger’s outcome, deep cultural differences

between the two groups is most commonly identified as the primary problem. “From the start,

the systems were incompatible” (Toland, 2011). The Penn State academic environment was at

odds with the corporate management style of Geisinger. It is important to remember “divergent

missions of hospitals will not spontaneously disappear as a result of a merger” and if not

addressed can “lead to a merger’s demise” (Blackstone & Fuhr, 2003). Former PSGHS Senior

Systems Engineer, Jon Roberts agrees. “At the core of the disagreement was a question of

values…Geisinger didn't perceive that the greatest asset of the Hershey Medical Center was its

reputation, which came in large part from knowledgeable and quality conscious staff exercising

its values. By ignoring those motivations, Geisinger alienated themselves from Hershey's patient

population and staff” ( Roberts, 2013).

Perhaps one of the most important lessons to be learned from the failed Geisinger/

Hershey merger is understanding the power of organizational culture and the importance of its

role in successful mergers. “The US experience shows how important it is explicitly to build in

time and effort for cultural development (Laszlo, 2013). Another valuable lesson to learn is

identifying irresolvable cultural differences before the merger happens. While it “may seem

intangible at times, culture should be a primary determinant as to whether your hospital shakes

hands with, or walks away from, potential suitors” (Stempniak, 2014).

LESSONS LEARNED FROM A FAILED MERGER 3

Creating Successful Mergers

Current healthcare reform measures have continued the trend toward hospital

consolidation (Brown, Werling, Walker & Burgdorfer, 2012) and it is anticipated to continue

(Dafny, 2014). Healthcare mergers and acquisitions also “present a host of issues and challenges

that are seldom seen in business transactions involving less heavily regulated industries”

(Thallner & Protin, 2013). A case study of the 1997 merger between North Shore Health System

and the Long Island Jewish Medical Center concluded that “the relative success of the clinical

merger has been guided by the principle that no clinical service should be integrated simply for

the sake of merging, but rather that integration should be encouraged where and when it

makes sense to achieve speci c program goals. (Cohen, Dowling & Gallagher, 2001).

The most successful healthcare mergers are the ones with “a clear vision, effective

leadership, good communication skills, an open process with physician input, respect for human

factors and different cultures, latitude to mourn the losses inherent in any major

organizational change and a relatively short timetable” (Rider & Esterbrook Longmaid, 2003).

Conclusion

Understanding what went wrong in the Geisinger/Hershey merger provides a valuable

resource in designing strategies for successful healthcare mergers and preventing unsuccessful

ones. Key factors in forming successful healthcare mergers are communication, effective

communication, clear goals and a health respect for the power and importance of organizational

culture. Perhaps the single biggest mistake made in the Geisinger/Hershey merger was the lack

of cultural integration between the two. “It’s so important because, if you get the culture

right, then you'll get the efficiencies and the results that you were looking for when you put

together the partnership in the first place” (Stempniak, 2014).

LESSONS LEARNED FROM A FAILED MERGER 4

References

Blackstone, E. & Fuhr, J. (2003) Failed Hospitals Mergers. Journal of Health Law, Spring 2003

Volume 36, No. 2. Retrieved from: http://www.ncbi.nlm.nih.gov/pubmed/12940679

Brown, T. Werling, K. Walker, B. & Burgdorfer, R. (2012) Current trends in hospital

mergers and acquisitions. Healthcare Financial Management March 2012

66(3):114-8, 120. Retrieved from:

http://search.proquest.com.proxylib.csueastbay.edu/docview/963358991?accountid=2845

Cohen, R. Dowling, M. & Gallagher, J. (2001) The Trials, Tribulations, and Relative Success of

the Ongoing Clinical Merger of Two Large Academic Hospital Systems, Academic

Medicine 2001;76:675–683.

Dafny, L. (2014) Hospital Industry Consolidation — Still More to Come? New England Journal

of Medicine, 370;3, January 16, 2014. Retrieved from: nejm.org

Laszlo, D. (2013) ACADEMIC HEALTH CENTERS: TWO CONTRASTING CASE

STUDIES Two case studies from the US suggest four key success factors for emerging

AHSNs and AHSCs. David Laszlo Partnership, December 2013.

Retrieved from: http://www.davidlaszlopartnership.co.uk/academic-health-centers-two-

contrasting-case-studies/

Rider, E & Esterbrook Longmaid, H. (2003) A model for merging residency programmes during

health care consolidations: a course for success. Medical Education 2003;37:794–801

Roberts, J. (2013) A Tale of Penn State. Mentata Systems. Retrieved from:

http://www.mentata.com/ldaphttp/examples/bigten/tale_psu.htm
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Stempniak, M. (2014) Health care CEOs and other industry experts say the sometimes nebulous

topic of culture is an important part of M&A decision-making. Hospitals & Health

Networks, July 2014. Retrieved from: http://www.hhnmag.com/display/HHN-news-

article.dhtml?dcrPath=/templatedata/HF_Common/NewsArticle/data/HHN/Daily/2014/Ju

l/071414-stempniak-culture-merger

Thallner, K. & Protin, Z. (2013) Seal the Deal: Health Care Mergers And Acquisitions

In Pennsylvania. April 2014, Pennsylvania Bar Association Quarterly. Retrieved from:

http://www.lifescienceslegalupdate.com/uploads/file/Seal%20the%20Deal.pdf

Toland, B. (2011) Nation casts its eyes on Highmark acquisition. Insurer's acquisition of West

Penn Allegheny Health System has wide implications. Pittsburgh Post-Gazette, July 17,

2011 Retrieved from: http://www.post-

gazette.com/business/businessnews/2011/07/17/Nation-casts-its-eyes-on-Highmark-

acquisition.print