In 2010, hospital mergers and acquisitions were valued at $3.8 billion, 2011 followed pace – and it looks like there will be even more M&A activity in 2012 as health care reforms kick in, certainty in the health care landscape increases, the economy picks up, and investors seek bargains.
Even before the health care reforms passed, there were good reasons to consolidate. With consolidation there is an opportunity to:
- Reduce duplicated functions to achieve cost savings
- Capture larger market shares
- Improve negotiating positions with vendors and insurance companies
- Obtain better bond ratings if one of the hospitals has a strong balance sheet
As the CEO of the University of Louisville Hospital Jim Taylor noted: “We couldn’t grow and our role was going to decline as we face revenue pressures from declining government reimbursement.”
As an example, he noted the Hospital couldn’t afford to buy advanced electronic medical records or upgrade its facility. Under the new consolidation arrangement, it was able to address these problems, integrate patient care, and look at innovative financial arrangements.
Examining it strictly from a financial perspective, the Berkeley Center for Health and Technology reports that consolidated local and regional chains typically wield greater bargaining leverage than do stand-alone facilities.
As a result, the evidence from research studies consistently show higher hospital prices and profits following consolidation. In one study, the average hospital in concentrated markets received $32,411 for each commercially insured patient undergoing coronary angioplasty, or one and a half times the $21,626 received in more competitive markets. Similarly large price differentials were observed for other procedures such as: pacemaker insertion, knee replacement, hip replacement, lumbar fusion, and cervical fusion.
Consolidation will likely continue to be a major trend in the health care industry. Two overarching implications appear clear – the sophistication and complexity of the buying process will increase and more profits will be available for investments. At a strategic level what does this mean for those of us interested in sales and sales training?
The changes created by M&A mean business as usual is unlikely to carry the day. So, what strategies hold promise for improving sales effectiveness in this new environment?
- Explore the use of the national account model. Just like other industries, the national account model is being embraced in medical sales – where corporate sales directors or similar titles are quarterbacking these large opportunities. Typically these corporate sales directors are responsible for leading the sales effort across their company’s product portfolio, at large IDNs. As the quarterbacks they work with all of the sales people selling into the IDN, coordinating the sales effort. This organization structure elevates the importance of team selling – and all its implications becomes an integral component of the sales strategy.
- Improve the skill of the sales team to have business conversations. After consolidation business discussions – which can range from financial issues to inventory concerns to contract terms and conditions – are elevated. And they involve large sums of money. In many cases they are escalated to the CFO level. CFOs are primarily concerned about cost savings. They want to know how the financial impact will be measured and what guarantees will be triggered if the targets are not met. Others, like Materials Management are focused on achieving cost savings, too. Everyone on the sales team must have the skills to carry out these discussions and the rest of the team needs to be able to provide the required support.
- Help physicians translate clinical value into economic value. Although after consolidation more people in the carpeted area of the hospital, like the CFO, are involved in the decision process, physicians certainly continue to play a key role in the adoption process. But they have to move beyond clinical arguments; they are required to consider the business case. This means all sales people in an account need to help physicians to “connect the dots” so doctors can translate clinical value into economic value for medical administrators.
When it comes to developing the sales training designs to address these challenges the programs need to be:
- Customized specifically to address the challenges posed by a consolidation.
- Team-based so that the corporate sales directors and the rest of the team can attend the program as at team. If you are going to sell as a team, you need to train as a team.
- Experiential since the skills that must be developed require substantial practice and feedback. Sales simulations have proven to be highly effective training design for helping a sales team develop the skills required to sell in the new environment created by mergers and acquisitions.
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©2012 Sales Horizons, LLC