PAINS

   Low enrollment
   Broker management issues
   Low customer retention
   Inaccurate reporting
   Quoting and underwriting delays
   Marketing campaign issues
   Competitor tracking
   Low productivity
   Increasing claims costs
   Increased expenses
   Billing issues
   Profit losses
   Merger difficulties
   Multiple offices and branches
   Internal communications
   Excessive paperwork
   Decrease in service quality
   Other

PAIN DESCRIPTION:

The recent mergers have some analysts believing that this is the beginning of a potential cycle of acquisitions, as managed care plans attempt to position themselves for growth over the next two to five years. Others believe that consolidation in managed care has reached the end, and these mergers are the final move.

Health Plans should be aware of numerous problems arising during consolidation, especially those related to merging information systems and business processes. But there is a way to avoid these pains.

PAIN ANALYSIS:

Merging acquired systems can be predictable, if not painless. Mergers and acquisitions can be classified into four species, with an integration strategy suitable for each. But no matter how generic the business combination, unforeseen complications may arise in IT.

#1. Marriage of Equals. Potentially fraught with difficulties is the marriage of equals, such as the merger that formed Harvard Pilgrim Health Care. Choices must be made between redundant systems and personnel. And the issues involved are not just technical, but political, too.

Case: Not integrated computer systems

For Harvard Pilgrim Health Care Inc., it was the best of years, and it was the worst of years. In 1998, Newsweek rated the health maintenance organization the finest in the country, awarding it a string of "A's" in various categories. Similar accolades came from U.S. News & World Report and a few consultancies, too. But if Harvard Pilgrim's service passed with high honors, its business flunked: the HMO posted a $94 million operating loss for fiscal 1998. The deficit was unprecedented, forcing the resignations of CEO Allan I. Greenberg and CFO Thomas J. Brophy.

Harvard Pilgrim was spending a lot of money exterminating the Millennium Bug. Worse, the HMO, which was formed by the merger of two plans in 1995, still had not integrated its computer systems. In particular, a legacy claims-processing system that previously supported 500,000 subscribers was expected, after the merger, to handle more than 1.2 million — but couldn't. As a result, "we created a backlog," said Debra E. Speight, senior vice president and chief information officer of HPHC in the late 90s.

The backlog, significantly longer than normal, meant medical providers would be paid late, causing them cash-flow problems and creating ill will. "It's difficult to understand where you are [in the business], with a backlog," summed up Speight, who, when asked about its dimensions, replied, "We're working on getting it down."

Experienced CIOs like Debra Speight are familiar with the kind of systems-integration problems that can result from a merger or acquisition, but many non-IT managers are not. It is a dangerous ignorance. Information technology can break a deal if you do not look at it and make good decisions in due diligence.
What post-merger lessons has Harvard Pilgrim learned? Speight emphasizes two. First, scalability issues cannot be overstressed: "One plus one doesn't necessarily equal two. You need computer power." Second, technology cannot solve business-process issues. "Systems can only reflect the complexity of the business," says Speight. "If you haven't rationalized your business processes, your systems are going to struggle."

#2. Same system, different customizations. What about a situation in which merger partners use the same CRM software? It may seem reasonable to assume that two identically named systems, controlling identically named processes can be combined without too much fuss. But in reality, customization may have made those systems as different from each other as from another vendor's software.

#3. Customer Conflicts. Acquirers can develop a false sense of comfort when a target is in the same business. Systems may be tailored to customers, and a target's customers may be very different from the acquirer's.

Case: Different customer bases

That lesson was learned two years ago by a large pharmacy-benefits manager. The PBM, with $2 billion in annual revenues, acquired another PBM half its size. The acquirer figured rapid integration and cost reduction would produce immediate benefits, earning Wall Street's approval.

They learned, very painfully, that both sets of systems had been customized to deal with very different customer bases. The larger PBM's business consisted of custom deals with Fortune 100 companies, while the smaller PBM focused on mid-tier firms and other health care providers. Making modifications to accommodate the new data was a huge investment, something that was not planned for in the merger financials, and that took a long time. The company's stock took a hit and has been slow to recover.

#4. Clashing Styles. Appraising a merger fit is not just a matter of systems and data; technology "style" counts, too.

Case: Different styles

In January 1998, MedPartners Inc. and PhyCor Inc., two physician practice management companies, scuttled their $6.25 billion merger, more than two months after it was announced. Why? "Each company takes a much different approach to business in a number of key areas, including information systems," said PhyCor chairman and CEO Joseph C. Hutts. One of these companies felt their approach was so different that, had they integrated them, they would have "taken the value out" of the deal. If they were to ratchet down the technology and service, their customers might rebel.

Best Practices

Given everything that can go wrong with IT in a business combination, companies should take steps to ensure that most things go right. For starters, they should consider making their CIOs privy to acquisitions in the planning stages, not when the papers are signed. At acquisition-minded companies like UnitedHealth Group, technology chiefs enjoy senior-executive status.

Above all, companies should develop an IT merger plan. Typically, integrating an acquisition has four broad phases.

In the first, pre-merger phase, when there is a tight lid on communications, you have to be looking at the 'outliers' — the benefits packages of IT people, structure of the IT organization, and so on. As for systems, you cannot get into them, because you have not signed the deal yet. But you have to ask, What are we doing the deal for? Cost savings? To increase market share? Can those systems and people support that goal?

The second, planning phase focuses on three things: (1) establishing a merger leadership team, (2) assessing the technology portfolio, and (3) opening up lines of controlled communications from IT to "stakeholders" in a merger, including employees, customers, and suppliers. The latter are frequently neglected with the result that insecurity and rumors abound.

In the third, implementation phase, everybody does the same job as before. You are really worried about systems people leaving, and it takes time to put together an organizational design. As a rule of thumb, 20 percent of IT staffers from the acquired company have to stay — the high-performing people, those who do network maintenance, operate mainframes, and so on. It is critical to keep systems running and minimize disruption.

It is also vital to establish basic communications between the merger partners — telephone systems, email, intranet connections. In the final, post-implementation phase, you do a postmortem on lessons learned. Even if you do everything right, you are probably going to move up from 'miserable' to just 'wretched.' But you will reduce the misery quotient.


Four M&A Strategies

How to integrate IT operations depends on the kind of business combination.

• Marriage. Companies are of similar size and play similar roles in the same industry.
  Strategy: Merge both the people and the technology.
• Acquisition. The acquiring company is at least twice the size of the acquiree — both companies are in the same industry and play similar roles.
  Strategy: Merge the people but replace the technology.
• Vertical integration. The companies are in the same industry but perform different roles — a manufacturer acquiring one of its distributors, for example.
  Strategy: Merge the people and build systems interfaces.
• Conglomeration. The companies are in different industries altogether.
  Strategy: Maintain separate IT groups and infrastructures.
  

Success Story: A health giant absorbs IT at ER speed.

Can you name a company with 5 percent greater revenue growth than Microsoft Corp.'s over the past dozen years? If you said UnitedHealth Group, you are correct. The Minneapolis-based diversified health enterprise's dizzying ascent from $200 million in revenues to its current $19 billion reflects a frenetic acquisition pace — about 15 in the past few years alone, according to CIO Paul F. LeFort. The acquisitions have ranged from managed health care plans to publishing concerns, from clinical-research organizations to software companies.

The systems of all those companies had to be absorbed, and that is why UnitedHealth has a team of about 80 IT employees who work full-time on acquisitions or integration. They immediately take over the day-to-day operations of an acquired health plan, working down backlogs as soon as possible. The team follows what LeFort calls a "cookbook approach" to systems conversions. "Our philosophy is to bend operations around the systems when we do consolidations," he says. "Ninety percent [of any changes] are in operations, not systems."

UnitedHealth's highly structured due diligence process focuses in turn on applications and infrastructure (telecommunications and networks, hardware, and middleware). LeFort says the company takes an "absolute approach" to financial and human-resource programs, switching all acquired companies to its CRM software. But with other applications, it will mix and match when feasible, taking pieces of acquired systems and bolting them onto other systems.

Claims-processing and enrollment systems are particularly daunting to integrate, says LeFort. Yet, since 1995, UnitedHealth has smoothly migrated millions of customers from a dozen different claims engines to its own systems. "We moved MetraHealth [United-Health's biggest acquisition, with 8 million to 9 million members, in 1995] over three years, and nobody knew it was happening," says LeFort with pride.

Where UnitedHealth reaps the greatest IT cost savings from an acquisition is the infrastructure. "About 50 percent of your costs are on the infrastructure," notes LeFort. "If you can get phone calls [from an acquisition] at 3 cents instead of 10 cents, you get immediate savings." The company outsources its telecommunications and data-center operations — making it easier to switch acquisitions to a shared infrastructure, and supplementing UnitedHealth's own IT expertise with what LeFort calls his "strategic partners."

To would-be acquirers, LeFort offers three pieces of advice. One: "Ask, 'What are the cost-reduction synergies?' If you make an acquisition, can you load what that company does on your infrastructure? " Two: "Understand the strength and stability of your systems. Will one more straw break their back?" Three: "Make sure you're buying some of the key talent, what I call the 'thoughtware' assets. You really need those." LeFort knows: he himself came to UnitedHealth via acquisition, as the CIO of MetraHealth.

ADVICE:

More importantly, organizations that regularly make acquisitions now view systems integration as a strategic competency. The swifter they can merge IT in an acquisition, the sooner they can reap benefits from the deal.

When there is a choice to be made, the priorities are, first, maintaining a seamless presentation to the customer, and second, ensuring optimum cost and efficiency, which includes system capacity. Data conversion is a critical task and the hardest job. Because systems are integrated over a period of time, you end up in many cases doing different rewrites of feeds from core systems. That is why you need HMOZ.

HMOZ is the best new technology that helps you eliminate Sales and Marketing inefficiencies and straighten business processes in your Managed Care Organization. As a result of an M&A, part of your sales personnel may be gone, but HMOZ helps you to prevent losing your data and to educate a new sales force about previous business practices. HMOZ is ideal for painless merging of several customer bases and uniformity of your data.

Often, merged companies attempt to combine multiple conflicting back-end systems, so HMOZ, being very flexible and easy to integrate with, serves as a single, centralized front-end system and saves a lot of time and funds on system replacement. HMOZ allows you to enjoy the benefits of accurate centralized admin, larger networks, lower cost providers, etc. Your MCO can provide more plan offerings, more custom made plans for the large clients, and satisfy higher consumer expectations.

Sales and marketing people can keep their jobs because no longer will data verification and validation be the sole responsibility of Underwriting and Benefits Administrators. HMOZ ensures your data is clean on the early stages of the sales cycle. Moreover, HMOZ complies with all recent legislations and restrictions, even "Do Not Call" and "Do Not Spam" lists.

One Demo is better than a thousand words, and one Solution Audit is better than a thousand demos. We encourage you to follow our CRM proverb and take advantage of this opportunity.

Click on one of the three links below to continue your HMOZ research.