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
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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.
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