Using the Balanced Scorecard for Successful Health Care M&A Integration
ARTICLE
The failure of merged organizations to achieve stated goals is commonplace. In health
care, the challenge is exace
ated by the industry’s third-party payer system and multiple
stakeholders, especially the physicians in the merging entities. This article describes how
the Balanced Scorecard helps health care leaders overcome cultural misalignment across
previously independent providers, enabling them to become better aligned to a new
strategy for delivering higher value for patients, physicians, payers, and communities.
Each year, more than 100 large mergers and acquisitions (M&A) occur between large U.S. health
care providers, with additional mergers occu
ing between hospital systems and independent
physician practices, and between payers and providers.1,2 The usual rationale is that industry
consolidation enables the combined institution to deliver better-integrated care across the many
products and services that patients require and also to create scale economies to reduce costs. But
igger has not proved to be better. Despite the noble sentiments expressed to justify health care
M&A activity, independent research has been unable to detect benefits for patients or payers. A
leading health care economist summarized, “… substantial academic literature finds horizontal
mergers of competing health care providers tends to raise prices, and very limited evidence
to suggest there are offsetting benefits to patients in the form of improved quality.”3 Indeed,
esearchers suggest that health care M&A activity serves mainly to reduce competition and
increase hospitals’ bargaining power with payers. Additionally, employees, especially those who
have been “acquired,” are frequently dissatisfied and demoralized.
Some of the reason, however, for the lack of tangible improvements from health care M&A activity
can be attributed to the difficulty of realizing the potential benefits from such transactions. Even in
the for-profit private sector, extensive evidence, accumulated over decades, shows that most M&A
transactions fail to add value to the acquiring company.4-6 To overcome this challenge, companies
in the private sector have applied a management tool called the Balanced Scorecard (BSC) to
achieve cultural and strategy alignment across the merging institutions. The BSC, introduced in
Using the Balanced Scorecard for
Successful Health Care M&A Integration
Robert S. Kaplan, PhD
Vol. No. | May 21, 2020
DOI: XXXXXXXXXX/CAT XXXXXXXXXX
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NEJM CATALYST INNOVATIONS IN CARE DELIVERY 2
1992 by the author and David P. Norton, showed how an organization’s performance could be
measured not only with financial metrics, but with metrics about customers, internal processes, and
employees, information, and culture (Figure 1).7,8 It expanded the viewpoint of CEOs and CFOs
eyond backward-looking financial metrics to include measures that predict future performance:
satisfied and loyal customers, high-quality processes, innovation, motivated and skilled employees,
and an aligned culture.
FIGURE 1
The Unique Aspects of the Health Care Organization
The customer focus of the BSC is especially significant for health care institutions, which have
many different types of customers. Customers of most companies perform three distinct functions:
They select which product or service to buy, theypay for the product or service, and theyreceive the
product or service. In health care, however, the three customer functions are performed by three
different groups. Physicians, especially primary care physicians, select (or strongly influence)
the hospital or clinical practice where their patients will receive care; private health plans or the
government pay the provider for the care; and patients receive the care. All three groups — refe
ing
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NEJM CATALYST INNOVATIONS IN CARE DELIVERY 3
physicians, payers, and patients — are customers of the provider organization, and the strategy
of the provider organization should explicitly recognize and measure how it creates value for all
three customer types. An academic medical center has additional customer types: interns and
esidents for its educational function, and academic scholars and practicing physicians for its
esearch function. If five customer groups were not complicated enough, all hospitals also have
esponsibility for the health and well-being of residents in the communities where they operate.
Table 1 shows examples of performance metrics for the diverse customers of health care providers.
The Need for Attentive Leadership
Companies use the BSC measurement system to overcome several significant ba
iers to strategy
execution. Most employees in large organizations do not know what their organization’s strategy is
or how to translate it into day-to-day actions that would contribute to the strategy’s success. Even
managers aware of the strategy have incentives based only on short-term financial performance,
not successful execution of a multi-year strategy. Not surprisingly, short-term cost-cutting actions
drive out long-term strategy implementation. Without the guidance of a BSC, the dominant
management system is the annual budget, prepared and monitored by the finance office. The one-
year operational budget leaves little leeway for initiatives that enhance customer relationships,
generate innovation, and invest in systems and employee development. Such initiatives cost money
in the short term but are necessary to deliver the value from a multi-year strategy. As reported
to me in co
espondence with Thomas H. Lee, MD, “many middle management and frontline
clinicians say that their organizations have grown so fast and so large and are so complicated that
people don’t know what the organizations are about. They think the CEO and other C-suite folks
focus only on the numbers and not on the values. There is real angst as a side effect of growth.”
The lens from the Balanced Scorecard helps us understand that the problem is not with using
numbers to run an institution; rather, the problem is using the wrong numbers, those that
measure only short-term financial results instead of the numbers that quantify the benefits to the
Table 1. Performance Metrics for Diverse Health Care Customers
Customer Type Customer Objectives Potential Metrics
Patient “Provide me with the highest quality of
care in a safe and respectful environment
that is easy to navigate”
• Index of Patient Outcomes
• Incidence of complications or readmis-
sions
• Patient Net Promoter Score
Refe
ing Physician “Provide easy access to excellent service
for my patients”
• Lead time to schedule appointment
• Quality of communication
Payer “Provide Competitively Priced Health
Services”
“Offer low administrative burden”
• Price index relative to regional compet-
itors
• Cost of invoice processing
Community “Understand our community’s health care
needs and work to address them”
• Rating of hospital by community advo-
cacy groups and local government health
agencies
• Number of collaborative community
health care initiatives
Academic Physician “Provide me with an excellent learning en-
vironment that enhances my development
as a health care professional.”
• Number of articles published in top-tier
journals
• Impact factor of published articles
• Quality of applying residents and fellows
• Placement of residents in top-rated aca-
demic medical centers
Source: The Author.
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NEJM CATALYST INNOVATIONS IN CARE DELIVERY 4
institution’s multiple customers. The sustaining success of the BSC has been its ability to allow
managers to continue their focus on short-term financial savings while also investing in the drivers
of long-term value creation for their customers. This cannot be overstated: The Number 1 reason
for lack of success when using the BSC is lack of leadership. The BSC is a measurement tool that
enables visionary leaders to communicate and implement a strategy.
The Development of the BSC for M&A
Initially, the BSC was used by individual business units in a corporation. Soon, however, executives
of diversified companies, such as the FMC Corporation9 and large energy and financial services
companies, extended the BSC’s scope by using it to align and monitor the strategies of their
multiple, decentralized business units. From aligning diverse business units to an overall corporate
strategy, it was a logical next step for executives to use the BSC to align the mission and strategy
for newly merging organizations. Companies that announce their intention to merge form a pre-
merger integration team of senior executives from the two companies. The team, even prior to the
official consummation of the merger, co-creates a Balanced Scorecard for the strategy of the new
company. Without use of this management tool, a merger is likely to fail because of the difficulty
of overcoming the quite different cultures, strategies, and growth models in the merging entities.
Typically, such differences become obvious only after the two companies have combined, leading
to friction and failure to achieve anticipated synergies. When merged health care institutions
encounter such conflicts, they cope by allowing each institution to operate mostly as it did before,
other than in negotiations with payers. It should not come as a surprise, therefore, that the merged
entity is incapable of delivering either lower total costs or better patient outcomes. In contrast,
private-sector companies that implement a BSC for the new entity are able to
eak down the
cultural ba
iers that cause most other mergers to fail, enabling them to deliver better value to their
customers.
The BSC enables the merging companies to translate the new corporate strategy into a balanced
set of performance metrics. Senior executives can use the scorecard to (1) better communicate
the new strategy to all employees, (2) align employees’ daily work to strategic priorities, and (3)
monitor, evaluate, and reward employee performance. It also provides the information for regular
strategy review management meetings that keep the organization focused on effective strategy
implementation during the critical post-merger years.
As health care leaders begin to recognize that a “good merger” will be
measured by reduced costs to payers or better patient outcomes, they
may find that a BSC could also help persuade regulators about the
enefits from a proposed merger."
Senior executives of merging health care providers should consider whether the BSC might play
a similar role for them. As health care leaders begin to recognize that a “good merger”10 will