NHS mergers: putting all our baskets into one egg?

Our new report on NHS mergers makes for sober reading. Looking at 20 mergers over the past five years, we question the strategic rationales for a number of them, point to convoluted approvals processes, and highlight the high costs of many recent mergers.

While there have been successful NHS mergers, success rates overall are very low. Towards the end of our research, we stumbled on the Audit Commission’s 2006 assessment of mergers involving failing providers and suffered an acute bout of déjà vu.

None of this is specific to the NHS or even to health care. Across sectors, study after study puts the failure rate of mergers and acquisitions at between 70 per cent and 90 per cent. The shareholders of acquiring firms usually lose from mergers, while the shareholders of the acquired firms tend to benefit, although shareholder value overall is typically eroded.

So why do those in charge persist in pursuing mergers, despite all the evidence against them?

Economists, with their knack for snappy phrases, point to the possibility of ‘principal-agent problems’, where managers have personal incentives to act against shareholders’ interests. The leaders of listed companies generally get substantial pay rises following mergers, whether they are successful or not. Even if there aren’t immediate financial rewards, managers may hope for power and prestige through leading major mergers.

Behavioural psychologists might have a slightly more generous perspective on human nature, but a dimmer view of our cognitive abilities. Our motives may be pure. But our primate brains, designed for gambolling across the Savannah, are ill-adapted to the rigours of weighing the costs, benefits and risks of major projects.  

We might approach the challenge with the best will in the world, but a host of cognitive biases conspire to trip us up. Senior leaders are typically over-confident about their ability to lead major projects, while systematically over-estimating the benefits and under-estimating the risks. Groups of people in organisations tend to reinforce these biases rather than countering them, with unrealistic assessments becoming the consensus view and scepticism interpreted as disloyalty.

Add to this our tendency to get locked into risky gambles. Senior leaders typically make a series of investments when pursuing a merger: carrying out an initial appraisal of options, developing the full business case, bringing in an accountancy firm to carry out due diligence and so on. As the investments mount up, it becomes increasingly difficult for leaders to walk away from the deal with their credibility intact.

Even where there is a strong strategic rationale for merger, leaders grossly under-estimate the challenges of post-merger integration. Michael West’s recent blog highlights our tendency to categorise others as members of ‘in-groups’ or ‘out-groups’ and our difficulties in overcoming deep-rooted inter-group prejudice when bringing different organisations together.

So what can we do to improve the quality of decision-making on NHS mergers, and can we stem the tide of unsuccessful mergers?

More robust corporate governance seems like a good place to start. We argue in our report that the national bodies should play the role of sceptical shareholders, rather than promoting mergers as happens at present. The chairs and non-executives of providers have a critical role to play in challenging merger plans.  

Perhaps we also need a fundamentally different approach to assessing the costs and benefits of mergers. The prevailing approach is for planners to make highly subjective assessments about the likely costs and benefits of individual mergers, a method that leads to systematic over-estimation of the benefits, irrespective of the ‘sensitivity analysis’ subsequently applied to the base case.

An alternative might be to avoid subjective assessments entirely. Rather than estimating the costs and benefits of the project at hand, we might focus instead on the costs and benefits of similar projects in the past. Rather than guessing the procurement savings from our merger, we might ask what procurement savings actually arose from similar mergers. We suspect that the business cases for some recent mergers would look rather different if the parties had taken such an approach.  

Mergers may seem a superficially attractive solution for struggling hospitals, but in the vast majority of cases there are other strategies that better tackle the root causes of providers’ difficulties. One alternative, which we set out in a future paper, is for groups of providers to develop place-based systems of care, with the emphasis on collaboration across organisational and service boundaries to meet the needs of a defined population.

This blog was co-authored by Michael West, Head of Thought Leadership at The King's Fund.

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Comments

#544953 Exerbia Chidombwe

The report is about NHS merges,its concerned about other organisation that have merged and failed.It suggests the failure rate of merges and acquisitions at between 70 percent and 90 percent.The blog was co-authored by Michael West,Head of Thought Leadership at The King's Fund.It outlines costs and benefits of similar projects in the past.

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