With a merger on the line, Centegra Health System navigated financial challenges to put themselves on the path to profitability.
Healthcare mergers and acquisitions are off to their strongest start in more than 10 years,1 continuing a trend shaped largely by value-based, at-risk reimbursement. Providers are bracing themselves for more to come. In a recent survey, more than 70% of respondents said they expect their organizations’ merger, acquisition and partnership activity to increase in the next three years.2
Strategically, a merger can make sense for both parties, provided the financials are in order. That was the case with Illinois’ Centegra Health System and Northwestern Memorial HealthCare when they announced a merger in 2016. But in early 2017, Centegra bore the brunt of a “perfect storm” of a series of simultaneous financial issues. These included opening a new hospital in a suburban area, closing the acute care function in another hospital within the system and the need to accrue more than originally anticipated due to increases in uncompensated care and growth in self-pay patients (a universal phenomenon in the last few years). Needing to make several mid-course corrections quickly, Centegra’s CEO reached out to Warbird Consulting, a financial consulting firm he had engaged in the past for select financial support expertise.
The magnitude of the financial impacts of the “perfect storm” issues was significant. The CEO wanted to take a comprehensive look at broad performance improvements ranging from revenue enhancements to labor productivity, among others, across the total health system. He also wanted his operations executives and directors to drive the process . A Warbird Sr. CFO, teaming with an operations executive from its partner, the CEO Advisory Network (CAN), moved quickly, creating six performance improvement teams led by executives and comprised of vice presidents and directors from across the organization. Warbird and CAN facilitated team activities, helping them form charters, establish financial objectives to make Centegra profitable within two years, and holding them accountable for metrics, decisions and results.
All six of Centegra’s performance improvement teams met weekly and made many major decisions, including reducing staff, outsourcing revenue cycle management and investing in technology. Warbird’s and CAN’s collaborative approach uncovered problems the staff had known about for years but didn’t know how to surface and resolve in a timely fashion.
“This worked for Centegra,” said Mike Eesley, CEO, “because Warbird didn’t tell us what to do. They gave us the structure and process to find the right solutions ourselves.”
Within four months of Warbird’s arrival, performance started turning around. Centegra forecasted a loss for 2018 but is on track to beat that prediction by more than $10 million, as a result of successfully implementing more than $30 million in “real and tracked” economic benefits emanating from the six performance improvement teams. EBIDTA also improved. The “run rate” for sustainable performance improvements is at $4 million per month moving into the next fiscal year. Centegra expects to reach their goal to be profitable in 2019, building Northwestern Medicine’s confidence in Centegra’s performance and their future partnership. In May 2018, Northwestern Medicine announced a joint signature for the definitive agreement to merge by September 1, 2018. That process is now in the planning stages.
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Michael Draa, CEO
Doug Fenstermaker, Senior CFO
“5 M&A Trends Investors Should Watch in 2018,” Morgan Stanley, February 6, 2018.
 Bees, Jonathan.“Mergers, Acquisitions, and Partnerships: Examining Financial and Operational Impact,” HealthLeaders Media, April 1, 2018.