Rx for Merger Trauma

Amid a resurgence in M&A, a veteran offers lessons learned from a difficult merger.
P.B. GrayMarch 15, 2006

Beth Israel Hospital and New England Deaconess Hospital were peaceful neighbors for decades in the nation’s medical mecca, Boston. Then, in 1996, the two merged — and for five long years, staffers fought over issues large and small amid a poisonous culture clash. Doctors and nurses quit in droves. By 2001, after hundreds of millions of dollars in losses, the institution was teetering on the brink of insolvency. Badly managed, the merger meant to strengthen the two hospitals instead very nearly destroyed them.

Beth Israel Deaconess Medical Center has survived the trauma, but only after a dose of bitter medicine including layoffs, cutbacks, and other painful measures. Today, four years into a turnaround, it is back in the black. Promising young doctors have been recruited and the institution’s damaged reputation is being repaired. Donors are giving generously again. Morale among nurses and other staffers is high.

Managing a difficult merger will test many a CEO and CFO in 2006. After a strong 2005, mergers and acquisitions are on the rise again this year, and if history is any judge, many will fail. Who better, then, to offer some insights on the pitfalls and promises of managing a difficult merger than the man credited with rescuing Beth Israel Deaconess?

Blunt and outspoken, Paul Levy says the biggest challenges rarely involve the nuts and bolts of the deal. “Most mergers are pretty well conceived in terms of the business,” says Levy, the $857,000-a-year president and CEO. “What gets less attention are the cultural and social issues — and these are the most difficult of all to resolve.”

Unlikely Candidate

Levy, 55, was an unlikely candidate to rescue Beth Israel Deaconess. Educated as an urban planner, he is not a doctor, nor did he have any experience running a hospital. He did have impressive credentials as a crisis manager. As head of the Massachusetts Water Resources Authority from 1987 to 1992, he led the cleanup of Boston Harbor, derided for years as the filthiest in the United States. In an extraordinary public-works feat, Levy pulled off a multi-billion-dollar public-works project faster — and for less money — than planned.

At Beth Israel Deaconess, the challenge indeed began with culture. Beth Israel was renowned for its nursing care; the hospital had a low patient-nurse ratio and nurses had more status and decision-making power than at the Deaconess. The Deaconess was famed for its surgical expertise; the hospital was the first to do a liver transplant in New England in 1983. Their union was billed as a merger of equals, but in fact, it was a takeover by Beth Israel of the financially weaker Deaconess. Complicating the matter, the health-care industry was in the midst of wrenching economic changes as costs were soaring while insurers were cutting back on reimbursements.

Levy started in 2002, as the institution was heading toward collapse. Beth Israel Deaconess was losing $1 million a week. Revenues had plummeted. Doctors balked at sending their patients there. The Massachusetts Attorney General, Tom Reilly, was so concerned that he demanded — and got — weekly financial reports from the hospital. (In Massachusetts, the attorney general has the authority to oversee certain charities.) He even threatened to force the sale of the hospital to a for-profit chain, which would have meant losing its status as a teaching hospital affiliated with Harvard University, a devastating blow to its doctors and nurses.

Day 1

Levy began with a bold move. On his first day, he sent all employees — from surgeons to janitors — a memo that stated “this is our last chance” to save Beth Israel Deaconess. That raw honesty jolted the staff; they had been fed a diet of evasions, half-truths, and outright lies for so many years they had grown used to discounting any messages from management. (One short-lived CEO had rewritten the mission statement to include “joy,” a stretch considering the hospital’s toxic environment.)

That same day, Levy also disclosed a report by a management-consulting firm that had been hired to analyze the hospital’s problems and offer solutions. The firm had proposed draconian measures, including laying off 625 people. In his memo, Levy warned of layoffs but promised he would not fire any nurses, because he didn’t want to compromise the quality of medical care. (He eventually laid off 325 employees, most of them in administration.)

In a major shift in media strategy, Levy made available the memo and the management report to local newspapers. Previous CEOs had tried to cover up or whitewash bad news, occasionally offering oddly cheery takes on bad news. For instance, after the hospital’s credit rating was downgraded to near-junk, officials told reporters the hospital’s condition was improving because admissions to the maternity ward were up that quarter.

As shocking as Levy’s assessment of the crisis was to employees, they were also relieved that problems were finally out in the open. Levy asked them for help devising solutions. Over the next few weeks, E-mails poured into his office. He answered all 300 personally. “From that point forward, everything was going to be out in the open,” Levy recalls. “I didn’t really have a choice. The whole city was watching.”

Keep the Customers Happy

For all the promises of economies of scale, the Beth Israel Deaconess merger, like many others, had failed to achieve many. Even six years into the merger, certain business processes were slow and inefficient. The number of unpaid claims soared. On average, the hospital took 75 days to collect accounts receivables.

In an effort to cut costs, the institution was operating with a lean staff. Fewer medical technicians and housekeepers meant more work for nurses, who were increasingly unhappy. Clerks were in short supply, too, and that proved costly. Doctors, in effect the institution’s most important customers, were outraged by the hospital’s administrative ineptness. Their biggest complaint seems, in retrospect, petty: when they called the hospital for an update on a patient, they couldn’t reach a staffer on the phone. When they left messages on voice mail, no one returned the call.

“These were not problems of medicine,” Levy recalls. “These were organizational problems.” Former CFO Mitchell Creem, to whom Levy gives much credit for the turnaround, recalls that when he first joined the hospital in 2001, “it was a rudderless ship.” For example, he says, efforts to merge the hospitals’ billing departments had created a dysfunctional system. Medical staffers hadn’t been trained adequately in the importance of documenting patient treatment in their charts or in the intricacies of coding (the practice of assigning every aspect of treatment a numerical code, which helps insurers determine how much to reimburse for treatment).

Billing staffers struggled to make sense of incorrect or incomplete charts. As a result, many of the claims they submitted to insurers were rejected or delayed for further investigation. “It wasn’t a problem of systems, but a problem of communication,” says Creem. “We fixed it by making sure everyone in the billing chain understood the importance of moving the right information to the right people as quickly as possible.” (One year later, the time to collect accounts receivables had shrunk to 52 days. Creem himself was recruited in 2004 to help turn around another ailing hospital system, UCLA Medical Sciences.)

The team also established a call center to handle physicians’ inquiries rapidly and efficiently. Levy met personally with referring doctors in their offices to apologize for the previous lousy service and to ask them to give the hospital a second chance. Over time, admissions rebounded.

Command Respect

Hospitals are intensely political environments. Doctors’ big egos can make the working environment difficult for administrators and other staffers. Harvard teaching hospitals are even more politically charged because of the school’s reputation as one of the best in the world.

For an administrator like Levy, managing such an unruly herd took the sophistication of a diplomat and the toughness of a general. As professors at Harvard Medical School, Beth Israel Deaconess’s doctors, like those of other teaching institutions, could not be fired or disciplined. But Levy needed to secure their cooperation and establish his authority in order to effect a turnaround.

Early in his tenure, aware of fierce battles ahead as he imposed cutbacks, Levy had laid out the rules of engagement. Everyone was free to criticize his plan, but all critics had to offer reasonable alternatives. Six weeks after he arrived, Levy was challenged. He had called a meeting of medical-department chiefs to discuss a particularly thorny problem. Afterward, one doctor, who had remained silent throughout the meeting, complained in an E-mail to Levy about a decision made there. He also cc’ed the note to all the other chiefs and to the chairman of the board, Levy’s boss.

Most CEOs would respond to such a breach of etiquette in private. Levy did not. Instead, he sent a sharply worded E-mail to the doctor — and copied all the other recipients, too. He scolded the doctor for his incivility and his failure to speak up during the meeting. He made it clear the hospital was operating under new rules and that he wouldn’t tolerate violations. The confrontation effectively ended the era of free-range rudeness to administrators. Levy also made it clear he wouldn’t be bullied into endless bickering over the turnaround plan. After the incident, other doctors privately praised Levy. They, too, were eager for less debate and more action.

Nurses at War

Shortly after the merger, Beth Israel and the Deaconess raced to merge clinical departments. Almost immediately, a bitter war broke out among nurses. Beth Israel’s nurses, who had more autonomy but also more responsibility for the details of patient care, clashed with those of the Deaconess, who had delegated certain tasks such as drawing blood to technicians. Battles raged over issues as seemingly inconsequential as color-coding on charts. The Deaconess’s head nurse resigned, as did scores of her loyalists.

By 2002, annual turnover of nursing staff had reached 15 percent. That meant costly recruiting campaigns and training sessions for new nurses. Levy’s team established a series of task forces to get nurses to address problems together. That helped them forge a new nursing culture. Tensions eased, and turnover dropped to 4 percent in 2005.

Today, 10 years after the merger, Beth Israel Deaconess is profitable and on the rebound. All 36 operating rooms are bustling. (During the crisis, 8 had been shut down.) A 5-year, $2.5 million marketing deal with the Boston Red Sox has restored visibility in Boston. (For an undisclosed sum, Beth Israel Deaconess gets its logo on the scoreboard and several big advertising banners in Fenway Park.)

Another measure of success: grateful patients and their families are making donations again. In fiscal 2005, the institution reports, donations topped $22.4 million. Steven Fisher, who replaced Creem as CFO, says, “There’s a great value in transparency. Everyone understands the plan, from the members of the board to the technicians in the lab.” Now, Levy says, the challenge is to sort through new opportunities and make the right decisions. “That’s a welcome problem,” he says. “When you’re on the brink, you don’t have a lot of choices.”

P.B. Gray is a business writer based in suburban Boston.

Crisis and Recovery
Beth Israel Deaconess came perilously close to collapse before it was rescued by a new CEO.
1996 Beth Israel and New England
Deaconess merge
1997 Infighting erupts; morale plummets
Major exodus of doctors and nurses
1998 Operating loss: $71 million
CEO Mitchell Rabkin, M.D., retires;
replaced by James Reinertsen, M.D.
40 anesthesiologists quit
1999 Operating loss: $69 million
Transplant team quits
MD exodus continues
2000 Operating loss: $59.8 million
2001 Operating loss: $58.5 million
Bond rating lowered to BBB-
Massachusetts AG threatens to force sale of hospital
Reinertsen forced to resign; chairman Bob Melzer steps in as interim CEO
Transplant department shut down
2002 Paul Levy named CEO
Operating loss: $26 million
325 employees laid off
2003 Operating loss: $14.2 million
Hospital inks marketing deal with the Boston Red Sox
Orthopedics department revived with new physicians
Hospital lands $13.7 million pharmaceutical research grant
2004 Operating profit: $37.4 million
2005 Operating profit: $33.7 million
Levy signs new three-year contract extension