Rx for Merger Trauma

Amid a resurgence in M&A, a veteran offers lessons learned from a difficult merger.

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.

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