Why They Merged and Why the Merger Was Unsuccessful
In 1997 University of California, San Francisco (UCSF) merged its two public hospitals with Stanford’s two private hospitals.The two separate entities merged together to create a not-for-profit organization titled UCSF Stanford Health Care.The merger between the health systems at UCSF and Stanford seemed like a good idea due to the similar missions, proximity of institutions, increased financial pressure with cutbacks in Medicare reimbursements followed by a dramatic increase in managed care organizations.
The first year UCSF Stanford Health Care produced a profit of $22 million, however three years later the health system had lost a total of $176 million (“UCSF-Stanford Merger,” n.
d. ). The first part of this paper will address reasons why the two institutions decided to pursue the merger by looking through the theoretical lens of bounded rationality, prospect theory and resource dependence theory (RDT). The second half of the paper will purpose reasons why the merger was unsuccessful by considering key concepts in organizational behavior such as power and culture.
The threatening and uncertain fiscal times led the leaders to select the option that they believed maximized their chances for survival. The theory of bounded rationality, proposed by Herbert A. Simon, suggests that people are largely limited by time, information and cognitive limitations(Simon, 1997). The merger between the two medical schools seemed to make sense, both institutions shared a common mission of treating the uninsured, training the next generation of innovative doctors, and remain at the forefront of breaking research and technology.
Since both were going to be competing for increasingly scarce resources, joining forces made sense. Together they would be able to reduce spending on administrative costs, and better prepared to negotiate contacts with large insurance companies(“UCSF-Stanford Merger,” n. d. ). Simon suggests that people, bounded by time, cognitive ability and information, are more likely to make satisfactory decisions rather than optimal ones(Simon, 1997).
Instead of focusing time and energy outlining potential ways to remain separate amongst the shifting payment structure UCSF and Stanford, both limited by time and fearful of the potential losses, agreed to merge. The merger was UCSF and Stanford’s way to mitigate risk and manage uncertainty. Prospect theory is a behavioral economic theory developed by Daniel Kahneman that holds that people are more likely to take higher risks when decisions are framed in negative terms(Kahneman & Tversky, 1979). Although mergers are complex and risky the looming fear of decreased reimbursements made the leaders focus on the benefits of merging.
Kahneman argues that people do not base their decisions on final outcomes, instead they base their decisions on the potential value of losses and gains(Kahneman & Tversky, 1979). Instead of analyzing the risk of the merger, leadership focused on the more pressing burden, the bottom line. To stay alive in the era of managed care, university hospitals across the country were seeking mergers with private hospitals. Calculations showed that hospitals lost $4 million annually for each 1 percent drop in indemnity patient population(Etten, 1999).
Since the 1990’s, indemnity insurance was on a drastic decline in San Francisco opening the market for managed care organizations(Etten, 1999). RDT looks at how the behavior of organizations is affected by their external resources. The theory, brought about in the 1970s, addresses organizations demand for resources, resources and power are directly linked(Pfeffer & Salancik, 2003). RDT holds that organizations depend on resources thus the idea of merging, due to increasing resource scarcity, appealed to both institutions(Pfeffer & Salancik, 2003).
On paper, the merger between these two institutions made sense – both institutions were close to one another and competing for diminishing resources. Together they could reduce administrative costs and join forces to negotiate with large insurance companies. The need to create a new culture and dissolve historically existent power struggles were two large tasks that needed to be addressed in order to ensure a successful merger. However, the way in which the merger was organized did not lead to a successful merger.
UCSF Health Care did not spend adequate time creating a shared culture in which the two organizations would see one joint organization with shared power (resources). On paper both organizations agreed to share power, however both parties behavior showed otherwise. Dr. Rizk Norman, co-chair of the combined physician group of UCSF and Stanford faculty, attests that neither institution was ever comfortable enough to share financial information(“UCSF, Stanford hospitals just too different,” n. d. ). UCSF did not fully disclose their fiscal concerns regarding one of their sinking hospitals, while Stanford was also guilty of ithholding information (“UCSF, Stanford hospitals just too different,” n. d. ). Merging into one should eliminate the sense of two separate entities, however not enough was done to shape the merger in such a way that facility and staff felt like equal partners. Loyalties existed within the organization, beginning at the top with the Board of Directors. Structurally the board was split between seven Stanford board members and seven USCF board members and three non partisan members, however loyalties to ones particular institution never dissolved(“UCSF-Stanford Merger,” n. d. ).
As outlined, RDT, holds that organizations depend on resources, which originate from their environment. Resources are an organizations power used to compete in their environment. The two health systems shared an environment, thus competed with one another for power (resources) (“UCSF-Stanford Merger,” n. d. ). Because Stanford was a for-profit organization, they held more fiscal power over UCSF. Pfeffer and Salancik argue that the way to solve problems of uncertainty and interdependence is to increase coordination, more specifically, to increase shared control of each other’s activities(Pfeffer & Salancik, 2003).
Had the two institutions worked from the beginning to increase coordination and communication between both institutions the merger may have more changes in succeeding. Increased coordination between the two institutions could have lead to the creation of a strong culture. Culture is the shared belief, expectations and values shared by members of an organization. (“Leading by Leveraging Culture – Harvard Business Review,” n. d. ). Employing a new culture starts from the top, management must model in accordance with the new culture.
This was not done at UCSF Stanford Health Care due to existing loyalties. Adding to the culture struggle, the institutions were far enough away from one another to merit concern. For an organization to flow smoothly, clear communication channels need to be established. Without open communication and collaboration a shared culture cannot emerge. Weak cultures harm the workplace by increasing inefficiencies that lead to increased costs. UCSF Health Care model from the top down to create a shared culture.
Had leadership spent adequate time addressing ways to dissolve existing power struggles, and creating a shared culture that would set the foundation to achieve a new-shared vision, the merger could have been successful. Engaging leaders in creating a strategic plan to merge two separate existing cultures would have encouraged them to show support and dissolve power struggles. Shared resources, open communication and a culture of oneness may have set the foundation for a successful merger between the two organizations. References Etten, P. V. (1999). Camelot or common sense? The logic behind the UCSF/Stanford merger.
Health Affairs, 18(2), 143–148. doi:10. 1377/hlthaff. 18. 2. 143 Kahneman, D. , & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263. doi:10. 2307/1914185 Leading by Leveraging Culture – Harvard Business Review. (n. d. ). Retrieved October 16, 2012, from http://hbr. org/product/leading-by-leveraging-culture/an/CMR260-PDF-ENG Pfeffer, J. , & Salancik, G. (2003). The External Control of Organizations: A Resource Dependence Perspective. Stanford University Press. Simon, H. A. (1997). Models of Bounded Rationality, Vol. 3: Emperically Grounded Economic Reason.
The MIT Press. UCSF-Stanford Merger: A Promising Venture. (n. d. ). SFGate. Retrieved October 16, 2012, from http://www. sfgate. com/opinion/article/UCSF-Stanford-Merger-A-Promising-Venture-2975174. php#src=fb UCSF, Stanford hospitals just too different. (n. d. ). Retrieved October 16, 2012, from http://www. paloaltoonline. com/weekly/morgue/news/1999_Nov_3. HOSP03. html ———————– Fall 16 PM 827 A1 Strategic Management Of Healthcare Organizations UCSF Stanford Healthcare – Why They Merged and Why The Merger Was Unsuccessful Sofia Gabriela Walton Mini Exam #1 08