Often times, companies will acquire others either for the talent, client base or aggregation of resources to implement a strategy. For the case of mergers, the process is more complex and difficult to analyze because there are so many things to take into account. Mainly, when two large companies merge together, there may be entirely incompatible management styles or strategies in terms of how to ensure future growth and prosperity. From a financial standpoint of the medical and healthcare industry, how risky a merger is can depend on many factors: debt, revenue, gross margin as well as other key financial ratios. For the case of DeKalb Medical Center and Gwinnett Medical Center, two healthcare giants in the Atlanta, Georgia, area, a merger between these two companies would require a close look at their financials in order to evaluate the risk.
Firstly, it will be important to look at each company’s brief background and their financial data. For the case of the two companies listed above, particular attention will be paid to key financial metrics such as revenues, liabilities, capital structure and equity financing. Then, a risk analysis of a potential merger will be explored while. Next, it will be important to look at the potentially problematic instance of integrating accounts receivables between the two companies as well as strategies for overcoming the problems. Finally, an explanation of key financial ratios will be shown as well as a table in the appendix to outline how each figure was calculated.
DeKalb Medical Center in Atlanta, Georgia, is a network of health care facilities that operate under a single entity. According to the company’s corporate website, it is a “not-for-profit health system, comprised of three hospital campuses” located in the Atlanta area (DeKalb Medical, 2012). While this health care network treats all patients for a wide variety of illnesses and scenarios, it is primarily focused on treating cancer, heart diseases, and surgeries. A recent news publication by West (2012) remarked that this health care network is comprised of over 800 physicians that cover “55 medical specialties.” DeKalb Medical Center has been in business since 1961 and prides itself on using the latest technology to provide cutting edge resources of physicians, patients, and staff. Their “627-bed system” makes it one of the largest hospital networks in Atlanta, and a viable option for a merger with another major healthcare institution in the area.
By the numbers, DeKalb Medical Center has experienced strong financial performance. Despite only having access to a 2007 financial analysis of the company, West (2012) remarked that in 2010, the $806 Million dollar revenue surge made it one of the most probative hospitals for stimulating the economy in Georgia. DeKalb Medical Center also employs roughly 6,500 full-time people, while making a strong social impact through its foundation and philanthropic activities (West, 2012). Its strong presence and influence in the state of Georgia are noteworthy because of the recent changes in government regulations surrounding the healthcare industry. Company financials (shown below) indicate that the healthcare network is positioned for a merger with another entity.
Debt, equity financing, and capital structure. According to Advameg (2007), company financials reflected a strong year of growth for the healthcare network. It is wholly owned and operated by the DeKalb Medical Foundation, its employees and the community as a whole (DeKalb Medical, 2012). Additionally, the corporate website of DeKalb Medical (2012) cited that the company is operated by 110 board members that serve as strictly volunteers. The most current source of financial data from 2011 reflected that the amount of income was $422,869 (all financial figures will be in thousands) (Advameg, 2007). Additionally, Advameg (2007) reported that the company had total assets in the amount of $404,221 at the end of the year, following a year of operations that resulted in a slight financial loss. Advameg (2007) also cited that the company’s liabilities were primarily notes payable and mortgages in the amount of $180,449 (all figures in thousands), or roughly 45% of total assets.
In terms of capital structure and equity financing, DeKalb Medical is largely invested in publically traded securities. For instance, Advameg (2007) cited that these investments tallied up to $162,998, or almost 37% of the company’s total assets. Despite being owned and operated by a foundation, the community, and its employees, much of this company is heavily reliant upon publically traded markets in the forms of stocks, bonds, and mutual funds. This represents a heavy risk or liability because of the volatility of publically traded markets. The company funds its own operations through its revenue, which has kept it profitable for many years. In light of this evidence, this medical center is positioned to be subject to a merger.
Gwinnett Medical Center is also located in Lawrenceville and Duluth, Georgia and has been in business since 1941. This world-class healthcare network has received national recognition as being one of the best hospitals in the United States according to Forbes magazine. Gwinnett Medical Center’s (2012) Annual Report for 2010 cited that it was a “not-for-profit healthcare network including two hospitals” (p.4). It serves the local community for a wide variety of specialties, including but not limited to, surgeries, cancer research and treatment, cosmetics, neurology and others (Gwinnett, 2012). Its broad medical offerings are also coupled with its adherence towards using cutting edge technology and state of the art equipment, much like DeKalb Medical Center.
According to Gwinnett’s Annual Report in 2010, the healthcare network has a formidable financial presence in the community and economy of Georgia. By the numbers, Gwinnett Medical Center serves patients in 553 beds and through 800 talented physicians (Gwinnett Medical, 2012, p. 11). In total, the company employs 4,133 full-time people and serves over 400,000 patients annually. This medical center is surely similar to DeKalb in terms of its scope, financial strength and presence within the community of Georgia. A merger with these two companies would surely be indicative of an organization that is a strong presence in the medical sector.
Debt, equity financing, and capital structure. Gwinnett Medical Center’s financial performance reflects a healthy company that is poised to merge with another organization. In 2011, the company recorded that patient revenue was $1,406, 421 from their two campuses (Gwinnett Medical, 2012, p.11). This makes Gwinnett the larger organization in terms of raw market capitalization. Since there was little information regarding the actual ownership and detailed equity distribution of the company, it is difficult to guess or analyze to what extent the company is burdened or troubled by its liabilities and/or financial obligations to financiers and investors.
The company has total assets in the amount of $814,491 (all figures in thousands) and liabilities in the amount of $481,164 (Gwinnett Medical, 2012, p. 10). Its capital structure reflects long term debt in the amount of $317,224 with zero financing obligations (Gwinnett Medical, 2012, p. 10). However, it is worthy to note that the company’s liabilities have increased over the last year by about 6%. This may reflect an added risk of current market conditions within the healthcare industry.
In analyzing the risk of a potential merger between these two companies, the inherent risks stem from the financial data that is subject to fluctuating market conditions. For instance, the primary concern is the market ratio of DeKalb’s investments into securities for publically traded companies. This could not be calculated because while almost 40% of their assets are invested in stocks, bonds and other funds, the volatility and real versus market value of these companies cannot be easily quantified. Nonetheless, it poses a serious risk because if the companies were to merge and the stock market went down significantly, the overall worth of the new company’s assets would be affected.
When it comes to debt ratios, there are some risks to consider. For example, Gwinnett Medical Center has a debt ratio of almost 60%, which is considered to be high and a risk for investors. This same liability would then be carried over onto the new company. However, the debt ratio for DeKalb Medical Center is also almost 60%, which is the same amount of risk. So, in this case, while both debt ratios are somewhat high, both companies are used to it and have formulated strategies to deal with it.
Finally, when it comes to gross margins, a merger would a great move forward for both companies to pool resources. While Gwinnett had a deficit for the year of 2011, DeKalb had a margin of about 20%. This is an opportunity because Gwinnett could utilize the same financial strategy that DeKalb uses in order to return to profitability. Surely, while this may seem risky, the scale and sheer size of the larger company can be modified in order to become more profitable over time.
If these two companies were to have a merger, their receivables would have to be managed through a centralized accounting system that both companies can adopt. Despite being the smaller medical facility of the two, Advameg (2007) cited that 12% of DeKalb Medical Center’s total assets at the end of 2007 were in the form of accounts receivable, or roughly $48, 506 (in thousands) (see figure 1).
Clearly, organizing, sorting and integrating this many accounts is a formidable task, even for a medical organization that is using cutting edge technology. Such an immense number of records to keep track of are surely an important facet of a potential merger to consider. According to Gapenski & Pink (2007) in Understanding Healthcare Financial Management, “the most obvious problem is the complexities in billing created by the third-party-payer system,” which is burdened with “the rules and regulations of many different governmental and private insurers using different payment methodologies” (p. 517). That is, with the merger of two different companies, there are going to be issues with dealing with dozens of different billing systems and methods. This will cause a strain on the operational end as well as the integration end because both IT departments will have to engage in a period of complex coordination while everything is implemented.
Another major challenge in terms of how these two accounts receivables departments are going to merge is the regulatory and compliance aspect. Mainly, since both of these organizations rely heavily on federal funding through Medicare and Medicaid in order to process payments and receive funds, there is an added layer of complexity. This added piece of complexity is important in terms of making sure that the newly established health network continues its financial strength in terms of efficiency. Adams, Norman, and Burroughs (2002) remarked that “it is essential for physicians to periodically review coding and billing documentation as a strategy for assessing financial risk and potential loss of revenue” (p. 433). Since both of these organizations use receivables management software that is newer and much more robust than legacy systems, this may not be as much of a risk as initially projected.
Addressing receivables management. Surely, sustaining the growth and success of a newly merged organization will require that billing systems are properly integrated and lost/mishandled claims are minimized at all costs. One strategy that may work would be to outsource the transition process to a much more established and credible IT consulting company. For example, since transitioning into technology consulting, IBM has helped numerous companies around the world integrate information technology (such as introducing electronic health records) to solve complicated issues such as these. Coordinating such complex issues would also potentially require a committee within the new company to specifically oversee and be accountable for the transition. As Adams et al (2002) cited that “the risks associated with improper coding [and billing] can be costly for physicians,” it is vital for a new organization to be prepared to utilize all available resources in order to make sure that the transition is as smooth as possible.
Financial ratios used. For the context of analyzing the risk for merging both Gwinnett Medical Center and DeKalb Medical Center, various financial ratios were used in order to gain a stronger understanding of key metrics. For instance, gross margin was used in order to show which business model or strategic method was most effective for each organization. This is important in analyzing risk and the potential benefit of a merger because the companies would have to choose which means is more effective. Operating margin was used for the same purpose as the previously mentioned ratio. Specifically for the case of DeKalb and its outstanding assets in publically traded markets, the concept of this ratio was used to show that is an uncertain and risky facet of the company’s assets. Finally, the debt ratio was used in order to show which company was more likely to be a financial risk when the merger was completed and all outstanding assets/liabilities were combined. Together, these financial ratios helped exemplify how the risks associated with the merger of the two companies could be negated or minimized by other outstanding advantages that the other company may offer.
Adams, D., Norman, H., & Burroughs, V. (2002). Addressing Medical Coding and Billing Part II: A Strategy for Achieving Compliance. Journal of National Medical Association, 94(6), 430-447.
Advameg (2007). DeKalb Medical Center Inc in Decatur, Georgia (GA) - faqs.org. Internet FAQ Archives - Online Education - faqs.org. Retrieved December 5, 2012, from http://www.faqs.org/tax-exempt/GA/Dekalb-Medical-Center-Inc.html#reconciliation1_a
DeKalb Medical. (2012). DeKalb Medical Atlanta Hospital and Medical Center | DeKalb Main Campus. Retrieved December 4, 2012, from http://www.dekalbmedical.org/Main/AboutUs8.aspx
Gapenski, L. C., & Pink, G. H. (2007). Understanding healthcare financial management (5th ed.). Chicago: Health Administration Press.
Gwinnett. (2012). Gwinnett Medical Center: 2010 Annual Report. Gwinnett Medical Center. Retrieved December 6, 2012, from www.gwinnettmedicalcenter.org/media/file/2010AnnualReport.pdf
Gwinnett Medical. (2012). Gwinnett Medical Center. Gwinnett Medical Center. Retrieved December 5, 2012, from http://www.gwinnettmedicalcenter.org/
West, N. (2012, June 13). DeKalb Medical Generated $806 Million for Georgia Economy in 2010 | News | DeKalb Medical News and Press Releases | DeKalb Main Campus. DeKalb Medical Atlanta Hospital and Medical Center | DeKalb Main Campus. Retrieved December 5, 2012, from http://www.dekalbmedical.org/Main/News/DeKalb-Medical-Generated-806-Million-for-Georgia-E-6759.aspx