The most significant, yet unappreciated, aspect of the NYU Hospitals Center (NYU)–Mount Sinai Hospital merger (fundamentally three years in duration) was the ability of the majority of trustees to recognize that it was not fulfilling their expectations and to effectively undo it. In fact, the unwinding of the merger was more decisive than the merger itself. This critical action saved much money and propelled both institutions toward independence and prosperity. Elsewhere in this issue, Dr. Kastor1,2 has articulated the rationale for why the boards of both institutions thought a merger would be beneficial. These reasons are, indeed, logical; however, mergers of equals require more than well-laid plans.
A merger of equals between academic health centers involves winning the hearts and minds of the human capital that is the essence of these institutions and blending the diverse cultures into one to form a single entity. Trust is an essential element of this daunting process and is vital to the success of such a merger. Generally, both sides need to make concessions to cultivate this trust and show that they are proceeding as partners. When NYU entered into the merger, it was with the understanding that the combined entity's increased debt capacity would finance the expansion of the new entity. Right after the merger was consummated, however, the anticipated $1 billion loan failed to materialize, and this was not the only promise to be broken. The credibility and benefit to an already skeptical NYU had evaporated, and the merger became most asymmetric, with Mount Sinai having its debt refinanced but NYU having no cash available to build a new facility. Trust between the parties in the context of a merger is a precious commodity. Once lost, it is extremely difficult to regain.
In addition to preserving trust, mergers must produce significant performance improvements early on to create the momentum necessary to overcome initial cultural obstacles. After the NYU–Mount Sinai merger, the combined hospitals neither garnered initial major victories nor articulated a vision that consistently resonated with faculty and trustees. The expected economies of scale were not realized, and the promised dramatic increase in managed care rates did not materialize. Separating the schools and hospitals of what had been two integrated academic health centers drove a wedge between school and hospital employees, further fracturing the atmosphere. The ambiguity of the value proposition to faculty and individual institutions created environmental anxiety reverberating within each institution and reinforcing fears that one institution or the other was being injured by the merger. This uncertainty created a kind of paralysis within each institution.
With the benefit of hindsight, it is easy to be critical of judgments made at the time of the merger. These crucial decisions were affected by the motivations of key stakeholders. Fears concerning lower-than-predicted managed care rates and government reimbursement and regulation were only exceeded by the concerns of the NYU board. The board was rightfully risk-averse given the near-death experience of the university as it dangled on a financial precipice in the 1970s. To them, the merger represented an opportunity to mitigate risk. To Mount Sinai, on the other hand, the prospect and vision of a combined entity was tantalizing. The National Institutes of Health dollars of the merged institution would catapult it into the top 10 in research funding. The association with NYU brought with it the institution's rich history—the medical school was founded more than 160 years ago. Further, being New York City's premier hospital could facilitate a philanthropic bonanza. However, Mount Sinai also appreciated the risk related to the conviction that NYU—and especially its capital needs—might interfere with Mount Sinai's ascendant academic trajectory. The challenges to the merger's success seem numerous and clear in retrospect. Both institutions had two very different cultures, one hospital-centric and one school-centric. Each had exceedingly different risk tolerances, and neither had the largesse or the patience to see the merger through to the end.
The vision of a combined academic health center was powerful, but in reality the environment did not facilitate success. The atmosphere was so toxic that the NYU faculty council sued its own trustees in protest of the merger. Although management should have played a critical role assuaging concerns as rapidly as they arose, issues were allowed to fester. Winning over stakeholders is challenging and time-consuming, but essential. This did not occur, and thus efforts like combining back-office functions and pediatric hematology were not enough to entice other clinical departments to grow closer. A much more complex, phased and focused effort needed to be expended initially to convince departments that painful challenges and sacrifices would result in real benefits from a successful merged entity.
This lack of effective communication and planning left many crucial questions unanswered at many levels. In terms of the hospitals, what would be the economies of scale of the merger? How would the patients benefit beyond lower rates, better outcomes, easier access, better amenities, etc.—all of which could be accomplished without a merger? From the faculty's perspective, how would the clinical and structural changes be implemented, given individual pride in and loyalty to each partner? It is unclear that the aggregated market share of the merged entity would have increased in the highly competitive, very local New York City market. The ambiguity of two medical schools and one merged hospital, coupled with much dissatisfaction on both campuses, was clearly not a vehicle to induce additional philanthropy. Medical center affinity by high-capacity donors is extremely narrow, and the more ambiguous the entity, the more difficult significant generosity becomes. For the physicians and staff, working in New York City is also unusual because of the number of medical schools (6) and large number of hospitals (over 70). Medical center staff can easily change affiliations without having to undergo a disruptive move. Thus, no institution can dominate or dictate labor or salary terms to its employees. These factors all played heavily into the failure of the merger, yet none was addressed effectively in initial planning and implementation stages.
No one should be surprised by the failure of the NYU–Mount Sinai merger. After all, it is generally accepted that 70% of all business mergers fail3; more specifically, other medical centers have gone this route and failed. The Penn State/Hershey Medical Center–Geisinger Health System two-year merger, which initially was touted to produce economies of scale and create a combined institution with both research and clinical strengths, dissolved in 1999 after “layoffs, pay cuts and fractious infighting among various stakeholders.”4 The cost of the 29-month UCSF–Stanford merger and subsequent demerger is estimated at $176 million.5 Indeed, one might also question how truly “successful” the so-called merged medical centers are and whether or not these enterprises are actually merged. In fact, the above demerged institutions, including NYU and Mount Sinai, have performed better after unwinding their mergers!
The lesson to be learned is that larger may not be better unless the combined institution has in place the operational horsepower to manage a united enterprise from the start. A highly effective management team is necessary to achieve any clinical integration, expense reduction, and economies of scale. The board must be composed of long-term investors who appreciate the obstacles and pain that must be weathered to achieve success. Capital for the merged entity may not be as forthcoming as predicted in the planning phase, and thus alternative plans need to be realistic and actionable. Finally, the value proposition must be obvious and attainable to a cynical faculty and staff. But even with greater economies of scale, perhaps the Achilles heel for the NYU–Mount Sinai merger was that in both medical centers, the strength of each institution was exactly what was threatened and undermined by the merger—the need to link the research and teaching in the schools with the clinical care in the hospitals. In both cases, the enhancement of postmerger school–hospital links has been instrumental in each of Mount Sinai's and NYU's more recent successes.
In a 1996 New York Times article, a health care expert speculated about the yet-to-come NYU–Mount Sinai merger: “This is going to happen again and again.”6 Such mergers are still rare, though, and the good news is that medical centers and their boards have learned valuable lessons from the mistakes of the past.
1 Kastor JA. Failure of the merger of the Mount Sinai and NYU hospitals and medical schools: Part 1 [published online ahead of print September 17, 2010]. Acad Med. 2010;85:1823–1827. doi:10.1097/ACM.0b013e3181f65000.
2 Kastor JA. Failure of the merger of the Mount Sinai and NYU hospitals and medical schools: Part 2 [published online ahead of print September 17, 2010]. Acad Med. 2010;85:1828–1832. doi:10.1097/ACM.0b013e3181f65019.
3 Harding D, Rovit S. Mastering the Merger: Four Critical Decisions That Make or Break the Deal. Boston, Mass: Harvard Business School Press; 2004.
4 Beeler S. Penn State, Geisinger part ways after 2 years. Centr Penn Bus J. 2000;16:15.
5 Failed UCSF/Stanford merger posts total loss of $176 million. J Investig Med. 2001;49:137.
6 Rosenthal E. Mount Sinai and N.Y.U. seek a medical merger. New York Times. June 13, 1996;B3.