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Sarah was appointed the director of development for Carston Healthcare System two years ago. She has recently been assigned the management of Carston's merger with a smaller system in an adjacent state. Their combined system will include 19 hospitals, 5 of them critical-access, generating revenues of $12.2 billion. The system also include 15 nursing homes, 3 home health agencies, 55 physician clinics, and 23 outpatient or urgent care centers. They have a joint venture health plan with a local Blue Cross company that has been moderately successful. Leaders anticipate some rough spots during integration but want most of the critical problems resolved and strategies decided within the next six months. The CEOs indiciate a willingness to approve consolidation of numerous corporate functions and overlapping services. Leaders from both systems sold the merger to their communities based on projected savings of at least 10 percent and a commitment to not raise rates for two years. Sarah has been charged with finding the savings and recommending changes to meet the promised objectives. She is working diligently to achieve this but has found the task daunting. To help herself and her colleagues understand the challenge, she has provided the following cost drivers:

1. Labor Costs: 35 percent

2. Prescription drugs: 5 percent

3. Professional fees: 5 percent

4. Professional liability insurance: 2 percent

5. Rising demand of care: 34 percent

a. Population growth: 15 percent

b. Use rate increases: 19 percent

6. Increased hospital intensity: 2 percent

7. All other: 17 percent

Sarah notes that the merger provides greater opportunities for savings in some of these categories than others. She needs to decide which she should focus on and what strategies might best help reduce costs in these selected areas.

Questions:

1. Which of these areas would be affected both positively and negatively by horizontal integration? Vertical integration?

2. Which areas should Sarah concentrate on? Why?

3. What types of strategies may reduce costs for the new combined system? Why