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The Process and Impact of Trust Mergers in theNational Health Service: A Financial PerspectiveAndrew Hutchings, Pauline Allen, Naomi Fulop, Annette King, GerasimosProtopsaltis, Charles Normand & Rhiannon WaltersPublished online: 05 Aug 2014.

To cite this article: Andrew Hutchings, Pauline Allen, Naomi Fulop, Annette King, Gerasimos Protopsaltis, CharlesNormand & Rhiannon Walters (2003) The Process and Impact of Trust Mergers in the National Health Service: AFinancial Perspective, Public Money & Management, 23:2, 103-112, DOI: 10.1080/09540962.2003.10874831

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The Process and Impact of TrustMergers in the National HealthService: A Financial PerspectiveAndrew Hutchings, Pauline Allen, Naomi Fulop, Annette King,Gerasimos ProtopsaItis, Charles Normand and Rhiannon WaitersMergers in the UK National Health Service have been justified by their perceivedbenefits. This article reports the findings from a study exploring the financialoutcome of trust mergers. The authors found that financial deficits in constituenttrusts, anticipated management cost savings and their reinvestment in services areimportant drivers for merger. However, savings achieved in the first two yearsfollowing merger were below target and there was a lack of transparency in howsavings had been reinvested. The merged trusts were able to partially addressequity issues, a theme that emerged during the merger process. This articlehighlights important issues that need to be considered when planning mergersand reconfigurations.

In recent years there has been an increase inthe number of mergers of health-careorganizations in the United Kingdom and inother countries. In the UK's National HealthService (NHS) many trusts are, or have recentlybeen, involved inmergers and reconfigurations,affecting a substantial part of the health-careprovision in the country (Crail, 1999; Garside,1999). Merger policy in the UK and the USAisbuilt on assessment in advance of the expectedimpact of merger and comparatively littleresearch has been carried out on the process ofmerger and what happens after mergers takeplace.

Arnould et al. (1997) identified four driversfor merger in the competitive health-caremarket in the USA:

• Excess capacity and declining margins.•The need to reduce transaction or contractingcosts.

• Increased size for risk-bearing.• Increased monopoly/market power.

Research on mergers in the NHS has citeda number of benefits of merger in relation toeconomic gains and improvements in clinicalquality that are thought to be associated withlarger organizations. Political drivers formergers include facilitating hospital or serviceclosures, securing perceived financial viabilityof smaller organizations, and ensuringincreased negotiating power and a strategy of

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survival by pooling resources and enlargingthe organization in response to challenges frompurchasers of services (Garside, 1999). Anumber of theories emerging from public sectorstudies have conceptualized large-scale reformsas part of a wider political and administrativemanagement culture that is characterized bythe periodic restructuring and transformationof public sector institutions (Ferlie, 1997).

Economic theory suggests that the benefitsof merger include efficiency gains from theremoval of excess capacity, and economies ofscale and scope. Cost savings related toeconomies of scale can arise by operatingefficiently at higher levels of production. Long-run average costs fall, because fixed costs arespread over a higher volume of activity.Economies of scope relate to the range ofservices provided, rather than the volume ofproduction. Cost savings associated witheconomies of scope may arise by concentratingspecialty services on a single site. A potentialdisadvantage suggested by economic theory isthe ability of dominant, or monopolistic,providers to influence price or supply throughincreased market concentration and marketpower. There may also be fewer incentives forproviders with monopoly power to operateefficiently (Goddard and Ferguson, 1997).

The majority of the academic literature onhospital mergers focuses on efficiency gainsand savings in administrative costs as theprimary drivers for merger. Some of the earlier

Andrew Hutchingsand Pauline Allenare Lecturers, NaomiFulop is SeniorLecturer, GerasimosProtopsaltis is aResearch Fellow andCharles Normand isProfessor of HealthEconomics in theHealth ServicesResearch Unit,London School ofHygiene & TropicalMedicine.

Annette King is aSenior ResearchOfficer in the CabinetOffice.

Rhiannon Walters isa consultant andHonorary ResearchFellow in the LondonSchool of Hygiene &Tropical Medicine.

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reports from the NHS suggest that mergerswere introduced to deal with the spare capacityavailable in the acute sector, thus creatingshort-run cash savings and reducing averagecosts by better using resources and avoidingduplication (Ferguson and Goddard, 1997).Bojke et al. (2001) and Greene (1990) alsoargued that hospital mergers can producesavings through improved patient volumes,operational changes and consolidation ofsupport and administrative services. In termsof efficiency indicators, a US study of32 mergersof non-profit hospitals by Treat (1976) foundthat merged hospitals produced a wider rangeof services than non-merged hospitals. Lynk(1995) reinforced this point and argued thatmerged specialized services may producesignificant efficiencies due to the presence ofscale economies in production. Nevertheless, asystematic review of the literature by Aletras etal. (1997) found little evidence for the existenceof economies of scope and that the evidence formergers generating cost savings througheconomies of scale is inconclusive. Increases inhospital size may lead to diseconomies of scalethrough additional sources of costs, and studiesusing econometric and data envelopmentanalysis suggest that the optimal size for ahospital is in the region of 200 to 400 beds.Aletras et al. 's review also highlighted the needto control for other factors that affect costswhen estimating economies of scale and scope.

In the NHS, the focus for cost savings hasbeen on management costs (McClenahan,1999a), rather than trust-wide economies ofscale. A key question, for which there is a lackof research evidence, is what level ofmanagement costs is needed to operateefficiently (Appleby, 2001). In the US, Dranove(1998) reported that substantial economies ofscale exist in non-revenue producing costcentres for small hospitals, but that they areexhausted in hospitals with over 10,000discharges annually.

Some evidence from the US and the NHSsuggests that many of the expected benefits ofmergers, particularly in respect of cost savings,rarely materialize post-merger and that positiveeffects take a long time to present themselves(McClenahan, 1999b; Treat, 1976; Fergusonand Goddard, 1997; Spang et al., 2001). In theUK, management cost savings have beenestimated at £200,000 to £300,000 per year,which is less than 1% of the total budget of themerged organizations (McClenahan, 1999a).Most notably, such savings are usuallyoutweighed by unanticipated costs that arisefrom support needed for the merging process.

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Other studies have shown that mergers havefailed to achieve anticipated savings. Dranoveand Shanley (1995) found no evidence ofeconomies of scale in the administrative costs ofmultiple hospital systems compared toindependent hospitals in the US, and Cohen etal. (2001) reported that the merger of two UShospital systems had, after three years, achieved'almost none' of the $49M savings estimated byconsultants. In the merger between Edgwareand Barnet General Hospitals in the UK, anexpected saving of £4.1 M for reinvestment inservices did not materialize (Whitfield, 1998).According to Hackett (1996), merging 'hospitalsincur extraordinary expenses during themerger year, which can reduceprofitability ... and the phenomenon is moreacute in the case of financially. distressedhospitals that merge'. However, 'merger mania'continues to dominate both the UK and the UShealth-care sectors, driven bywhat many believeto be 'short-term savings or current politicaldogma' (Gould, 2000).

While there is academic research on themerit of mergers, in terms of the optimal size ofhospitals, there is much less evidence on whathappens after hospitals have merged and stillless on the consequences of mergingorganizations which provide mental health orcommunity health services. This article isbasedon a study of the process and outcomes ofNHStrust mergers in London undertaken betweenFebruary 2000 and June 2002, and exploresthe financial drivers and consequences ofmerger, including savings in management costs.The impact of economies of scale and scopewere not assessed because they were rarelystated objectives of the mergers. The impact ofmerger on service delivery and managementissues has been reported elsewhere (Fulop etal., 2002).

Baseline Study and Case StudiesThis study uses a multi-disciplinary researchframework to follow through the multi-facetedprocesses of mergers over time and tocontextualize the case studies within othermergers and reconfigurations in London. Themethodological approach of the study is'contextualism', which combines differentperspectives and temporal and historicalcontexts in the analysis of organizational changeand process (Pettigrew et al., 1992). Thisapproach allows for an integrated retrospectiveand prospective analysis of the process ofmergers over time.

The baseline study collected consultationdocuments of all proposed changes and

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reorganizations to trusts in the NHS's LondonRegion (now the London Directorate of Healthand Social Care) in 1998 and 1999. Ninemanagement mergers and trust reorganizationswere included (fiveacute, two community, onemental health and one mixed) and 14representatives from the seven healthauthorities involved in the mergers wereinterviewed. The semi-structured interviewscovered the background, drivers and objectivesof the trust mergers and also asked for apreliminary assessment of the merger outcomeand process. Consultation documents,prepared as part of the statutory process ofconsultation, give the reasons and backgroundsfor the mergers and reconfigurations and setout the arguments for the favouredorganizational structure, including thebudgetary implications of the mergers. Theanalysis draws out common financial reasonsfor the proposed mergers in acute, communityand mental health trusts and highlights thedifferences.

Four in-depth case studies were conductedin one acute, one mental health and twocommunity trust mergers during the secondand third years post-merger. The case studieswere selected to be representative of thedifferent types of trust merger. The mergedtrusts were all created on 1April1999, and datawere collected in two phases. During the firstphase of data collection, 96 interviews wereconducted with a variety of internal informantsand external stakeholders between August andDecember 2000. Internal informants includedchief executives, finance directors, other boardmembers and senior managers, as well asclinicians and managers at different levels inthe trust. External stakeholder interviews wereconducted with representatives of the healthauthorities, the London Region NHS Executive,localcommunity health councils, localauthorityrepresentatives, sister trusts in the area, andprimary care groups. The second phase of datacollection consisted of 35 interviews withinternal informants and external stakeholdersbetween September 2001 and March 2002.Data for the case studies were collected usingsemi-structured interview schedules. Allinterviewees were asked about the drivers ofthe merger, significant issues which played arole in the merger and their assessment of themerger. Data from the baseline and case studiesare presented here in an anonymised form.

Management Costs AnalysisWe explored changes in management costs inthe case study trusts in the first two years

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following merger (financial years 1999/2000and 2000/01). The relationships betweenmanagement costs, trust size and trust typewere analysed for the base year 1997/98 usingregression analysis to estimate the fixed andvariable element of management costs. Trustswere included in the analysis if they were partof the NHS Executive North Thames or SouthThames Regions in 1997/98 and within theboundaries ofNHS Executive London Regionin 1999/2000. Teaching hospital trusts,ambulance trusts and single specialty acutetrusts were excluded. The remaining trustswere categorized as acute or non-acute,depending on whether they provided multi-specialty acute services. Integrated trusts wereincluded in the acute category and trustsproviding single specialty acute servicesalongside community or other non-acuteservices were categorized as non-acute.

The savings in management costs in thefour case study trusts in the first and secondyears following merger were estimated bycomparing the actual costs with an estimate ofthe costs had no merger taken place. A controlgroup of eight London trusts that had not beeninvolved in a merger or major reconfigurationsince 1 April 1995 was used to predictmanagement costs in the case study trusts hadno merger taken place. The control trustsconsisted of three acute trusts, three communitytrusts and two mixed (community and mentalhealth) trusts.

The case study trusts were not all two-to-one trust mergers-the services of some pre-merger trusts had been transferred to two ormore ~ifferent merged trusts. Eight pre-mergerconstituent trusts were identified, where themajority of their services were transferred tothe case study trusts, with two pre-mergerconstituent trusts for each case study trust.Using 1997/98 as the base year, managementcosts and income for the eight pre-mergerconstituent trusts were predicted for 1999/2000 and 2000/01 using the changes in thecontrol trusts' costs and income. Savings inmanagement costs were estimated as thedifference between the predicted costs for theconstituent trusts and the actual costs for thecase study trusts. Sensitivity analysis was usedto model different assumptions about therelationship between income and managementcosts for each year, with the most likely estimatebeing the actual relationship for the controltrusts. Where there was a difference betweenpredicted and actual income, the estimatedsavings in management costs were adjustedusing the different variable cost assumptions

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from the sensitivity analysis.Data on management costs and income

were obtained from the trusts' audited financialaccounts. The analysis used the re-based costsfor 1997/98, which were calculated using therevised definition of management costsintroduced in 1998/99 (NHS Executive, 1997).Adjustments relating to the five-yearlyrevaluation ofNHS assets were removed fromthe income and management costs figures for2000/01.

The Process and Impact of MergerDrivers, Aims and ObjectivesThe need to make savings featured as asignificant driver in all the consultationdocuments and our interviewees agreed thatfinancial pressures were a significant driver forthe mergers. These included budget red uctionsin the health authority, either because ofoverspends in previous years or because ofanticipated reductions in health authoritybudgets in the future. For example, two healthauthorities anticipated a reduction of theirfuture expenditure and the need to channelany additional funds into primary care serviceprovision.

Trusts' budgetary deficits were one of thecentral drivers for acute and communitymergers. Both types of mergers sought toredress financial shortfalls in the predecessortrusts. One acute trust, for example, sought toresolve a £7M shortfall accumulated by itsconstituent trusts. There is evidence among asmall number of the trust mergers that therewas an implicit expectation that some of thefinancial deficits accumulated by constituenttrusts could be written off. While none of theofficial documents explicitly stated this, a smallnumber of representatives from healthauthorities made reference to the fact thatdeficits had been part of the mergernegotiations. In the case of one merger trust,negotiations were f?cused on the issue that themerged organization could not be expected totake over the large deficit of one of theconstituent trusts:

We had a limited role in that we wanted to secure that[merged trust} didn't inherit the financial problems(i.e. deficit) of [constituent trust}, that we would beexpected to underwrite. (Health authorityrepresentative.)

In the merger of our case study communitytrust II, one of the constituent trusts had aconsiderable deficit. When the extent of thisdeficit became apparent after the merger, the

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new trust negotiated for the deficit to be writtenoff:

Defacto we started with a deficit. We didn't realize thesize of [constituent trust's} deficit-part of their debtwas written off but we started with a debt between ourbudget and our income ... Regional Office and onehealth authority were very supportive and we weren'tleft to sink. (Senior manager, case studycommunity trust II.)

It is not clear from the data to what extent suchfinancial negotiations were common in thepre-consultation planning. It may be that theywere restricted to specific circumstances.

In translating financial drivers into specificaims and objectives, a common aim across trusttypes was the projected savings ofmanagementcosts of £500,000 to £750,000 per annumassociated with the reduction of themanagement boards in the merged trusts andother savings in corporate functions. In thecase study acute trust merger, the financialaims centred on projected savings ofmanagement costs of £500,000 per annum andthe rationalization of non-clinical departmentsand management. Implicit in the wish to saveon management costs was the assumption thatsavings would be available to the mergedorganizations and could be redirected intopatient services. The merger documents alsopointed to additional savings througheconomies of scale, for example the reductionof duplication in equipment and purchasing.In the health authority interviews, economiesof scale were rarely mentioned. In case studycommunity trust II, the merger would alsoallow greater flexibility in the allocation anduse of resources.

Management Cost Savings and ReinvestmentSavings in management costs were below thetarget level of savings of £500,000 per year.Views differed within the trusts on the level ofsavings that had been achieved, and how thesavings had been reinvested in services.Evidence also emerged of additional costs inthe newly-merged trusts and additional costsassociated with the merger process.

Regression analysis of management costsand income for 1997/98 produced a stronglinear relationship, with the variable elementof management costs estimated at 4.9%of trustincome. Although acute trusts were generallylarger than non-acute trusts, we found noevidence that the relationship betweenmanagement costsand income differed betweenthe two types of trust. The eight constituent

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Table 1. Income and management costs in the case study and control trusts.

Mean (standard deviation)

N Income Management Management costs(£'000) costs (£'000) as % of income (£'000)

Study trusts1997/98 (pre-merger) 8 46,473 (22,636) 2,863 (961) 6.55 (1.22)

1998/99 (pre-merger) 8 49,929 (23,890) 2,877 (967) 6.10 (1.21)

1999/2000 (post-merger) 4 107,390 (45,440) 5,541 (1,738) 5.33 (0.80)

2000/01 (post-merger) 4 111,326 (52,827) 5,380 (1,608) 5.08 (0.75)

Control trusts1997/98 8 63,276 (15,865) 3,647 (897) 5.77 (0.47)

1998/99 8 67,921 (16,890) 3,710 (908) 5.47 (0.40)

1999/2000 8 72,784 (18,810) 3,703 (936) 5.10 (0.35)

2000/01 8 80,025 (19,815) 3,761 (904) 4.73 (0.51)

trusts that merged to form the case study trustswere, on average, smaller than the non-mergingcontrol trusts with respect to income andmanagement costs, although management costsrepresented a higher proportion of income(see table I). Following merger, the case studytrusts were larger than the control trusts interms of income and management costs. Therewas a year-an-year reduction in managementcosts as a proportion of income in all trusts,although post-merger this proportionremained higher in the case study trusts despitetheir larger size.

The average saving in management coststhat can be attributed to merger was £178,700in the first year after merger and increased to£346,800 in the second year (see table 2). Thesefigures are below the target savings of £500,000per merger per year. The estimated savings inthe individual case study trusts ranged from a£393,000 saving to a £8,000 increase in costs in1999/2000, and from £187,000 to £576,000 in2000101. The estimated savings were adjustedfor differences between predicted and actualincome in the case study trusts using the actualrate of variable management costs in the controltrusts. Sensitivity analysis showed that savingswere sensitive to different assumptions aboutthe rate of variable management costs. Anincrease in the assumed rate of such costsreduced the estimated savings.

Views in the case study trusts were dividedas to the level of savings and what benefitssavings had brought for the trust. Staff at thecommunity trusts maintained that the mergersresulted in 'teasing out' the budgets for mentalhealth and community health. It was perceivedthat overhead costs had been reduced and thatmanagement cost savings had been made, evenifat board level only. In both trusts, however,staff were sceptical as to whether the savings

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were reinvested into patient services:

We have saved management costs but it hasn't resultedin more resources for services. We have fewermanagers. (Executive board member,community trust II.)

What happened to the efficiency savings from themerger? They haven't come into services. We've askedto see where they went, but haven't been shownanything. (Primary care group representative,community trust I.)

The cost savings that were supposed to go back intoservices to users have yet to be seen-Ii M hasdisappeared. (Community health councilrepresentative.)

Opinions on the potential for other costsavings and greater financial control post-merger were also divided. A number ofrespondents claimed that overall savings hadbeen nominal. In the acute trust merger, boththe health authority representatives and thetrust's staff believed that management costsavings had not made a lot of difference to theiroverall financial situation. The view was thatthe merger could only achieve its financialtargets in the long-term. One acute trust seniormanager admitted:

You cannot have tight financial· control at thebeginning of a merger, with transitional costs ofmerging and with people's time and effort on thedesigning process. The eyesare off the ballfor day-to-day stuf! (Executive board member.)

There was doubt that any tangible benefits hadcome from savings:

There are no lessfinancial pressures than there were

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Table 2. Estimated savings in management costs (£'000) in the study trusts in the first two years followingmerger.

Variable costassumptionl(%of income)

Mean saving in management costsattributable to merger(95% confidence interval)

Estimated saving in management costs in case study trusts in £'000Acute trust Mental health Community Community

trust trust I trust II

First year following merger (1999/2000)5.15% 59.8 (-104.5 to 224.1)5.0% 119.3 (-55.6 to 294.2)4.85%2 178.7 (-20.3 to 337.8)4.7% 238.2 (-5.6 to 470.8)4.55% 297.5 (25.6 to 569.5)

76.734.5-7.6

-49.7-91.7

Second year following merger (2000/0 1)4.45% 200.4 (-129.6 to 530.4)4.3% 273.7 (-56.8 to 604.3)4.15%2 346.8 (5.3 to 688.2)4.0% 420.0 (58.1 to 781.9)3.85% 493.2 (102.8 to 883.5)

273.8230.4187.1143.8100.5

80.8169.6258.5347.4436.1

-79.7- 4.371.2146.7222.0

161.5277.2392.8508.5623.8

19.1128.5237.5346.6455.8

198.8293.0386.8480.7574.7

309.9443.1575.8708.7841.7

I. The variable component of management costs as a proportion of income.2. Most likely estimate based on the actual variable costs in the control trusts.

before. There's actually an erosion of core operationalbudgets and not an enhancement, which has a directimpact on service delivery. (Executive boardmember, mental health trust.)

In the mental health trust merger, it was alsounclear whether savings were reinvested inservices and facilities. Management cost savingswere:

... shared out between the health authorities accordingto fixed costs and pro-rata contributions of healthauthorities to the trusts. (Health authorityrepresentative.)

The savings had to be returned to the health authorityso it's difficult to say if they have been returned tomental health. There has been investment and thehealth authority would argue that it is the same moneybut I'm not convinced by that. (Executive boardmember, mental health trust.)

In all trusts,' there was increasingrecognition that the merger process itselfconstituted a considerable financial burdenand that this had been underestimated in theplanning of the merger:

Yes, they saved on management costs, but then theyhad to get all these consultants in to help with themerger. That has used up all the savings. (Boroughdirector, community trust I.)

There was also a recognition thatmanagement salaries had increased as the resultof the increased sizeof the merged organiz~tion:

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Although there is now only one board, there areassistants and higher salaries. You would think thatfrom two chief executives to one, you would makesavings, but I changed my tune because previouslythere were two people earning £75,000 each and nowthere's a chief executive and a deputy with combinedearnings of £175,000, so that's £25,000 the wrongway. But then again regarding the other directors, Ionly have onefinance director and one nurse director,so we have made some savings. (Executive boardmember, acute trust.)

All mergers have an element of saving money, but Idon't understand what money they save. Managersget a £2,000 salary raisefor doing two-thirds of ajobon top of their original job, and then there's anotherlayer of management, the associate directors-the oldmanagers were getting around £35,000 and they[the associate managers} must be getting more.(Service manager, community trust II.)

In the mental health trust, this included anadditional layer of management:

The workload is still there but I have now a full-timeservice development officer that saves huge amount oftime, and he also deputizes for me at meetings, whichsaves time too. (Service director.)

Equity of FundingEquity in the allocation of resources withintrusts was rarely mentioned as an objective ofthe mergers, but emerged as a distinct themepost-merger. External pressure on healthauthorities and internal reallocation ofresources were the two approaches used to

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improve equity, although neither was whollysuccessful.

Issues over equity became apparent fromearly on. In most cases, the mergers not onlyexposed the true financial situations of theconstituent trusts, but also revealed differencesin funding and staffing of services across themerged organizations. These were often theresult of the different histories of these servicesin the predecessor organizations:

The merger has thrown up the comparative investmentin mental health services between [health authorities},which is phenomenal. (Primary care grouprepresentative.)

A number of health authorityrepresentatives reported that there wereconcerns from the financially stronger trusts,aswellasfrom the health authorities themselves,over the effects of the financial deficits of theweaker merging trusts. They feared that themerged trusts would:

... inherit defzcits and that geographical areas andcommunities [were} being given an inequitable start.(Health authority representative.)

In the case study mental health trust, anumber of respondents felt that the mergerhad allowed things tobecome more transparent.For example, funding varied in different partsof the trust. One borough in the mental healthtrust was significantly underfunded comparedto the others:

The merger has highlighted the differences in resourcesand finances in all three areas of the trust. We areaware that one part of the trust has a lower budget formental health services than the other parts of the trust.(Primary care group representative.)

Prior to merger, financial data had notbeen shared between the constituent trusts, sodifferences in service funding were notnecessarily apparent. The clearer financialpicture emerging after the merger allowedmerged trusts to put relevant pressures onhealth authorities to increase funding. Theexpectation was that services would undergo ageneral levelling up. Particularly in thecommunity trusts, the hope was that the reviewprocess would deliver service improvements.

However, the opposite seems to havehappened. Both community trusts seem tohave adopted different models for servicesacross the patch, partly as the result of localresistance and also in anticipation of the future

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arrangements for primary care trusts. Casestudy community trust II, for example, adoptedfour models for intermediate care, some ofwhich had a designated multi-disciplinary staffteam, while others had a small nursing teamdrawing on clinical services from otherdirectorates. Clearly, budgetary implicationswere very different for each of the models andthere was a growing sense of frustration thatbudgets should be so unevenly administered.In case study community trust I, the childhealth service from one constituent trustcontinued to have more specialist staff than theother localities in the merged trust. In themental health and acute trusts, the issuesseemed to be less pressing, perhaps as theresult of the continued independence ofoperations in the acute hospitals and theborough basis of the community mental healthteams.

By the third year after merger, someexamples of improvement in equity in the twocase study community trusts had beenidentified. Dental, speech and language servicesin two boroughs in case study community trustII had received additional investment to bringthem closer to the level in the third borough.There had also been a redeployment of staffand resources for child health services to twoboroughs in community trust I, although levelswere still below those in the third borough.Preparing for transfer to primary care trustshad become a higher priority than equity acrossboroughs.

The inequity in funding across boroughs inthe mental health trust had reduced partlybecause the. health authority providedadditional funding to the under-resourcedborough after the difference had beenhighlighted. However, the improvement inequity was the result of external funding ratherthan the trust transferring resources internallyand some differences remained:

We can't cross-subsidize. People are frustrated bythat. [Borough I} services are certainly moreimpoverished than ones in [borough 2}. There isn't alot that can be done about that and it will get evenmore polarized with primary care trusts and taking on[borough3} inApril2002. Now at least we can cross-subsidize within [borough 2}. (Executive boardmember, mental health trust.)

Discussion and ConclusionsThere are important implications for mergerpolicy arising from the main findings from thestudy reported here: the drivers of merger,savings in management costs, the reinvestment

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of savings and equity.From a financial perspective there were

two important drivers of merger, althoughviews on their importance differed. These were:

• Savings in management costs and theirreinvestment in services.

•Addressing financial deficits in a constituenttrust.

Savings in management costs and theirreinvestment became explicit aims andobjectives of merger. A financial deficit in aconstituent trust was a driver for severalmergers, although this was not always explicitin the merger documents.

It has been suggested that where driversfail to result in specific aims and objectives, theunforeseen work to resolve the deficits cancontribute to delays in the merger process andservice development. Underestimating thework involved in the process of merging is anunintended consequence that should be takeninto account when planning reorganizations(McClenahan, 1999a; Fulop et al., 2002).

The drivers that emerged from the studycorrespond to two of the four drivers identifiedby Arnould et al. (1997) in US mergers.Management cost savings in the merged trustscorresponds to the cost reduction driver, andaddressing trust financial deficits can beregarded as corresponding to spreading riskthrough increased size. The removal of excesscapacity has been previously highlighted in theUK (Ferguson and Goddard, 1997), forexample, through hospital or service closures(Garside, 1999), but did not feature as asignificant driver in this study. If anything,maintaining and improving services in the lightof external policy drivers was more important(Fulop et al., 2002). Likewise, monopoly andmarket power did not feature as a driver in thisstudy. Increased negotiating power withpurchasers of health care has been identified asa driver in the UK by Garside (1999) and theability to influence purchasers emerged as oneof the ways to address issues relating to theequity of funding.

The analysis of savings in managementcosts found that the merged trusts did not meetthe target reduction of £500,000 per year in thefirst two years following merger, althoughsavings were higher in the second year. Thisappears to contradict the views of someinterviewees that the target savings had beenachieved, and may be explained by two reasons:the method of analysis and distinguishingbetween underlying and actual management

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costs. The method of analysis sought to identifysavings that can be attributed to merger andcontrolled for other factors that may have animpact on these costs such as general trends incosts and the definition of costs. Between 1997/98 and 2000/01 management costs werereducing in all NHS trusts, not just in mergingtrusts, and the proportion of income spent onmanagement costs in the control group oftrusts fell from 5.8% to 4.7% in this period. Theanalysis assumes that a similar reduction wouldhave been observed in the constituent trustshad they not merged, and that this reductioncannot be attributed to merger. Failureadequately to control for such factors has beenreported as a weakness in the literature on costsavings from mergers (Aletras etal., 1997). Thesecond explanation for the difference involvesdistinguishing between underlyingmanagement costs that will be incurred in thelong term and transitional costs associated withthe merger process. Hackett (1996) highlightedthe costs involved in the merger process itself,and evidence of increased costs of managingthe process, such as management consultantcosts, emerged in the study. These transitionalcosts may contribute to the lower savingsachieved in the first year post-merger comparedto the second year. A second factor that maycontribute to the lower savings in the first yearis that the reduction in underlying managementcosts occurs over a period of time and not onthe date that the merged trust was created.Savings may arise both before and after thedate of merger and therefore the penultimatepre-merger year (1997/98) was used as the baseyear in the analysis.

The failure to achieve target savings inmanagement costs in the first two years isconsistent with previous research that indicatesthat savings are smaller than anticipated (Cohenet al., 2001; Whitfield, 1998) and that theyrarely materialize immediately post-merger(McClenahan, 1999b; Treat, 1976; Fergusonand Goddard, 1997). However, there isuncertainty in the estimates of managementcost savings given the wide confidence intervals,a result of the small sample size, and theirsensitivity to different assumptions aboutvariable costs. Further research is needed tofind out if target savings are achieved in thelonger term, although .the impact of otherfactors make it difficult to measure the savingsthat can be attributed to merger (Goddard andFerguson, 1997).

The validity of using management costsavings as an objective of merger is alsoquestionable. From an economic perspective,

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efficiency and economies of scale and scopeneed to be evaluated across all inputs toproduction rather than for a single elementthat represents around 5%of total expenditure.Economies of scale outside management costswere rarely mentioned at any stage of themerger process, despite research evidence thatsuggests that diseconomies may outweigheconomies of scale in larger hospitals (Aletrasetal., 1997). Some evidence of diseconomies ofscale emerged from the study interviews, withadditional posts required to cope with theadditional work involved, although the studydid not set out to measure overall efficiencyand economies of scale. The strong linearrelationship between management costs andtrust size may also reflect pressure on trusts toconform, rather than identifying what areappropriate inputs to operate efficiently in thelonger term (Appleby, 2001) and what input isrequired to effectively manage the mergerprocess itself.

The clearly stated aim of reinvesting savingsin services could not be demonstrated andinterviewees within trusts differed in their viewson how, if at all, savings had been reinvested.Scepticism was greater with externalstakeholders and service managers. In the casestudy mental health trust, the savings werereturned to the health authority for'reinvestment', although across all mergersthere wasa lack of transparency in this process.The research literature is limited in this area,although the importance of being able to showevidence of reinvestment is highlighted byWhitfield (1998) who reported a case wheresetting unachievable targets for savings andreinvestment resulted in failure to meet publicexpectations and raised concerns about thehealth service's ability to handle futurerestructuring.

Where equity emerged as a theme ofmerger, the trusts were partly able to addressthe problem and the approach depended onthe context. Equity in funding and resourceallocation emerged as a theme for the mentalhealth and community trusts although it wasonly mentioned as an aim or objective in onecommunity trust merger and has not beenregarded previously as a significant driver ofmerger (Arnauld et al., 1997; Garside, 1999).The different approaches adopted by thecommunity trusts and the mental health trustto reduce inequity was largely driven by healthauthority purchasing arrangements. Thecommunity trusts were able to target resourcesto underfunded areas internally becauseservices fell within the same health authority

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boundaries. Inequity in the mental health trustcould not be addressed internally because twohealth authorities funded services at differentlevels and cross-subsidization was not allowed.Instead the mental health trust was able to putpressure on the health authority to increasefunding levels. In the first three years aftermerger, both approaches had only partiallyeliminated the inequities. The transfer ofpurchasing responsibilities from healthauthorities to smaller primary care trusts willhave implications for the equitable funding ofservices and the ability of health-care providersto address issues of equity without cross-subsidization.

This study explored the process andoutcomes of trust mergers from a financialperspective. Although some research existson whether mergers should take place inrelation to the size of hospitals (Posnett,1999), there is much less on what happensafter hospital mergers (Ferguson andGoddard, 1997) and we found none on theoutcomes of mergers in community andmental health trusts. The case study approachenabled the process and outcomes of trustmergers to be explored in depth acrossdifferent types of trust, although there maybe limits to the generalizability of the findingsgiven the relatively limited geographical area.Further, the study was commissioned afterthe mergers had taken place and the follow-up may be too short to identify the longer-term outcomes of merger (McClenahan,1999b; Goddard and Ferguson, 1997; Weil,2000).

In conclusion, this study identifies fourimportant issues that need to be consideredin planning future mergers andreconfigurations:

•Any financial deficits in constituent trustsand how they will be addressed should bestated explicitly in planning the mergerprocess.

•Targets for savings should be set realisticallyand be based on evidence that they areachievable. There should be considerationof overall efficiency, economies anddiseconomies of scale and scope across theorganization, not just management costs.

•Where reinvestment in services is anobjective of merger, there needs to be atransparent process for identifying savingsthat have been made and how they havebeen reinvested.

• Issues of equity, and approaches toaddressing them, should be identified early

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in the merger process given the contextualfactors that may limit a trust's ability toachieve equity. •

AcknowledgementsThe study was funded by the NHS ExecutiveLondon Region Organization and ManagementR&D Programme. We thank all those staff inNHS and allied organizations who took part inthe study.

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