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Five years later: A look at the Centerstone merger

June 20, 2013
by Dennis Grantham, Editor-in-Chief
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Part 1: A merger to serve a mission
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More than five years ago, as he prepared to address a National Council Conference audience about a merger of behavioral health agencies, David Guth noticed that conference organizers kept packing more chairs into the room. 

“We got several times the number of people that we expected that day,” Guth recalled, joking that “there were probably a lot of people coming to see what a big mistake we had made.” The 2008 merger of Tennessee-based Centerstone with the Indiana-based Center for Behavioral Health and Quinco Behavioral Health Systems was the largest such merger ever in the field. Guth became CEO of the merged organization, since known as Centerstone.

At the time, there was plenty that could still go wrong. No one had ever tried such a large merger, which combined three nationally-recognized (and non-contiguous) behavioral health organizations in May 2008 and a fourth — Indiana’s Dunn Mental Health Centers in September 2009 — to form the Centerstone that we know today.

The merger announcement “shook up a lot of preconceptions about what mergers would look like,” said Guth, who recently recounted the process and its results in a Behavioral Healthcare interview.  His starting point was our June 2008 cover story, “Pursuing a larger mission through a merger.”  (Guth is also the author of a new book, Strategic Unions:  A marriage guide for healthy, not-for-profit mergers,that was introduced at April’s National Council Conference.)

Start with the mission, then scale up

Essential to any merger’s success is a process that begins long before any thought of a merger or a merger partner, Guth explained. Within every not-for-profit entity, executive leadership must tap into the skill and vision of board members to consider the future of the organization and its mission, establish realistic and attainable near- and long-term goals, and then adopt strategies and tactics to meet the goals.  Within this strategic planning process, it is essential, Guth noted, to ask some critical questions:

·         What resources are needed to support service lines that are core to the organization? 

·         What are the fixed costs of performing or delivering those services at a high level of excellence? 

·         How narrowly do these programs, services, or capabilities need to be directed so as to configure them and lead them effectively?

The answers to these questions led Guth and the board not only to define Centerstone’s core capabilities, but to estimate their operating costs and management requirements. From these answers, Guth said that he and his board determined that to achieve its goals, a provider like pre-merger Centerstone would ideally need $250 million in annual revenue to support the mix of core services, essential in-house capabilities, and external expertise required.  

Achieving such a large revenue number was unrealistic based solely on organic growth, (pre-merger, Centerstone’s 2008 revenues were $70 million), so the need pursue a merger became obivious, Guth said. Also obvious was the need for a multi-state footprint. The ideal, they determined, would be an entity with a four-state presence.

“You want four, not 20,” said Guth, “because you’ve got to ensure that you’ve got enough scale” to deal with each state’s differences—in service definitions, for example—but that “you aren’t too small to deal with the complexity in any one state.”  Diversifying the footprint across several states is good, he added, because “you don’t want to have too much in one basket, one market.”  Key factors—politics, funding, third-party insurance, philanthropy, regulations—also tend to function and change on a statewide scale, he continued, so a multi-state footprint tends to increase stability: a poor operating climate in one or two states will likely be balanced by a more positive climate in others.

Creating and sustaining an effective scale of leadership is also essential, not only for sound operations, but to transform the capabilities of the post-merger organization, Guth explained. One transformational strategy is to narrow the scope of services assigned to a leader or manager. “Narrowing the scope of services lets leaders focus. You want your leaders to be experts—to go an inch wide and a mile deep—whether it’s about emerging care approaches, interfacing with community systems, or reimbursement strategies,” he said. Such specialization and mastery is “a huge benefit for the people you’re serving.”

Merging is all about talent

Say the word merger, and people can’t help but have an impression of what it means. And, because so many well-known mergers involve big, for-profit organizations, a for-profit mindset predominates in the minds of board members, Guth said. “To most people, merger means acquisition or takeover,” he continued, denoting a transaction in which one party gets money and the other gets the organization plus debt. In the new entity, the latter group and culture typically predominate, while members of the former group are required to adapt or leave.

In non-for-profit mergers like the one that formed today’s Centerstone, “the acquisition mentality is a mistake that you’ve got to work to avoid,” said Guth. He points out that there’s rarely any money involved in not-for-profit mergers. Instead, he suggests, the focus is on talent and how to keep it. “You’re building one common culture, new competencies and systems. You want to keep the best of what everyone brings.”