The Case of Sunderby Hospital Merger

Micromanagement in Merger: The case of Sunderby Hospital Merger

Thesis within Business Administration Authors: Granit Morina, Sebastian Wendahl Abbas, Olga Shekshaeva Tutor: Zehra Sayed Jönköping May 2011

Acknowledgements

We, the authors of this thesis would like to thank the following persons for helping us with our thesis: Zehra Sayed, for her guidance and support. Jörgen Johansson and Tuula Anneli Kunto at the NCC archive for finding the right documents, and sending them to us. We would also like to thank our interview objects, for taking time from their busy schedules to answer our questions. Our colleagues at JIBS for their feedback. Finally, we want to thank each other for all the hours spent in computer rooms and in the library.

Granit Morina Olga Shekshaeva Sebastian Wendahl Abbas

Bachelor Thesis in Business Management

Title: A Swedish Hospital Merger - The Case of Sunderby Hospital Author: Granit Morina, Olga Shekshaeva, Sebastian Wendahl Abbas

Tutor: Zehra Sayed

Date: May 2011

Subject Terms: Mergers & Acquisitions, Health care, Hospitals, Efficiency, Public Sector, Synergy, Technical Economies, Scale Economies

Abstract

Purpose The purpose of this paper is to investigate and analyze the reasons as given by the Norrbotten County Council behind the Sunderby hospital merger.

Background Mergers and Acquisitions have grown to become very popular as a way for achieving organizational development. This has been seen in both public and corporate sectors. Mergers did not become popular in the Swedish health care sector until the end of the 21th century, when the first merger took place many followed. In this case the authors investigate one of these hospital mergers.

Method The authors have made a qualitative research. To gather data they contacted the authorities and interview politicians. The authorities provided them with public documents from their archive. The interviews were semi-structured with open-ended questions.

Conclusion The authors of this thesis have found that the Sunderby hospital merger was supported by academic literature. The reasons stated by the Norbotten County Council (NCC) for doing the merger, were consistent with theories about mergers found in academic research. The authors have also provided their non-supported beliefs under the Discussion section, as well as recommendations for further studies.

Contents 1. Introduction ...... 6

1.1 Background...... 7

1.1.1 Hospitals & Mergers ...... 8

1.1.2 Management in the Public Sector...... 8

1.2 Problem Statement...... 9

1.3 Purpose ...... 10

1.4 Delimitations ...... 10

1.5 Definitions ...... 11

1.6 Disposition...... 12

2 Frame of Reference ...... 13

2.1 Mergers...... 13

2.1.1 Technical Economies and Efficiency...... 14

2.1.2 Management in the Public Sector...... 16

2.2 Technical Economies in Hospitals ...... 18

3 Method ...... 21

3.1 Research Method ...... 21

3.1.1 Archival Research: A research method...... 22

3.1.2 Interview: A research Method...... 22

3.2 The Interviews Process...... 22

3.3 NCC’s data ...... 23

3.4 Creditability...... 24

4 Empirical Findings ...... 25

4.1 Documents from the NCC’s archive ...... 25

4.1.1 Investigated topics...... 25

4.1.2 Primary Data - Medical Quality and Safety report ...... 26

4.1.3 The Final Decision ...... 29

4.1.4 Opposing political views...... 29

4.2 The interviews ...... 30

5 Analysis...... 36

5.1 Economic motivation analysis...... 37

5.1.1 Economies of Scale ...... 37

5.1.2 Efficiency ...... 38

5.2 Public sector settings impact ...... 40

6 Conclusion...... 42

7 Discussion ...... 43

7.1 Further studies ...... 44

8 References ...... 45

9 Appendix ...... 49

9.1 The Questions...... 49

1. Introduction In the first section of our thesis we will present our background, problem statement, delimitations, definitions and the actual purpose of this thesis.

The authors of this thesis have a common interest in strategic tools that are used for organizational development. We are investigating mergers as a way of achieving development. On our first day of literature gathering we focused on cross-cultural mergers. After a meeting with our tutor we decided to switch our focus to mergers within the health care industry. It was during this time that we were informed about the Sunderby hospital merger. After reading more about this situation we decided that it was the right case to base our thesis on.

The Sunderby hospital merger was between Boden and Luleå hospitals. The decision to merge was made by the Norrbotten county council (NCC) in 1989 but construction did not begin until 1995; the hospital was not operational until 1999. The NCC is an elected administrative body who governs the Norrbotten County. The NCC body belongs to the Swedish government and works through it.

In 1989 the health care in Norrbotten was revised in order to secure its future development. The NCC reviewed several alternatives and decided that the best alternative for securing future development was to merge the two hospitals. Since the NCC relied on merging as a tool for organizational development and is a body from the public sector, we chose to add literature about management within the public sector upon the literature that we previously gathered about mergers within the corporate sector. After reviewing the new literature we found and linking it with our literature on the corporate sector, we concluded that there was enough material on the topic to write a case study about the Sunderby hospital merger.

We acquired the given reasons for choosing the merger alternative as a way for development, and investigated if they are consistent with earlier research on mergers in the corporate sector and mergers within the public sector.

The Sunderby hospital merger was chosen because mergers within the health care sector in Sweden have become very popular (Choi, 2011), and we want to see if the given reasons for merging hospitals are supported by academic theories about organizational development.

1.1 Background

Mergers and acquisitions (M&A) have permeated all sectors of society, both private and public sectors, this includes the health care sector as well (Choi, 2011). The phenomenon of M&A can be traced back to 1895 in the US manufacturing industry where subsidiaries started to merge between each other in order to survive the harsh competition within the industry (Choi, 2011).

Throughout history mergers seem to occur in waves where thousands of firms merge within a short time period. Five of these massive merger waves have been observed since the 1900s up to the present day (Barkoulas et al., 2001; Gärtner & Halbheer, 2009). The main reasons for mergers are, according to Goddard and Ferguson (1997), motivated by financial and operational motives.

Today M&A can be seen all around the globe and are in most cases used as a method for creating value, gaining market share, or renewing organizations. By looking at the merger waves we can see that the phenomenon of M&A is becoming more popular throughout time as the first wave back in 1895 recorded 1,800 firms merging in the manufacturing industry and by 2004 (the fourth wave) over 30, 000 mergers were observed worldwide (Cartwright & Schoenberg, 2006).

Reasons why firms choose to use M&A as a tool for organizational development instead of organic growth are, amongst others: speed, cost and to increase market size (Frankel, 2005). By utilizing M&A the firm does not have to wait for the fruit to ripen (Frankel, 2005). This means that the organization does not have to wait for internal innovation, and promoting internal innovation requires complex entrepreneurial programs to be applied within the organization (Frankel, 2005). On top of the extra time needed for organic growth these projects are not fail safe, so they also have a risk of failing and if this occurs the company not only loses time but also money (Galpin, 2008).

Due to globalization, markets are increasing in size. Globalization is in short the increase in cross-border trades where businesses seek to conduct business across their domestic borders

(Gregoriou & Neuhauser, 2007). The increase in globalization has led to more M&A in general. As vast growing economies such as China and India enter international trade, the use of M&A as a tool to overcome diverse barriers is set to increase even more (Gregoriou & Neuhauser, 2007).

1.1.1 Hospitals & Mergers In 1980 the merger trend hit the health care sector, starting with mergers between private hospitals in the US (Choi, 2011). After many success stories from the American health care sector, health care sectors in other countries adapted mergers as a way of reforming their health care systems (Choi, 2011). The phenomenon of merging hospitals grew at a very fast pace and by the mid 1990’s it was already nine times bigger than it had been during the 1980’s (Williams et al., 2006). This resulted in vast merger waves in the UK health care sector in the mid 1990’s (Choi, 2011). By the end of the 20th century merger mania had spread to Sweden, beginning in the mid 1980’s with a restructuring of the health care sector and followed up by a wave of hospital mergers starting from the mid 1990’s. In the year 2000 the trend reached the Swedish academic health care institutions and as a result Sweden got their first University Hospital Merger which was Sahlgrenska University Hospital (Holmberg & Jansson, 2008; Choi, 2011; Söderström & Lundbäck, 2002).

1.1.2 The Public Sector and Management Financial and operational factors are, as previously mentioned by Goddard and Ferguson (1997), perceived as important by companies. These factors are also considered important by organizations in the public sector (Bellone & Goerl, 1992; Osborne & Gaebler, 1993). The factors became relevant as governments suffered budget deficits and needed to revise their management strategies. According to Kuratko et al. (2002), the same management that occurs in companies has also started to occur in the public sector. The public sector has an interest to decrease expenses (Bellone & Goerl, 1992; Osborne & Gaebler, 1993) and to enhance their operations (Kuratko, Morris& Covin, 2002).

Organizations in the corporate sector and in the public sector have both differences and similarities (Kuratko, et al., 2002). They both have stakeholders and demands from them. They differ in who their stakeholders are and what they demand. The corporate sector´s stakeholders are their shareholders while the public sector’s stakeholders are the citizens of

the state (Kuratko, 2002). The shareholders are interested in their shares’ value while the citizens are interested in intangible goods, such as social value, etc (Kuratko, 2002).

The degree of accountability required to meet the stakeholder’s demand varies between the public and the corporate sector. Most forms of mismanagement and malpractice in the public sector cannot be punished or remedied by legal means (Mitchell & Williams, 1987). The politicians that manage the public sector are elected on the basis of trust, and there are no legal forms for enforcing promises (Mitchell & Williams, 1987).

In the public sector there are different types of enterprises and they have been categorized according to their characteristics. Public hospitals are categorized as mutual benefit organizations (Kuratko et al., 2002). They provide services at fees below actual costs to their constituency, the tax payers.

1.2 Problem Statement Mergers in the health care sector have been occurring in significant numbers for more than three decades (Choi, 2011). Hospital mergers are used as a tool for optimization within health care sectors (Choi, 2011; Goddard & Ferguson, 1997).

Despite the globally increased popularity of mergers in the health care sector, ambivalence exists within the academic community regarding the phenomena of mergers in general but specifically about mergers within the health care sector. Lars Werkö (2003) strongly condemns the notion of hospital mergers as a myth preferential among decision makers in Sweden. The idea that larger hospitals, created through mergers, lead to greater efficiency and/or economies of scale is, according to him, simply wishful thinking. In Sweden this attempt of increasing efficiency has often manifested itself as occupational fatigue. It is also very common that costs are underestimated when it comes to the merger process (Werkö, 2003).

Whether mergers in the health care sector is the cure that the Swedish politicians perceive it as, or if it is an illusion, still persists within the Swedish hospital agenda (Holmberg & Jansson, 2008). Decision makers in Sweden have adopted the merger approach as a national standard for achieving the goals which they have set for the restructuring of Sweden’s health care sector, and this is why many Swedish hospitals have merged. Sahlgrenska Univesity Hospital in Gothenburg, an outcome of a Swedish hospital merger is one of the world’s

largest hospitals (Holmberg & Jansson, 2008). A fact that might seem illogical in regards to Gothenburg’s population, because it is not one of the most populated cities in the world. In this merger the reasons for merging did not come from a population-ratio analysis, but from the belief that larger hospitals have a higher efficiency rate.

In some of the Swedish merger cases within the health care sector the reasons for merging are not clear. This is why we chose to focus our attention on the Sunderby hospital, and what the NCC stated as reasons for demolishing Boden and Luleå hospitals in order to build the new Sunderby hospital.

1.3 Purpose The purpose of this paper is to investigate and analyze the reasons as given by the NCC behind the Sunderby hospital merger.

1.4 Delimitations We decided on writing our thesis with the intention of investigating the Sunderby hospital merger from a managerial perspective. Due to this we want to limit the scope of our analysis to only focus on the managerial activities of this merger.

A merger has several perspectives; one can study the organizational integration, the accounting aspect, performance ratios, cost allocation basis return on investment calculations, financing calculations, etc. This is why we chose to narrow down our thesis to only cover the managerial aspects of the Sunderby hospital merger. Strategic management is not an isolated cognitive field. Strategic management belongs to the larger context of business administration, so we cannot fully exclude other concepts. If improved performance ratios is a desired outcome of a strategic management theory it needs to be mentioned briefly in our thesis. There will not be any extensive writings on any topics besides the field of strategic management in this thesis.

The people who decide whether the strategies are good or not are, in our case politicians. Hospitals in Sweden are operated by the public sector, in our background we have arguments that justify that public administration belongs to the academic field of business administration. In our theoretical framework we have included research on management in the public sector. This has been done because members of the NCC wrote the primary data, that

was acquired; all of whom are members of diverse political parties. We did include interviews with relevant politicians to add some more substance to that aspect of our thesis.

However, we are not going to cover research on the public sector from aspects other than the business administration research. It acknowledges a part of our case that must be explained and put in context in order for us to be able to complete our analysis of the Sunderby merger.

1.5 Definitions • Merger: a combination of two equal firms into a new legal entity (Cartwright & Cooper, 1992).

• Acquisition: “…The purchase by one company of a controlling ownership interest in another firm, a legal subsidiary of another firm, or selected assets of another firm…” (DePamphilis, 2010, p. 715).

• Verticals mergers are usually seen between firms that complement each other such as the union between customers with vendors (Chen,Y. 2001).

• Horizontal merger: Involves the combination of firms that offer substitute goods or services, in other words firms that are in direct competition to each other. Horizontal mergers are considered as being hostile takeovers when a bigger company usually buys a smaller company and takes full control over it in every field, in order to reduce competition (Farrell & Shapiro, 1990).

• Hostage Situation: When organizations in the public sector are overloaded with inputs of influence from different political affiliations (Kuratko et al., 2002).

• Economies of Scale (EOS): An idea in the academic society that as the output increases the average cost decreases (Silbertson, 1972; Sheffrin & O´Sullivan, 2003).

• Scale economies: See EOS.

• Norrbotten County Council (NCC): The chosen representatives to administrate the Norrbotten County.

• Effectiveness: “…Doing the right thing…” (Drucker, 1986, p.36). It concerns the driving power in an organization, which looks for results (Drucker, 1986). It is not about

increasing optimization of production, it is about finding the production that leads to the best results for the company. Which products gain the most market share? It is about allocating resources to matters that generate positive results for the company. It is not about reducing costs (Drucker, 1986). For a car company effectiveness would not be about producing a car at the lowest cost possible, it would be about producing a car model that would have the greatest success on the market.

• Efficiency: “…Doing the things right…”(Drucker, 1986, p.36) This comes from a cost perspective. It means to do more with the same resources. Increase output/input, which reduces the cost ratio (Drucker, 1986). In a car company efficiency would not be about producing the most popular car model of the year, but producing cars with maximum cost- reduction without lowering the quality. • Synergy: Synergy is the total net incremental cash flow that comes from the merger of two organizations and cannot be achieved separately. Any costs derived from the reaching synergy should be considered while calculating synergy’s value. Synergies can be classified as cost savings and revenues (Ficery, Herd & Pursche, 2007). • Technical Economies (TE): These are scale economies and occur when the physical process inside the firm is altered so that the same amounts of inputs, or factors of production, produce a higher quantity of output (Lubatkin, 1983, p.219).

1.6 Disposition In the first section we have the introduction to our thesis. In the introduction there is a general background, a research narrative, and the purpose of this thesis, as well as delimitation of the thesis’s scope and important definitions. In section two we introduce the theoretical framework which includes literature within the fields of mergers, hospital mergers and management in the public sector this was later used as basis for analyzing our empirical findings. The third section contains the method, which explains the research methods we have chosen and how we have gathered our data. In the fourth section we have the empirical findings; this section explains the primary data we have retrieved. The fifth section is the analysis; it is here we have analyzed our empirical findings according to the theories represented in our frame of reference. In the sixth section we have the conclusion, where we give a summary of the analysis. Section seven contains the discussion, where we give our own opinions and suggestions for further studies.

2 Frame of Reference In this section we will describe the important theories behind M&A and within Management in the public sector. In this section we rely on earlier research and findings made within the two respective fields.

The disposition in our frame of reference is structured in a triangular shape beginning with the explanation of mergers and then splitting up to literature within the field of technical economies (see figure 2.1). Followed by our findings within the field of management in the public sector, lastly we also include our findings within hospital mergers and technical economies. As many reasons to why firms merge were found, we had to narrow them down to only chose reasons that are relevant for our specific case. These were: Technical economies (including economies of scale), efficiency and political reasons since as mentioned above the merger was conducted in a public sector.

2.1 Mergers In literature on reasons to why firms use mergers as a way of organizational development we could see that the main reasons for firms to merge were motivated by operational and financial success (Goddard & Ferguson, 1997). These motives are also reasons to merge within the public sector (Bellone & Goerl, 1992; Osborne & Gaebler, 1993). Improving overall performance is the primary purpose of merging and has been the same since firms started to utilize mergers as a strategic alternative for organizational development (Lubatkin, 1983). After reviewing the literature there was still no consensus seen for explaining the increasing popularity of mergers.

Lubatkin (1983) says that post-merger performance is measured by synergy. Lubatkin (1983) explains synergy as when two operating units are more effective and efficient together than apart. According to Campbell & Goold (1998) the level of synergy is measured by the fit between shared tangible and intangible recourses, coordinated strategies, vertical integration, pooled negotiating power and combined business creation.

The Federal Trade Commission (FTC) mentions three kinds of economies; technical economies, pecuniary economies and diversification economies. Technical economies (TE) are the most widely used sources of economy, in the literature TE are mostly seen as scale economies and occur when the operational process inside the firm is altered so that the inputs or production factors produce a higher quantity of outputs at a lower cost. Detailed explanations for TE and synergies can be read in section 2.1.1. The existence of TE is appealing to many researchers but no proven empirical data has been recorded to measure the gains in efficiency and average cost (Lubatkin, 1983). This data is also a scarce and unreliable as a source to depend on (Shepherd, 1979).

When two companies merge horizontally, the synergy achieved will result in a technical economy, thus the new firm will have acquired scale economies (Lubatkin, 1983). If the two firms would merge through a vertical merger instead of a horizontal merger, the achieved synergy would still lead to scale economies. More about synergies in relation to mergers can be read in section 2.2.

2.1.1 Technical Economies and Efficiency Economics of Scale (EOS) or Scale Economics reflect the phenomena when the average cost decrease as output increase (Sheffrin & O´Sullivan, 2003). On a diagram showing the relation between average costs and output the average-cost curve would be negatively sloped. This would look as following:

Figure 2.1 EOS Illustraion (Source: By authors, adapted from Sheffrin & O´Sullivan, 2003)

This implies that as organizations produce more of a product or offer more of a service, the price per service/product decreases, as in an exponential function (Sheffrin & O´Sullivan, 2003). Limitations of EOS include the hardship of applying scale economies to small scare production firms. Inputs are indivisible if they cannot be scaled down for production of smaller quantities. As shown in figure 2.1 costs per unit are the highest when few units are produced.

The classical definition EOS has been revised but Silbertson (1972) stresses that this definition does not cover the whole concept of EOS. There are many prevailing factors for EOS; a company might not have unilateral purpose for services or products. Different types of services/products lead to differentiations in the variables. For example a car company producing different types of cars may have different results each month. Due to these implications, the concept of scale economies is not as static as many perceive it (Silberston, 1972). EOS involves processes that are dynamic; they vary from month to month. In relation to our case, one cannot say that nurses are a homogenous variable. Different types of nurses and diverse tasks require different amounts of time and have varying costs attached to it. Since TE includes the concept of EOS, from now on we will use technical economies (TE) instead of economies of scale (EOS) in the thesis.

The achievement of TE through mergers concerns reaching synergy within the three broad categories if synergies: financial, operational and managerial synergies (Trautwein, 1990) below are categories of synergies defined:

Financial synergy is a way of lowering costs for the firm; increasing the size of the firm through a merger can pursue it. The firm does not have to merge with another firm to gain TE, they can aim to allocate resources more efficiently within the existing firm instead. (Trautwein, 1990).

Operational synergy is when there is a free flow of knowledge transfer in a newly formed organization or by joining operations from separate entities (Porter, 1985). Operational synergy leads to production and/or administrative efficiencies (Chatterjee, 1986).

Managerial synergy is exercised when one of the merging or acquiring companies has unique qualities and abilities in management area, which can be applied, and benefit another merging part or acquired company (Matsusaka, 1993; Trautwein, 1990).

Pursche et al. (2007) provide an additional definition to synergies; he says that not all synergies can be measured in tangible terms. Where synergies can be measured in financial terms, a synergy is a net additional cash flow that is obtained by merging two entities into one and which cannot be achieved by them separately (Pursche et al., 2007). From a cost saving perspective this cash flow would be reached by eliminating duplication of operations and facilities (downsizing) (Pursche et al., 2007). Increased revenue would be achieved through entering new markets or product segments, developing new skills or technologies by merging (Pursche et al., 2007).

Röller, Stennek & Verboven (2000) agrees with Trautwein (1990) and Pursche et al.’s (2007) ideas of synergies, and has stated which efficiencies that a merger can lead to, these are as shown below:

• Economies of scale. Average cost of operations/production is decreasing due to increasing in total output

• More opportunities for developing research & development (R&D) sector due to free knowledge flow and incentives for innovation

• Improving utilization of assets

2.1.2 Management in the Public Sector

The factors mentioned above have been put in focus by the public sector as well (Osborne & Gaebler, 1993). It has been concluded that, “… public officials are now judged by whether they can work … smarter, and do more with less” (Osborne & Gaebler, 1993, p.19). The process of judging public officials has been studied and three important criterions have been found (Mitchell & William, 1987). The criterions are: expertise, entrepreneurship and legitimacy.

Expertise reflects “..allocating resources so that they will be more productive. This is criteria is problematic since there are no clear-cut definitions of what is considered to be expertise. ..” (Mitchell & William, 1987, p.446). Brown (1984) says that different groups of society perceive different values. These values are also intangible, economic value does not directly translate to communal value. Another problem is that expertise is not an isolated aspect, it is affected by organizational design, external economic events, etc (Mitchell & William, 1987).

Entrepreneurship regards the ability to create innovation and progress (Mitchell & William, 1987). This is also a problematic criteria, entrepreneurship is a perceived skill and hence subjective. Mitchell and Williams (1987) states that this is the least important criteria, since people often do not think that public officials are more qualified to do their job than other high-skilled professions, such as doctors and university teachers.

The third criterion resembles Entrepreneurship, since it is also a perceived ability. Legitimacy is “…based on the notion that administrators must display the virtues of trust and honourableness in order to be legitimate leaders...” (Mitchell & Williams, 1987, p.448). It regards the perceived level of credibility to run an organization, the trust you have for a person. Mitchell and Williams (1984) put emphasis on that trust as a skill is not covered by the law. Most forms of mismanagement and malpractice in the public sector cannot be punished. The society cannot legally hold anyone accountable for a badly managed public sector (Mitchell & Williams, 1987). Bellone and Goerl (1992) discuss the relevance of the current society´s inability to participate in state affairs at high levels. This phenomenon is called a thin democracy (Bellone & Goerl, 1992; Åström, 2001). Besides not participating in state affairs at high levels, Åström (2001) argues that the citizens are more like customers to political parties than individuals of own decision power. The citizens disempower themselves and give away all authority to politicians, on the merit of their trustworthiness. The citizens’ only way to criticize the politicians is by measuring the public sector’s performance (Åström, 2001). Measuring the public sector’s performance is as previously mentioned difficult since there is no clear definition of what good expertise (and resource allocation) is (Mitchell & Williams, 1987; Brown, 1984).

Besides the difficulties to measure performance in the public sector, there are many pit falls in the public sector when it comes to applying management concepts (Theobald, 1997). According to Theobald (1997), overemphasis on having good managerial policies can lead to less focus on the core mission. There is also a lack of knowledge among the managers in the public sector when it comes to improving effectiveness and efficiency (Foster & Bradach, 2005). The absence of managerial skills may cause resources to be used wrongly (Foster & Bradach, 2005), and opportunities for improving effectiveness and efficiency may be missed (Dees, 1998).

The public sector also lack the flexibility to easily capitalize on external opportunities, it is confined to a rigid system of rules and procedures (Kuratko et al., 2002). Managers for the

public sector are elected; hence the lack of permanent ownership may shift the management’s attention towards the election cycles. Long-term success is often down-prioritised since focus shifts to the short-term success, which helps with winning elections (Kuratko et al., 2002). The absence of permanent ownership creates more issues; it prevents managers of the public sector from experiencing either financial risks or rewards (Kuratko et al., 2002). It also creates a situation where decisions are taken through democratic processes; at times the political process cannot reach unity. The lack of consensus in choosing a direction creates a “hostage situation” where the organization within the public sector becomes omitted to the will of the politicians. The above mentioned factors, lack of permanent ownership and the “hostage situation”, often push the public sector to make compromises. These compromises are referred to as the “Rational Limited Search” (RLS), a fast solution is preferred over the most effective/efficient solution (Kuratko et al., 2002).

2.2 Technical Economies in Hospitals Söderström and Lundbäck (2002) investigated if there is an optimal size of hospitals. An initial theory they look at is the prevalence of experts. A larger hospital would gather more specialized doctors to one facility. This would increase the likelihood of a patient always having a specialist to cater on his/her problem at the hospital. This will increase the efficiency of the hospital, since it can deal with a greater variety of situations (Söderström & Lundbäck, 2002). Valentini and Dawson (2010) agrees that a larger knowledge base (higher concentrations of experts) would”...improve performance (1) through cross-fertilization, that is, by providing ‘‘new’’ solutions to ‘‘old’’ problems …” (Valentini & Dawson, 2010, p. 182). Good knowledge sharing is achieved through good communication, a common professional language and experience, and by knowledge base similarities within the communicating parties (Lane & Lubatkin, 1998).

Söderstrom & Lundbäck (2002) argue that TE would decrease operating expenses in health care. Lynk (1995) confirms that TE apply to hospitals: ”This would imply that a consolidation of the overlapping departments of, … two hospitals might produce significant efficiencies due to the presence of scale economies in production” (Lynk, 1995, p.508).

A reoccurring problem with the research on TE within hospitals and health care is that there are no hospitals that are identical; the patients tend to have different diagnoses (Söderström &

Lundbäck, 2002; Lynk, 1995). Despite the absence of an exact method of comparison or a foolproof method to pinpoint the benefits of TE in the health care sector, the benefits are assumed to be there by a majority of researchers (Söderström & Lundbäck, 2002).

A classical reasoning that Söderström & Lundbäck (2002) and Sheffrin & O´Sullivan (2003) use is the relationship between nurses and patients. 200 nurses can treat 400 patients per day, while 400 nurses can treat 1000 patients (Söderström & Lundbäck, 2002; Sheffrin & O´Sullivan, 2003). This reasoning implies that the relationship between production factors and output is incrementally increasing; output reacts positively towards the increase of production factors which is not proportionate.

Illustration of EOS affect on output

Nurses Patients Production factors/output Ratio

200 400 400/200= 2

400 100 1000/400= 2,5

Table3.2.3 Source: By authors, adapted from Söderström & Lundbäck, 2002

For measuring the overall efficiency of a hospital one divides a hospital into different diagnosis related groups (DRGs), about 500 categories (Söderström & Lundbäck, 2002). The categories are initially cost measured separately than the aggregated cost of all DRGs is used to calculate the average cost of a patient. This system is widely considered to be far from perfect, but that it is often an instrument for measuring overview costs (Söderström & Lundbäck, 2002). Lynk (1995) says that the DRG approach does not measure the effectiveness of different treatment capabilities in hospitals. This leads to a bias that is harmful for large hospitals. Since, specialised clinics are effective in their area of expertise, but if the hospital is large and contains a broad spectrum of expertise the work may be underestimated (Lynk, 1995). One has to consider that large hospitals can deal with complicated issues at the same level of competence as specialized clinics, but that they can fill the role of many specialized clinics through gathering many experts under one roof (Lynk, 1995). Benefits gained from a larger knowledge base have been connected to lower mortality rates (Sloan et al., 1999).

Lynk (1995) also says that a large hospital requires less staff on standby for emergencies. Standby staff earns money without being utilized until they are called in, this will waste money. A larger population fluctuates less than a small one, hence the even flow in a larger organization is easier to manage (Taleb, 2008 ; Söderström & Lundbäck, 2002).

A larger amount of patients, have been said to be beneficial for hospitals (West, 2001). The concept of “practice makes perfect” is applicable in health care according to West (2001, p.43). The more a professional can repeat a specific task the better the task will be implemented (West, 2001).

Research done by Connor, Feldman, Dowd and Radcliff (1997) on 122 hospital mergers in the US revealed an average cost reduction to about seven percent. They claim that TE leads to “…elimination of duplicative services; reduction in unused capacity through pooled staffing; improved management and production processes…” (Connor et al., 1997, p.63).

Harris et al. (2000) claims that mergers are the best method to reduce facilities and service duplication in the health care, which reduces costs. This concept is called “low hanging fruit”, this can be explained as when “…the combined organization does not need two heads of sales or human resources. And when, for example, a merger reveals distribution centers or retail operations whose territories overlap, it is evident that some real estate facilities can be shuttered…” (Pursche et al., 2007, p.30).

The elimination of duplicative services in health care (Tang & Timmer, 2008; Connor et al, 1997; Pursche et al, 2007), is based on the idea that the remaining staff can fill the void of downsized staff and maintain their functions at full work load (Tang & Timmer, 2008). This phenomenon is sometimes claimed to make the health care less personal, however it allows better efficiency (Bilchik, 1998).

Spang et al. (2001) investigated performance of merged hospital entities. After studying 204 hospitals participating in merger activity and more than one thousand of non-merging hospitals, they found that the growing level of costs were lower in merging hospitals than in hospitals that did not merge. Ferrier and Valdmanis (2004), and Groff et al. (2007) have investigated merged and non-merged hospitals and reached the conclusion that merged hospitals achieved TE by the end of the second year after merging. The non-merged hospitals showed less on improved productivity and higher on average costs than the merged hospitals (Ferrier & Valdmanis, 2004; Groff et al., 2007).

3 Method

This section describes our chosen research method, how data was collected, and the validity of our research.

3.1 Research Method

In light of our purpose, to investigate a specific merger, we have decided to structure it as a case study. It looks at the specific scenario, of a merger between two similar organizations in the county of Norrbotten. Case study research is according to Dyer & Wilkins (1991) an approved way for theory generation when a single case can be the source for all primary data. Furthermore, case studies “...involves viewing evidence from diverse perspectives. However, the process also involves converging on construct definitions, measures, and a framework for structuring the findings.” (Eisenhardt, 1989, p. 546). Case studies belong to the domain of qualitative research, which is defined as:

“... multi method in focus, involving an interpretive, naturalistic approach to its subject matter. This means that qualitative researchers study things in their natural setting, attempting to make sense of or interpret phenomena in terms of the meaning people bring to them. Qualitative research involves the studied use and collection of a variety of empirical materials - case study, personal experience, introspective, life story, interview, observational, historical, interactional, and visual texts – that describe routing and problematic moments and meaning in individuals’ lives.” (Denzin & Lincoln, 1994, p.2).

This definition sums up the vital aspects for studying cases. Denzin and Lincoln also add: “…qualitative researchers deploy a wide range of interconnected methods, hoping always to get a better fixed on the subject matter at hand” (Denzin & Lincoln, 1994, p.2). Qualitative research is a method when one wants to go beyond a generalization of a subject (Neergaard & Ulhoi ,2007).

The reason for not wanting to use quantitative research is due to the implication of it. Contrasting quantitative and qualitative: Quantitative research concerns the measurement of things, how to count and put numbers on something (Berg, 2009). Berg (2009) says that qualitative research is about the meaning, and characteristics of things. Quantitative research can give mathematical results that involve the appearance of exactness, while qualitative

research has the ability produce better depth of understanding (Berg, 2009). This contrast made us go for qualitative research, since we are investigating meaning and not measurements. To quote Kaplan: “if you can measure it, that ain’t it!” (Kaplan, 1964,p. 206).

3.1.1 Archival Research: A research method

The study of recorded data and personal or organizational historical documents constitutes archival research method (Jenkins, 1985). Using historical documents about events helps to clear a picture of past decisions-making process and its implementation (Jenkins, 1985). Documents contain information, while records are official account of proceedings (Guba & Lincoln, 1981).

3.1.2 Interview: A research Method

Interviews are conversations with the purpose of gathering information (Berg, 2009). Since it is an accepted approach in the qualitative research family, as stated by Denzin & Lincoln (1994), we wanted to include it. There are many designs to interview and we want to explain the philosophy that guided the design of our questions. The design we chose is called the semi-standardized interviews (Berg, 2009), also known as semi-structured (Denzin & Lincoln, 1994; Saunders, Lewis & Thornhill, 2007). We wanted to have open-ended questions since it offers us some control over the topic while the interview objects can express their opinion (Bryman & Bell, 2007) Where we felt ambiguity if this was not clearly emphasised in the question, we added, “please motivate” to the question. The reason for us wanting open- ended questions was that we felt content with the facts we already acquired from our primary data. There was no specific part of information we wanted. The questions that relate to the primary data can be seen in section four, but that we wanted their own answers and interpretation of successes, failure, etc. According to Saunders et al. (2007), semi-structured interviews can have predetermined list of questions, however some of them can be eliminated in the interviews and/or added new ones. The interview objects received the questions prior to answering them, in accordance with the concept of semi-structured interviews (Berg, 2009).

3.2 The Interviews Process We wanted to interview politicians who were involved in the process of decision making. We utilized two approaches to find politicians. Firstly we contacted political representatives of both municipalities, Luleå and Boden. Secondly we contacted politicians mentioned in our

primary data; their numbers were retrieved from the phone directory. We settled with using two interviews as data for our empirical findings. These two individuals are not in the same political party. They were both heavily involved in the process of negotiating the Sunderby Hospital Merger. Their identities will not be disclosed according to their wishes. We are allowed to say that they were NCC representatives during the time they were involved in the negotiations. They are still politically active to varying degrees.

Involvement in the Interviewee Party merger Date of Interview

Heavily involved in the Politician A Party A entire process as a NCC April 26, 2011 representative.

Heavily involved in the Poltician B Party B entire process as a NCC May 11, 2011 representative.

It was decided to do interviews over the telephone, which limits the method by only obtaining verbal information from the interviewees not seeing them in person. However, this was not important to us as we are not conducting psychological or social research among consumers of a product/service where non-verbal information is of some significance (Zaltman & Coulter, 1995). We made notes of the interviews as they were being executed. We informed the interview objects about their right to be anonymous.

3.3 NCC’s data We contacted the NCC’s archive. They provided us with protocols, reports, and other documents through the entire thesis process. The documents were in Swedish, so we could not use exact quotes from the data.

3.4 Creditability Validity and reliability has its origin in quantitative research, where the purpose was to test measurements and hypothesis: that the results of the study could be reproduced (Golafshani, 2003). The concept’s applicability does not directly translate towards qualitative research; it needs to be measured by methods especially developed for qualitative research (Cutcliffe & McKenna, 1999). Qualitative research tries to make sense of its study objectives (Denzin & Lincoln, 1994), but there is no singular universal truth (Cutcliffe & McKenna, 1999).

Instead for finding an exact value, one can try to evaluate the credibility of a research (DePoy & Gitlin, 1999). A way of measuring the credibility is applying the realism paradigm; “…relies on multiple perceptions about a single reality” (Golafshani, 2003, p.603). It is based on the idea that if several perception are taken into consideration: “exception may lead to a disconfirmation” (Golafshani, 2003, p.603). This idea of using several sources for data is called triangulation (Guba & Lincoln, 1981; Golafshani, 2003; DePoy & Gitlin, 1999; Cutcliffe & McKenna, 1999). The methods involved multiple data sources when investigating a manner. If one can find two sources that collaborate each other’s substance then the uncertainty is greatly reduced (Guba & Lincoln, 1981). It is one of many ways in qualitative research to measure truth (Golafshani, 2003). According to DePoy & Lincoln (1999), triangulation increases the researchers understanding of the study he/she researches. It also enhances the researchers’ ability to present the study in a holistic way.

In our thesis we are using two different sources: documents from the NCC’s archives, and we interview politicians. Cutcliffe and McKenna (1999) mention that the most important factor for indicating creditability is if the researchers themselves feel the findings as meaningful in terms of the experience.

4 Empirical Findings The initial of part of this section is about the primary data we received.

4.1 Documents from the NCC’s archive We retrieved three documents from the NCC’s archive: an investigative report, a progress report, and a protocol. The investigative report is called “Medical Quality and Safety”, and finished October 1990. It concerns three topics that were investigated: the health care of the time, medical and technical development for the county and future staff needs. The report was ordered from the secretariat of NCC’s executive committee. The progress report was released in 1991, and states the vital points of the report “Medical Quality and Safety”. The protocol was written during a NCC meeting in 1991 and includes information about the decision process, the final decision and internal critic about the final decision. All these documents are public records and can be requested from the NCC’s archive.

4.1.1 Investigated topics The process started with the NCC’s desire to investigate the possibility for restructuring the county’s health care. To acquire a decision basis, the following factors were investigated:

• Complete assessment of the health care in Luleå and Boden’s municipalities, its functions and operating costs. • Analysis of the medical and technological development and predicted resource requirements that the development will require on a 10-year perspective. • Analysis of staff requirements within all professions on a 10-year perspective.

Following options for restructuring were given:

1. Maintain the contemporary situation, with some added adjustments. More functions of the health care sector would be incorporated in Boden’s organization. Boden would also have to meet obligations to the entire county. Each hospital would still have the capacity to properly manage most requirements. They would both have emergency rooms.

2. Changing the hospital care to one primary hospital and one lesser hospital. The primary hospital would be the only hospital with institutional care and 24-hour activities. The lesser hospital would only have activities during the day, and would have limited variety of services to offer. 3. Moving all health care activities to one hospital, that would have both municipalities as catchment. This alternative offers suboptions; you could either set Boden’s Hospital or Luleå’s Hospital as the municipalities’ common hospital. Another suboption would be to construct a new hospital in another location than the two pre-existing hospitals are.

4.1.2 Primary Data - Medical Quality and Safety report The report that contains the investigated topics and the recommended alternatives for restructuring the health care is the “Medical Quality and Safety Report”.

4.1.2.1 The Investigators The project manager was Ulf Öhman. Besides his staff, union representatives were present. The union consisted of the Swedish Association of Health Professionals (SHSTF1), Swedish Union of Local Government Officers(SKTF2), Swedish Municipal Workers' Union (SKAF3), and Swedish Confederation of Professional Associations (SACO4). A group of doctors were also present to give their oppinion. Consults have been hired from the following companies: Sensia Konsulter AB, NAB Arkitekter & Ingenjörer AB, CMN Byggprojektledaren and Hööks Arkitektbryå AB.

4.1.2.2 The Medical Technological Development Development in medical technology is viewed from a 10-year perspective. The fundamentals for this process rest on three factors: competence, technique and organization. It was vital that the following areas of competence were developed in the Norrbotten county:

• Cardiology, Neurology ,Hematology, Microbiology, Allergology, Audiology, Hand Surgery, Oncology, Thorax Surgery The following areas of technological development needed to be invested on:

1 The Swedish Abbreviation 2 The Swedish Abbreviation 3 The Swedish Abbreviation 4 The Swedish Abbreviation

• Magnetic resonance imaging, extracorporeal shock wave lithotripsy, Laser technology, Ultra Sound, Teleradiology, Coronary artery bypass surgery, and the processes in the hospital have to be computerized and automated.

When it came to changing the organization the rigidness was perceived as the problem. At the time, the hospital was divisionalized and resource sharing across departments was limited due to bureaucracy. Some clinics were relatively small and utilized their bed capacity poorly. It was desired to change the current structure. Having departments for common diseases, an intensive care department that would be able to treat many diverse diseases, and in general create broader categories for different patients needs. The latter part would then be substantially different from very fragmented approach the hospital at the time was using. By forming larger units, that could treat many diversified problems, one could aggregate resources in fewer cost-pools. These measurements were perceived to both decrease costs per patients, and increase the quality of care. The health care’s hotel functions were also needed to be revised. When comparing the alternatives, stated under section 3.5.1, the common newly built hospital was considered to be the best option. To construct solutions for technological needs it was best to build a completely new hospital, this was the easiest way to accommodate for the future needs. This option would not have any limitations; making solutions in already pre-existing buildings would be limited due the buildings’ pre-existing characteristics and design. Starting from scratch was perceived to be the best way to accommodate for a large sum of needs.

4.1.2.3 Staff needs In general the total population of the Norrbotten County was forecasted to decrease. Looking at age-groups the population younger than 44 years old were perceived to decrease by 18 000 until 2005, while the age-group of 45-64 years would increase by 13 500. The decrease of population in total and the increase of the average age, in combination with a triple increase of health care staff retiring, put pressure on the need to sustain the access to qualified staff.

To summarize, the forecasted access to staff was critical for all occupational roles besides for physiotherapist and occupational therapists. These roles were sustained due increased training places in the county. The rest was perceived critical; both the domestic and national access was forecasted to be limited. The counter measure was considered to be putting extra

emphasis on creating a health care that would be an attractive working environment. The common hospital was decided to be the best solution. To keep it as it had been was perceived as being the worst possible decision. Splitting the county care had a good potential for fulfilling its staff needs, but it required more staff than one single common hospital. A new hospital could fulfil its staff needs, at the same as it would require less staff and keep the same effectiveness.

4.1.2.4 Economy Below is a graph taken from the report (see figure 1.1), it summarizes its section on cost- calculation of the different alternatives. It concludes that gathering the health care in a single hospital would be more cost-efficient than the other options. As noticed gathering the health care in a common newly built hospital is more expensive than of the other common hospital options. Still in a 30 year perspective, a new and modern hospital would only be 460 Figure

1.1 Source: Primary Data: Medical Quality and Security. Retrieved from the NCC’s achieves.5 million SEK more expensive (2.6%) than having the Boden Hospital as the common hospital, and 250 million SEK (1.4%) more than having the Luleå Hospital as the common hospital.

5 Black Square: Today, White Square: Split Boden, Black Tilted Square: Split Luleå, White Tilted Square: Common Boden, Black Triangular : Common Luleå, White Triangular: Common, New.

4.1.3 The Final Decision

After reviewing the consequences of each of the alternative the decision was taken to have one common hospital for both municipalities. This hospital would have the common emergency facilities for both municipalities as well as it would cater several needs for the entire county. The reason for this decision had its roots in the 3 outlined structural changes in the previous section.

To optimally cope with quality and security requirements the NCC perceived the largest possible catchment as best alternative. The combined population of the two municipalities is naturally larger than any single municipality’s population. It would achieve additional patient loads through the catering of certain services to the entire county. A larger hospital was also considered to be able to contain more expertises and functions. This played well with the demand on medical and technological development, as well on the need for staff. A larger hospital was perceived as a better source for development of skills and new competences. The staff need is emphasised further on, as the documents mention the increased competition of labour. It says in the documents that due to the shortage of labour supply for the health care sector the Boden and Luleå health care sector had to be more competitive. A larger hospital was perceived as more attracted health care professions, and the new hospital would solve the problem of staff needs.

The documents say that the budget needed to be safeguarded or else financial means for sustaining development and quality would impoverish. It was therefore considered that operating costs had to be reduced. This was believed to be achievable through a common hospital. It is explicitly mentioned in section about cost projections that the future scenario, the merger of two hospitals into one, would be more economically effective than the contemporary solution.

4.1.4 Opposing political views

In the primary data we retrieved from the NCC’s archive, we found reservations from representatives against the final decision. Some political fractions argued that the overall- development is the health care needs to be highlighted in the context of citizens’ right to the proper health care. Long-term focus was therefore first an economically sustainable health care with the adequate levels of quality and safety. Due to the vast geographical distances in

the county, it was argued that a decentralised health care was a good solution for the entire county. The massive investment for the Sunderby Hospital would then deprive other hospitals in the county of much needed funds. If the Sunderby Hospital was built, then all future investments in the hospital must be viewed as being potentially able to cause negative consequences for the entire health care in the county.

It was also argued that the window of opportunity for large investments by the NCC would be limited as there was no budget surpluses predicted in the foreseeable future. Since there were some reports that claimed that a good health care was achievable without the construction of a new hospital, it was seen as an unconsidered decision to put such a large amount of money a project that was not an acute need.

There were criticisms that despite that all investigations had been executed flawlessly, the extent of the investigations were inclusive. One aspect that was not covered in the investigations was the socioeconomic costs for Boden’s municipality when its hospital would be shut down.

4.2 The interviews Neither Politician A nor Politician B’s party had a unified stance towards the decision. Party A’s NCC representatives were in favour of decisions since the hospital would be more efficient and less expensive than the pre-existing scenario. The party in general, were against it as they believed it was not wise to centralize the health care to such an extent. Party B were pro-merger with exception of their Boden affiliation that was given permission to vote against the party line. During a county congress for party B a compromise was reached regarding the final location. Originally it was desired to build the hospital in Porsön but due to lack of union the party settled for a compromise; to argument for Sunderbyn as the final destination. If party B’s opinions were split on Sunderbyn as the final decision, party A’s NCC representatives were strongly against it. They wanted Luleå as the location for the new hospital. Their argument was that basic medical treatment catchment had 75 % of its population in Luleå, and the county medical treatment catchement had 33 % of its population in Luleå. Further, they considered Sunderbyn to be an area with a bad building foundation. Its terrain has characteristics similar to swamps, and there are cost-calculations that state the construction in

Sunderby was 5 % more expensive than Porsön. . The extra costs are associated with constructing a building that could cope with the hardship of the terrain.

The aftermath of the final decision took a hard blow on party A. Since the majority of the party was against the merger, a severe drop of moral hit the party. Due to the low level of moral the party took a low profile on the political scene, and consequently lost all seats in the NCC. Party B remained in the NCC but lost some seats. According to politician B they were generally relieved after the decision was settled. It had caused large frictions in the group, but still not severe enough to ravage the party completely. Several people have expressed amazement for the parties that were pro-merger in the case of Sunderbyn, and that not have collapsed during the process. Many attempts to undergo large restructuring processes in the rest of Sweden had failed because the politicians driving the process lost support from their own parties. Politician B wants to point out that the party who was ruling the NCC by majority were pro-merger, but lost so many seats that the NCC had to be ruled through an alliance. Another phenomena was the appearance of a party of disconent; Norrbotten’s Health Care Party (NHCP)6. This party was the strongest opposition against the decicion, even though they did not have any seats in the NCC. In the county council election after the Sunderby merger was settled, the NHCP gained 19 seats in the NCC. They became the largest opposition party and remains so today even though they decreased their seats until 13. NHCP has since then appeared in several other parts of Sweden, often becoming popular after controversial hospital changes. Politican B wants to put emphasis on that the Sunderby merger was the starting point for this trend.

Regarding the other alternatives besides the merger that took place, party A’s majority of members were in favour of keeping the health care as it was. That was the most desired outcome by party A. Party B on the other hand did not share this belief, they considered the scenario of the time as unacceptable. To have two large hospitals 30 miles apart was not acceptable; the operating expenses were perceived to be too high. Party B’s Boden Affiliation was strongly in favour of upgrading the Boden hospital and then transferring the majority of the health care function to it, in accordance with one of the alternatives. In the end the party did not accept this. This was due to two main reasons; the first was that it was seen as a risky process to upgrade such an old hospital as Boden had. Final costs were known to be much

6 Translated from ”Norrbottens sjukvårdspartiet

higher than initial cost-calculations, when it came to restructuring old buildings. The second reason was that it was considered to be complicated to maintain the health care’s functions while upgrading one building. Luleå was too small to cope with patient transfers from Boden, and Boden hospital was unable to function at the same time as it was being upgraded. The small size of Luleå disqualified it from being the larger hospital in accordance with alternative 2. Party B saw it as much easier to build a new hospital, and transfer all functions towards it after it had been finished.

When it comes for the cost of the new hospital both politicians mentions that the hospital was built with only saved money. That meant that no money was needed to be borrowed, or no budget deficit was created. Politician B says that despite the success in cost savings, the NCC is still cutting costs for the hospital. This aim has existed since the start of the hospital and continues to exist today. For example, the hospital was designed with the best technology disposable at the time of the construction that would reduce electricity spending. Today the NCC is reviewing the hospital to see if changes can be made that reduces operating costs on a long-term basis. Politican B wants to mention that this is not an approach that is only being used on the hospital. All parts of the public sector in Sweden are looking for ways to reduce operating expenses without jeopardising quality. For example, the NCC’s headquarter in Luleå is being reviewed in order to see if one can reduce expenses.

The efficiency of the hospital is argued by both politicians to be good. The staff decreased, while the hospital managed to treat the same amounts of patients. Politician A points out the benefit of despite the decrease of staff, the hospital has maintained all the function that the two previous hospitals had. Politician B mentions that the Sunderby Hospital actually treats more patients than it was originally planned to treats. This is not due to a population increase, but due to that the Sunderby hospital is continuously given more functions to manage.

There are issues when it comes to effectiveness, but none of them can be said to have the Sunderby Hospital as the source. Both politicians argue that the issues that exists are not unique for Sunderbyn, but for the entire health care. Politician A says that issues that exist are due to the contemporary national health care policies. Politician B says that health care is a field that continually changes, which makes the topic always complicated. These issues reappear in the topic of medical quality in the Sunderby Hospital. Politican A is not satisfied with the quality of the hospital, but mentions again that his/her critique is not isolated to the Sunderby Hospital. They are problems that exist at a national level, due to the implemented

health care policies. Politician B says that besides the complex of problems that comes with medical quality, that it is a very dynamic concept, his/her party is very satisfied with the quality of the Sunderby Hospital. Doctors are being trained at the hospitals AT (AT & ST)7, research is being undertaken, and a cancer treatment centre has been built. The hospital can also treat complicated diagnosis that only the Umeå University Hospital could handle in the Norrbotten County. Politician A sees this as factors that indicate good medical quality.

When we ask them if they had any opinions whether larger hospitals were better (question 5, see appendix) both politicians say that “larger” is an ambiguous term. Larger in terms of absolute size is not desired; that the hospital was modern and got more patients was the main objective. The fact that the hospital was modern made the hospital a lot more attractive as a working place according to both politicians. According to politician B, the health care in Norrbotten always had problems with finding specialist doctors until the modern the Sunderby Hospital was built. Politician A says that in the decision process the question of R&D was taken up and they put emphasis on several points, the most important being that larger hospitals are better for research. In the same spirit, politician B partially collaborates this statement when he/she says that it was, and still is, perceived that concentrations of experts are good. Politician B also addresses the higher inflow of patients; for certain expertises, like surgery, it is important to repeat tasks every day. He/she uses the metaphor “surgery is like a trade”, and surgeons need practice in order to stay sharp. The parties differ from each other when it comes to the topic of placing the hospital in Porsön adjacent to Luleå Technological University (LTU) in order to conduct research and collaboration. Party A never had such an aspiration, politician A reminiscence no such rhetoric from his/her party. Party B was of the complete opposite; they wanted collaboration with LTU with much emphasis on conducting research. Although the hospital was not build adjacent to LTU there is cooperation today between LTU and the Sunderby Hospital, the distance between the two are less than 20 km. In fact, politician B points out, that a representative in the NCC also has a seat in the board of directors of (LTU). Politician B says that the public sector at the moment is interested in having a relation with the pharmaceutical industry. How that relationship would look like is not defined, but the possibility is explored.

The parties also disagree upon the idea of a larger catchment. Politican B recycles the argument about the benefits of higher concentrations of certain activities. Certain medical

7 Allmäntjänstgöring (AT): General Practice, and Specialisttjänstgöring (ST) : Specialisation practice

professions, as surgeons, are like trades and need to be performed every day in order to sustain a high skill level. Party A does not share this idea, they believed that the health care should be decentralized, and hence close to every community. They also disagreed with the nationwide accepted idea that doctors are allowed to specialize to a high extent. Politician A claims that doctors make themselves available for certain small selection of patients, representative of the doctors’ specialisation, that their working hours cannot be utilized efficiently. Politician A points that despite the criticism of specialisation in health care, the guidelines for it say that a hospital should have catchment that is 1 million or more. The Sunderby Hospital’s catchment is less than that (basic medical treatment: 100,000, County medical treatment: 275,000). The guidelines say that for being a hospital that has general treatment capabilities its catchment should be around 200,000. Party B does not share this philosophy, and politician B says that specialisation is globally perceived as a positive thing. He/she mentions that there is one clinic in Uppsala that is specialized to only deal with one type of treatment, and that it treats all patients in Sweden that requires that specific type of treatment.

When we came to the final question the two parties had different stories to tell. To sum up Party A’s standpoint:

“We have tried to forget the whole thing” quoted by Politician A.

The moral drop that occurred after the decision was finalized has made topic taboo. It is a faux pas to talk about it.

Party B says:

“Yes and no” quoted by Politician B.

No reflects the side of the coin where people do not favour centralization. Politician B does not know how to define it, but he/she feels that some people are uncomfortable around matters that concern centralization. Party B does not speak about the issue in the presence of people who used to work in Boden and felt discontent with having to commute to Sunderbyn every day. The side of the coin that reflects the “yes” is the cost saving aspect that was achieved through the merger. In our contemporary society cost reductions are a lot more relevant for the public sector than it was in 1989 when the process started. Party B is definitively convinced that the operating costs of the two hospitals would not have been

accepted today. The end of the 90’s was the peak of criticism on the public sector’s spending habits. Today the pressure is a lot lower than it has been in recent years, this is many ways because of the period of recovering that has started after the recent financial crisis. Still the forecasts say that the coming years will be difficult for the public sector. Decreasing costs without lowering the quality will remain one of the core issues for the public sector according to Politician B.

He/she says:

“Our budget has increased from what it was in 1989, but the expenses and salaries are higher today” quoted by Politician B.

Politician B goes on to say that if the project had not been undertaken at time when the decision was finalized, it would not have happened. Today there is not budget leverage for large scale restructuring in any aspect of the public sector. In general, the party is very satisfied with the outcome. Since the merger was in line with the cost reduction concept that is prevailing in the Swedish public sector.

5 Analysis

In this part of our paper we will present the analysis that we have done on our empirical findings. We will apply the theories from our theoretical framework on the empirical findings.

While reading the primary data that we had obtained from the NCC we could find that they stated three reasons for the merger between Boden and Lulea hospitals. There were also three different alternatives mentioned for developing the health care in the county. The NCC was choosing from these three alternatives shown below:

1. Keeping the county health care as it was with no changes made

2. Dividing functions between Boden and Luleå hospitals with establishing one of them as a main hospital and another one as a minor

3. Combining these two hospitals into one serving both Boden and Luleå municipalities as a catchment area

We strongly believe that the last alternative was presented among others in this case because Sweden started to utilize mergers as an optimization tool around the time of creating the list of development strategies in the NCC. The third alternative was chosen for the hospitals by the NCC as stated in the primary data, it can be concluded that the other two options were not seen as satisfying for achieving improvements in the county’s health care system.

Porter (1985) claims, that merging two entities into one is not only about the merging process itself but there are some factors decision makers should contemplate on. From our primary data we found some factors that the NCC representatives considered as advantages in favour of the merger choice, which we refer to as economic motivation. As the merger took place in public sector settings, this factor is also analyzed. One has to bear in mind that the main reasons found for mergers according to the literature are to reach financial and operational excellence (Goddard & Ferguson, 1997). The reasons and impacts are presented in the way that the structure is consistent with the one of the theoretical framework.

5.1 Economic motivation analysis

5.1.1 Economies of Scale The FTC mentions technical economy as the most widely used source of economy (Lubatkin 1983). Technical economy (TE) is basically the same as economies of scale (EOS) where the operational process inside the firm is altered so that the inputs or production factors produce a higher quantity of outputs at a lower cost (Lubatkin, 1983). In the primary data we found that the NCC used the aspect of size as one of the priorities for the merger. Size was often used throughout the primary data as a mean of reaching enhanced quality, development, cost reduction, and the fact that the hospital’s perception as an attractive workplace is enhanced as well. This factor is very well supported by the literature review and we were able to draw direct parallels between earlier theories and what actually happened in the merger.

Cost-reduction is at the very central of the classical definition for Technical economies. The fact is that larger organizations offer lower costs (Sheffrin & O´Sullivan, 2003; Silbertson, 1972; Söderström & Lundbäck, 2002; Lynk, 1995). We have strong arguments that supports that this was the way of thinking that prevailed in the pro-merger fraction of the politicians. The politicians continually put emphasis on the cost-reduction aspect, not only for the prompt situation but also for the long-term scenario. There is a perceived need to reduce costs for the future budget, since they believed that funds would decrease.

The fact that the NCC decided to tackle these problems through razing two smaller hospitals in favour of building a larger one, clearly reflect TE thinking.

Staff development, was also included in the desired outcomes of the new hospital, this also has substance in TE. West (2001) specifically tackles this issue when she states that gathering inflows of patients allow better skill-development for the professionals in the hospital. Silbertson (1972) also talk about how different technological abilities in a large organization can cross-fertilize in the organization and improve the overall ability. We argue that is a viable starting-point for improved staff development.

Effectiveness, in terms of improved results, is also approached in the TE concept. Sloan et al. (1999) and Lynk (1995) reflect the NCC’s pro-merger politicians’ belief of an improved base for quality, in the concept that a concentration of experts promotes better results. Politician B emphasized this fact a lot in his/her interview, saying that the Sunderby hospital has more

experts now than Boden and Luleå hospitals had combined, which increases the accumulated knowledge. Higher concentration of experts in hospitals is related with to lower mortality rates and better care for complicated issues (Sloan et al, 1999). West (2001, p.34) theory of “practice makes perfect” is once again applicable; the staff would according to her improve in terms of better quality in a large hospital, compared to a smaller one.

5.1.2 Efficiency From the primary data it can be seen that efficiency is seem as another important factor for the third alternative (merging, and building a new hospital). Apparently, efficiency was found hard to improve through the other two development alternatives as they would have a hard time to reach the fit between shared tangible and intangible recourses, coordinated strategies, vertical integration, pooled negotiating power and combined business creation (Campbell & Goold, 1998). Since in both alternative one and two, the hospitals would be kept separate with a physical distance of about 36 kilometres between them, this would make the job of achieving the fit between the above mentioned factors much harder.

By choosing the merger alternative over the two other alternatives, the NCC representatives condemned the size of Boden hospital since it was larger in size than Sunderby hospital was but had a lot of unused space. This shrinkage in size would give the Sunderby hospital the ability to improve the turnover rate of patients. Higher turnover leads to better cost reduction, which in turn gives a higher efficiency rate. This decision was logical and fit well in the NCC aim of improving efficiency in the county’s health care system.

Rapid technological progress is required in every industry; in the health care sector technological development is not only about surviving competition but it concerns saving people’s lives through faster treatment as well. The NCC saw the merger of Luleå and Boden hospitals as a good way of increasing medical and technological development and thus covering the technological progress part completely. It would also cost the county less to buy modern equipment for one hospital than two. Politician A mentions that the NCC’s representatives put emphasis on the modernity of the future Sunderby hospital as yet another reason for the merger. A merger was in this case seen as the best alternative for the purpose of future health care development and at the same requiring a smaller budget than maintaining the two hospitals.

The NCC’s choice for achieving technological development by choosing to merge is supported by academic literature. Creating a new hospital instead of maintaining the two older ones is a way of developing the health care sector. Because it will sharpen the competitive edge for the hospitals hunt for employees. Secondly, skills and competences are developed better in a consolidated hospital because of the operational synergy, which includes free knowledge flow within the hospital (Porter, 1985). This would also lead to an overall improvement in the hospitals knowledge base (Valentini & Dawson, 2010). Since there is no physical distance between specialists in one hospital, as it was before the two hospitals were merged. The hospital merger would lead to related diversification, which in turn would give a strong foundation for a high level of sharing and communication between specialists in the medical area (Lane & Lubatkin, 1998). According to Politician B, more types of diseases are treated now in the Sunderby hospital and it as also started its own R&D department. Thus, the NCC’s expectation of skills development in the new consolidated hospital is also supported by the theories found.

Staffs needs was mentioned a number of times in the primary data. Politician A estimates that about 50 % of the workforce could be reduced without decreasing efficiency through the Sunderby Merger. This is in line with Tang and Timmer’s theory (2008) of efficiency.

The whole synergetic value as a total of the merger value can be argued to have lessened due to a chosen location for the new Sunderby hospital. From Pursche’s et al. (2007) definition of synergy; it can be seen that the cost of achievement should be calculated and subtracted from the total value of reached synergy. Interviews with politicians A and B reveal the arguments about the final decision of the new hospital’s location. In the end it was decided to build it between Boden and Luleå, which was not the best alternative since the cost of construction increased due to the hardship of the terrain. Having built the new hospital in a better location would increase the achieved synergy value as a total. However, in reality those additional costs should be subtracted. According to the data we retrieved from the interviews we can see this decision was reached partially due to political circumstances.

From the primary data showing pre-merger considerations and decision making process and the interviewees’ answers about both their perceptions of the future merger and its outcomes, it can be concluded that some of the goals were met and most of the cost savings synergies were achieved. Financial synergies are disputed according to Politician A, which states that medical quality improvement in the new hospital is not satisfactory. However, Politician B

has different opinion about it and argues that the medical quality has improved a lot. Some quality improvements did take place and there are several reports to prove it, nevertheless there is some ambiguity about the quality increases and this requires more research.

5.2 Public sector settings impact

From the interview with Politician B we found that the decision of merging the two hospitals was made just in time. The NCC had enough funds saved for financing the construction of the Sunderby Hospital, and the merger would give a long-term benefit of costs saving. The focus on cost saving through management concepts is prevailing in the public sector (Bellone & Goerl, 2002; Osborne & Gaebler, 1993). According to Kuratko et al. (2002), politicians have the tendency to look at the short-term successful projects, due to the re-election cycles. However, in the case of the Sunderby hospital the decision was not very popular among the voters. The party, who were in majority of the NCC at the time, were pro-merger and subsequently due to the unpopularity of the merger they lost their majority.

Party A experienced internal frictions to the extent that the party could not muster enough support to do a sufficient electoral campaign to maintain their presence in the NCC. Due to these events, we feel that the NCC had quite a genuine motivation to merge the hospitals, having long-term perspective in mind, in spite of the unpopularity.

However, as the public sector became more concerned about good managerial principles, it should not overemphasize the advantages too much because the focus on the core mission can be lost (Theobald, 1997). The decision to merger Boden and Luleå hospitals resembles a decision patterns used in the corporate sector. In the end it helped to save money for taxpayers. Nevertheless, many people are not satisfied with the idea of centralisation while others feel left out due to them having the disadvantage of living in smaller places according to Politician B. He/she also mentions dissatisfaction of Boden employees due to shifting of their working place to Sunderbyn. In accordance with what Brown (1984) says, decision makers should also look at noneconomic values, as politicians represent the society, where different groups perceive different values. However, from the interviews with politicians A and B we can conclude that the debates about the merger and the location for the hospital had its place and the decision did not come smoothly due to different opinions about the hospitals location.

An interesting subject we came across studying the documents retrieved from the NCC’s archive, and the results of the interviews was that there were opinions that voiced criticism regarding the final location of the hospital. The hospital was positioned with an equal distance to both municipalities. The distance between them is about 36 km and in the middle we have the new Hospital. This was criticized since 25 000 people live in Boden while 75,000 people live in Luleå. Even more interesting was the criticism for the foundation in the Sunderby area, where the hospital is built. The foundation is according to responses from our interviews, of a swamp resembling type. A lot of clay compromised its stability, and a more expensive construction was required. Politician A appreciated the cost to be about 5 % higher than it would have been if the hospital was built on a normal foundation. This decision seems tainted and the “rational limited search” proposed by Kuratko et al. (2002) can be an explanation here. We believe that this decision, which does not reflect the best sought solution for efficiency according to business logic, is due to a “hostage situation” that was created during the merger decision process. The forces that might have been the captors of situation could be politicians in the Luleå municipality and Boden municipality. An internal fight between NCC-representatives might have resulted in this 50/50, regarding the distance, solution.

Politician A mentions that he/she is unsatisfied with the razing of Luleå and Boden Hospitals. They were demolished and their materials were not used for building the Sunderby hospital or for any other purpose. The documents retrieved from the NCC’s archive do not raise this issue, neither does Politician B. It can be seen as negative consequences of the solutions in public sector, as according to Kuratko et al. (2002), its decision makers have no personal financial responsibility. Even though the NCC representatives tried to justify and reach efficiency improvements in the new hospital, they entirely missed the discussion of other issues such as utilization of old material.

6 Conclusion In this section of the thesis, the findings from our analysis are presented and summarized.

The purpose of the thesis is to investigate and analyze the reasons as given by the NCC behind the Sunderby hospital merger. In order for us to answer the question in our purpose we had to acquire empirical data directly from the NCC. After the empirical findings were read trough they were to be analyzed. The analysis was conducted by examining if there were any links between the reasons found in the empirical data with reasons that have been stated by researchers within the fields of mergers and public sector management.

We found that the merger decision had economic motivation as almost all the mergers in corporate sector do. However, as hospitals in Sweden belong to the public sector, the decision to merge was also influenced by the fact that the decision makers were politicians.

The economic reasons that were found for the Sunderby hospital merger were as mentioned in the analysis to achieve technical economies. Technical economies would lead to several beneficial factors for the hospital such as: cost reductions, increased work place attractiveness and an overall quality improvement.

The NCC also believed that by having one consolidated hospital they would be able to allow a larger budget for medical and technological development since they would be able to rationalize the costs in one hospital better than between two separate hospitals. The merger also lead to staff downsizing since the new hospital would not require the same amount of employees as the previous ones did, this was also considered as a cost reduction by the NCC.

Since the decision process for the merger was done within the public sector it was influenced by more factors that just economic. The actual process of granting the merger a green light was not as smooth as the NCC had expected, because the different political parties within the NCC had the responsibility of defending the interests for their voters.

In contradiction with the common perception of politicians choosing to only participate in short-term successful projects for their future re-elections. The Sunderby merger case was planned with long-term goals in mind, this also lead to complications within the NCC and some parties lost mandates while others gained mandates in the County council.

One of the most argued questions in the NCC during the decision process was the choice of location for the new hospital, this question made the already tense “hostage situation” even worse. The outcome was explained in the analysis by use of the rational limited search theory, which says that in situations when the decision makers do not agree they tend to seek for the solution that benefits them both equally instead of the best solution. Indeed the chosen location for the hospital was in the middle between both municipalities, but as it was shown afterwards the costs related to this decision turned out to be higher than they would have been if one of the parties had “backed down” in the decision process. The fact that decision makers are politicians with no personal financial responsibility, gives us an idea to why several details were omitted from the decision process (e.g. materials utilization).

There are several areas for future studies within this case but to answer the purpose of this thesis, we can say that our findings show that Sunderby hospital merger was done in order to gain technical economy within the health care sector in Norrbotten. To the question, if the reasons had academic support we can conclude that all the reasons the NCC stated behind the merger decision were supported by academic literature.

7 Discussion

This section regards the limitations of the study as well as suggestions for further research

It is the authors’ opinion that the pro-merger fractions of the NCC were not without substance when they claimed that a merger would improve the health care. Still as Lubatkin (1983) says, there is no strong evidence that mergers always lead to better results, and the same applies to mergers of hospitals (Söderström & Lundbäck, 2002). We want to put emphasis on our belief that the merger could not have happened if it was not favourized by the political climate. In hindsight, knowing the final decision, we can conclude the majority of the NCC was in favour for merging. According to Holmberg and Jansson (2008) the idea of merging in the health sector is popular on a national level in Sweden. After doing the interviews we understood how controversial the decision was, and after the interview with Politician B we grasped how close the process was to be stopped.

The qualitative nature of this research prevents us from determining if the merger was the right choice, since Cutcliffe and McKenna (1999) states that there is no reliable data that pinpoints mergers to improved organizational development. Still we believe that the reasoning

was right. A decentralized and local health care sounds good, but the realities is that it would require high operating costs, relatively high compared to a centralized health care, that would deprive funds for other functions in the county. This is of course not written in stone, it is quite possible that the concept of technical economies will become inapplicable in the future.

7.1 Further studies Regarding suggestion for further studies we would like to draw substance from the delimitation under section 1.4. We are reviewing the given reasons for doing the merger, in light of their relevance according to academic theories about management. How the costs were analyzed, how the financing was structured, and similar topics could be studied in a different paper. Besides all the pre-merger investigations that are possible to review, we have not analyzed or looked at post-merger outcomes at a large extent. An analysis could be done whether the hospital lives up to all ratios it had as goals. This topic would open a path that could lead to several news researches. The public management perspective of the Sunderby merger case is touched upon but could also be investigated for further studies. We have used business administration theories for the public sector management in our case, but not other theories. There are studies in politics, organizational communication, etc, which could be applied. We believe that each new field would have enough substance to create a new thesis. There is also the aspect of the NCC’s accountability to its constituency, as Bellone and Goerl (1992) states that we live in a thin democracy, because we as a society do not intervene frequently in state affairs (Åström. 2011). A new research topic could be to investigate the public sector’s accountability towards its people when they execute large restructuring. This research could be done like the Sunderby hospital merger case, or as an investigation on Sweden in general.

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9 Appendix

9.1 The Questions Translated from Swedish to English:

1. Which role this you/your party have in the discussion about the potential merger of Luleå Hospital and Boden Hospital into the Sunderby Hospital? Were you/they for or against the merger? 2. How did you/your party react to the final decision? (The decision to build the Sunderby Hospital) 3. There were two other options; to not change anything and keep it as it was, or move the majority of the operations to one of the two hospitals. Which attitude did you/your party have towards these options? 4. Are you/your party satisfied from any of the following perspectives, please motivate: • Cost • Effectiveness • Medical Quality (for both Luleå & Boden, and for the functions Sunderby Hospital offers to the county) 5. Did you/your party perceive larger hospitals, compared to smaller ones, as better in the following criteria’s: medical quality, development (competence, technique, etc), and to be attractive as work places? Please motivate. 6. Did you/your party have an opinion regarding if the hospital should have been located closer to LTU with the intention of easing collaboration between the hospital and the university for different topics. Such as research? Please motivate. 7. Did you/your party perceive that a larger catchment of patients (Luleå and Bodens aggregated population using one common hospital) would lead to better results? With results we refer to criteria of medical quality. Please motivate. 8. Do you/your party defend or emphasize the taken standpoint to the decision today? With this question we want to address how frequently you mention the Sunderby discussion and the role you played. If the topic still exists in your agenda or if it is something of the past.