Abstract:
The intent of this research was to conduct an exploratory study of determinants of effectiveness of hospitals privatization through mergers and acquisitions (M&A) in Kenya.
This paper provides an overview of 7 waves of M&As starting in 1897 and the most recent one (wave 7) starting in 2011 which includes emerging markets (BRIC) and Africa. It also shows that M&A activities are increasing in Africa and there is a history of privatization of state-owned enterprises (SOEs) / parastatals in Africa and Kenya which started in 1990s.
Privatization of hospitals has been popular in North America (U.S., Canada) and Europe (Germany, England) which have included public and not-for-profit (NFP) hospitals. There has also been an increase in utilization, demand for hospital services, privatization and M&A activities in other countries such as India, China, Saudi Arabia and Africa / Kenya. The reasons for these trends are industrialization of developing countries, changing lifestyles, aging populations, longer life expectancy, technological advancement, development of new drugs, growth of the middle class, increase of non-communicable diseases (NCDs) and inefficiency of public health systems. There is a need for African countries to expand their private sectors, and privatization of healthcare is an attractive area for private equity firms and private hospital chains due to growth of the economy, higher demand for healthcare services and particularly expansion of NHIF (National Hospital Insurance Fund) coverage in Kenya.
Property right, transaction cost and institutional theories which are related to M&A were reviewed with focus on the following motivation theories of M&A: process theory, synergy and efficiency theory, disturbance theory, and theory of valuation. The aforementioned theories are considered as underpinning theories of this study and a theoretical framework was also developed.
The intent of this research was to determine the effectiveness of privatization (dependent variable) through M&A by studying Level 4, 5 and 6 hospitals in Kenya and investigate the posed six hypotheses to identify the effect of the following independent variables (determinants): top leadership, knowledge of M&A process, knowledge of regulatory compliance requirements, valuation methods, hospital size and level 4, 5 and 6 (independent variables) and political climate (moderating variable).
The research philosophy, methodology and design of this study was based on exploratory, post positivism, deduction and utilization of mixed method (quantitative and qualitative) with focus on verifying hypotheses. The population of this research included Level 4, 5 and 6 hospitals in Kenya as defined by Ministry of Health and Kenya Medical Practitioners and Dentists Board. The population of this study consisted of 268 hospitals, triangulation was utilized to calculate the sample size of 158 hospitals. Proportionate stratified random sampling methodology was used to determine sample size of each hospital level (Level 4, 137 hospitals, Level 5, 14 hospitals, and Level 6, 7 hospitals).
With the help of research assistants, an exploratory study was conducted consistent of focus groups and in-depth interviews which included Chairperson of the Board (COBs), Chief Executive Officers (CEOs), Chief Operating Officers (COOs) and Chief Financial Officers (CFOs) and other senior leadership of hospitals. Results of these activities were analyzed and subsequently the research instrument, a self-administered structured questionnaire consisting of the following sections: 1) demographic, 2) top leadership, 3) knowledge of M&A process, 4) knowledge of regulatory compliance requirements, 5) valuation methods, 6) hospital size, 7) political climate, and 8) effectiveness of privatization, was modified. The research instrument was finalized based on the results of the focus groups, in-depth interviews and literature review.
10 percent (10%) of the sample size was randomly selected to test the reliability of the instrument. The Cronbach alpha ranged from 0.753 to 0.957 and it was determined that each section of the questionnaire had α > 0.7 and, therefore, was deemed reliable.
The self-administered structured questionnaire was sent to the leadership of the hospital: COBs, CEOs, COOs, CFOs and other senior managers, and the return rate was 32%. Demographic analysis indicated that fifty two percent (52%) of the participants were from Level 4 hospitals. Eighty six percent (86%) of the respondents were senior management of the hospitals and sixty three percent (63%) of them had background in medicine; followed by twenty three percent (23%) in business administration. Ninety six percent (96%) of participants had Bachelors and Masters degrees and seventy six percent (76%) of them had less than 5 years of experience in their position. Sixty four percent (64%) of the hospitals were government and county sponsored NFP hospitals and twenty one percent (21%) were private NFP and religious NFP hospitals. Therefore, eighty five percent (85%) of the hospitals that participated in this study were NFP and fifteen percent (15%) of the hospitals were for-profit (FP). Seventy percent (70%) of the hospitals had experienced revenue growth ranging from 1% to 19% and eighty eight percent (88%) of participating hospitals had not experienced any decline in revenue growth.
Six hypotheses were tested and there was moderate and strong relationship between dependent and independent variables and regression models were found to be reliable. Five null hypotheses were rejected and hypothesis number three which states that there is a negative relationship between knowledge of regulatory compliance requirements and effectiveness of privatization was not rejected.
In conclusion, hospital leaders’ knowledge concerning privatization / M&A of hospitals is insufficient, the legal system in Kenya is challenging, and requirements for privatization, M&A of hospitals are unknown in Kenya. Hospital leaders’ knowledge concerning proper methods of valuation of public entities is limited and the role of politicians and government is not clear in regards to privatization of public hospitals through M&A.
It is recommended that similar studies be conducted in East and South Africa to explore if these determinants are valid to enable researchers to perform comparative analysis in order to improve the body of knowledge in this area.