The healthcare landscape in the U.S. over the past several decades has fueled a wave of mergers and acquisitions (M&A) among hospitals, giving rise to so-called “mega” integrated healthcare systems, such as Kaiser Permanente in California. However, the main drivers of the M&A movement have been multihospital systems that sought to acquire freestanding, private hospitals for strategic reasons. Hospitals have been watching margins erode as they face intense pressure from private insurers as well as Medicare and Medicaid to drive down costs while simultaneously delivering higher-quality care. The fiscal vulnerability of safety-net hospitals, which are a cornerstone for training student doctors and other providers, may also spur academic medical centers to consider M&A to offset financial losses. The importance of realigning healthcare systems is underscored by the 2011 report by the Advisory Board Company, “Running on Medicare Margins: Restructuring Costs and Building the Care Management Enterprise to Prosper on Radically Lower Pricing,” which indicated that business-as-usual would result in a net negative margin of 15.8% by 2021 – very troublesome for hospitals indeed.
The opportunities for hospitals to increase revenue through M&A activity are manifold. Mergers enable hospitals to create economies of scale and scope, which reduce duplicative functions and increase overall efficiency. The enhanced clout of a larger, regional hospital system increases bargaining power with payors as well as with suppliers, including drug and device manufacturers, which can also boost margins. Hospitals also benefit from higher patient volumes and a larger specialist referral network that could promote continuity of care and increase patient satisfaction.
In a truly integrated system, hospitals can perform better as a result of expanded service offerings to patients and shared resources across hospitals. The cost savings are easy to imagine when you consider the frequency with which test results and imaging studies are repeated when a patient is transferred from an “Outside Hospital” or self-refers to a different Emergency Department or specialist for a second opinion. I recently had to explain to the parents of a young boy that, although I fully believed his arm was broken in 3 places, the CD containing the image from a hospital down the street was incompatible with our system, and we needed to take our own X-rays before consulting orthopedic surgery. If the majority of hospitals in a community belonged to an integrated network, then the need for patient transfers to receive specialty care may be eliminated altogether, but at the very least, the de-facto requirement for redundant services would disappear.
The benefits of M&A extend to healthcare providers – greater job security for front-line clinical staff employed by a strong, solvent hospital system is an obvious advantage. Not all of the benefits are strictly financial. A multihospital system could offer providers access to greater physical space for services, more personnel, and increased resources for training and education. Moreover, transfer of knowledge and expertise within multispecialty groups is likely to improve competencies among providers.
The primary disadvantage to patients posed by hospital M&A activity results from the inability of smaller hospitals in the community to compete successfully. Freestanding hospitals may be forced to downsize or shutter their doors completely, which can cause substantial disruptions in care for patients by eliminating access to critical services, such as hemodialysis.
Another disadvantage stems from the potential for healthcare systems with a large geographic footprint to exert a monopoly on pricing. In a 2012 report, the Robert Wood Johnson Foundation determined that price increases for services can exceed 20% as a result of hospital mergers in saturated markets. However, according to a 2014 report by FTI Consulting – commissioned by a for-profit hospital association – such surges in pricing have not been observed in a consistent manner across studies, and the threat may be more imaginary than real.
Ultimately, patients and communities appear to be benefitting from the consolidation of healthcare systems, especially in geographic areas where a diverse array of services is not available at smaller, community hospitals. Although these stand-alone hospitals are unlikely to remain viable when competing against large, integrated healthcare networks, such networks will eventually be forced to compete with each other. This will be good news, since it should translate into cost-savings and improved quality for patients. Meanwhile, providers may need to jump on the bandwagon of a multihospital system, since the “bigger and better” trend in hospital M&A is not going away any time soon.
References:
Dan Verel. “Get Used to Seeing More Mergers and Acquisitions in Healthcare.” September 2014. http://medcitynews.com/2014/09/get-used-seeing-mergers-acquisitions-healthcare-hospitals/. (Accessed March 19, 2015).
Federica Angeli, Hans Maarse, Mergers and acquisitions in Western European health care: Exploring the role of financial services organizations, Health Policy, Volume 105, Issues 2–3, May 2012, Pages 265-272, ISSN 0168-8510.
Gaynor M and Town R. “The Impact of Hospital Consolidation.” The Robert Wood Johnson Foundation. June 2012. http://www.rwjf.org/en/library/research/2012/06/the-impact-of-hospital-consolidation.html. (Accessed March 19, 2015).
Jared Crapo. “Rising Healthcare Costs: Why We Have to Change.” 2014. https://www.healthcatalyst.com/hospitals-solve-rising-healthcare-costs. Accessed March 19, 2015.
Margaret Guerin-Calvert and Jen Maki. “Hospital Realignment: Mergers Offer Significant Patient and Community Benefits.” FTI Consulting. January 2014. https://www.fah.org/fah-ee2-uploads/website/documents/FTI_Hospital-Realignment-Mergers-Offer-Significant-Patient-and-Community-Benefits_Report.pdf. (Accessed March 19, 2015).
