My Take: The art of becoming big: the dilemma of mergers & acquisitions in health care
By Mitch Morris, MD, Vice Chairman and National Health care Provider Lead, Deloitte LLP
Deloitte, Health Care Current, November 12, 2013
Consolidation has transformed nearly every U.S. industry—manufacturing, retail, life sciences and hospitality — you name it.
The U.S. health care industry is well into another round of consolidation. Already, according to the American Hospital Association, 3,007 hospitals (roughly 53 percent) are part of a health system. The industry went through a round of consolidation in the 1990’s but many would say that, other than better access to the debt market, the resulting health systems were, for the most part, holding companies and not operators that had a focus on economies of scale or reduced costs.
According to Irving Levin Associates, in 2012 there was twice the number of hospital mergers as compared to 2009 and this shows no sign of slowing down. The Affordable Care Act (ACA) has served as a catalyst to accelerate the consolidation movement, which seems to have taken on a life of its own. Several trends are beginning to emerge across the industry:
* As reimbursement rates continue their downward trend and the costs of maintaining infrastructure and regulatory compliance march ever higher, the acute care industry seeks scale to better manage costs. Many acute care players are beginning to reduce costs through economies of scale, including the implementation of shared services, programmatic integration and consolidation, selective sourcing and addressing clinical effectiveness. The hope is that costs can be shaved by as much as 30 percent, which is certainly not a goal that can be achieved simply by headcount reduction.
* The stand-alone hospital may be an endangered species—many smaller organizations simply cannot afford to invest in keeping up with facilities, upgrading IT capabilities, attracting the best clinicians, or playing an active role in the emerging payment model innovation game. Nor do they all have the market clout to be considered essential players in narrow health plan networks. As margins shrink and access to capital becomes more difficult, even hospitals in affluent communities are feeling the pinch.
* Health plans, which also continue to consolidate, are dipping their toes into the provider business through the acquisition of medical groups. Many are also developing capabilities to manage population health.
So is bigger better? How big is big enough? And can a system be too big?
It’s not uncommon for mergers to fail to produce expected benefits for the new organization or the communities they serve. But there is some data to suggest that, by some measures of performance, hospital acquisitions do produce a benefit. A Deloitte Center for Health Solutions report, Hospital Consolidation: Analysis of Acute Sector M&A Activity, recently studied hospitals that were acquired in 2007 and 2008 and found that, over several years, the acquired hospitals had increased volumes and improved margins compared to a cohort of similar size (case mix adjusted) that was not acquired. The benefit was most pronounced when the acquirer was a national chain as compared to a regional system.
We are quickly moving toward needing a larger scale to successfully compete. In the 90’s we did not have the same economic or legislative imperative to achieve higher value in a lower cost structure. Now we do. And those organizations that don’t get both the art and science of this transition are likely to find themselves in a difficult position.
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An online poll of Health Care Current readers (results as of 11/12/13, 1:47 PM EST):
There are many factors driving consolidation in health care, but I believe the greatest is…
37.84% Margin constraints such as declining reimbursement rates and costs of infrastructure
10.81% The increasing complexity of regulatory compliance
51.35% Companies vying to remain in a competitive market position
00.00% Consumer demand
00.00% Innovation and new technologies
http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/Newsletters/health-care-current/4a2992c0bab42410VgnVCM3000003456f70aRCRD.htm
Deloitte report: “Hospital Consolidation: Analysis of Acute Sector M&A Activity” (26 pp): http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Center%20for%20health%20solutions/us_dchs_2013HospitalConsolidation_05292013.pdf
Comment:
By Don McCanne, M.D. This Deloitte report reveals that hospital merger and acquisitions are occurring at an accelerated pace. Is that good or is that bad? The answer depends on whether you believe that hospitals should be run like businesses, trying to obtain competitive advantages in the health care marketplace, or if you believe that they should be run as a service organization, emphasizing patient care as its predominant role in the community. Consolidation through merger and acquisition increases market clout. It is anti-competitive, giving the merged entity a larger share of the market. Because of the ability to negotiate better rates, prices go up without the need to provide additional services and amenities that might be more attractive to patients. There is less need to improve quality when competitors are less able to increase revenues that might be allocated for their own quality improvements. Private sector consolidation leading to oligopolies or monopolies result in the opposite of what markets are supposed to bring us. They result in lower quality and higher costs. Yet health care reform is supposed to bring us higher quality at lower costs. Maybe we overuse the example of a fire department, but it is a useful analogy. We think of the fire department as a service organization, always there when we need it to put out fires or to perform other community service functions. We don’t think of it as a business that competes in the marketplace. We don’t shop for fire services based on price and quality. We simply pay for them through the tax system, and we expect that the fire personnel will continue to take pride in the services that they provide to the community. Health care should be the same. Hospitals should be service organizations, always there for when we need them. Instead of us shopping prices, whether directly or through our insurers, they should be financed through the tax system – using global budgets just as fire departments do. And quality? That is automatic and stems from the fundamental moral fiber of dedicated health care professionals, as long as they are not corrupted by the business element that is increasing its presence to fulfill its mission of using private market business tools, such as consolidation, to maximize market share. Yet, consolidation of a public service entity can be used to improve efficiency, quality, and value. The readers of Deloitte’s Health Care Current likely represent the business oriented element in health care. It is interesting to see the response of the online poll of what they believe is the greatest factor driving consolidation. A majority believe that it is due to the business goal of trying to achieve a better market position. A large minority believes that it is due to declining margins – lower payment rates and higher infrastructure costs. A few believe that it is due to greater regulatory complexity. In general, these concerns that encourage greater consolidation are more business concerns rather than patient service concerns. What is particularly revealing is what these health care businessmen do not believe are contributing to efforts to consolidate. They do not believe that innovation and new technologies are primary driv ers, though they continually tout them as being one of the great products of a business economy. When service is the goal, new innovation would be adopted based more on patient benefit rather than on business opportunities afforded by the technology. In a service model, efficiency could be improved by consolidation if efforts are made to improve efficiency by assuring optimal capacity – neither excess nor deficient capacity. Most impressive in the current phase of health care evolution, wherein the health care business community is foisting on us consumer-driven health care, is that not one of these businessmen believe that consumer demand is a major reason for consolidation. It is not about the patient; it’s about businesses and markets. We need to change that. We could if we adopted our own single payer national health program, dedicated to patient service.
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