Spring is in the air and that can only mean one thing: the sweet smell of continued hospital merger and acquisition activity. This week alone saw Tenet announcing the sale of three acute care hospitals to HCA Holdings alongside CHS completing the sale of nine hospitals.
The care delivery system is in a state of deciding what it wants to be in the future...and the hospital business is changing as a result. Varying forces have led to consolidation in the hospital sector but much of the action has led to dampen competition in the space, leading to higher costs for patients. While some industry experts have posited actionable items to enhance competition, a flurry of regulatory actions and regional influences could increase consolidation even more, leading to even less competition.
The space could be more competitive
"The U.S. healthcare system does not work as well as it could, or should," Martin Gaynor, an economist at Carnegie Mellon University; Dr. Farzad Mostashari, founder and CEO of Aledade; and Paul Ginsburg, an economist at University of Southern California, wrote in a recent report. The findings skewer the lack of competition in the system, which the authors say can lead to higher prices as well as quality issues. In part, they place a share of the blame to consolidation among providers and insurers.
"At a basic level, the U.S. healthcare system is a market-based system," Gaynor recently told Healthcare Dive. "Think of the market as the engine in a car. If you have engine trouble, the car won't run. It's important to have policies in place that enable and support competition so healthcare markets can work as well as they possibly can."
3 charts showing how the hospital landscape looks today
The number of hospitals is declining
The hospital industry doesn't look particularly rosy these days. In 1997, the American Hospital Association identified 6,100 registered hospitals. In the following years, hospitals have been steadily biting the dust with 5,627 standing in 2016. AHA currently identifies 5,564 registered hospitals. While the total number of hospitals has dropped, for-profit hospitals are on the rise. Still, the number of nonprofit community hospitals and state and local community hospitals has declined.
Data Source: AHA
All hospital admissions have declined steadily since 2010
Admissions aren't faring any better. In 2010, all hospital admissions totaled 36.9 million admissions. By 2013, admissions had dropped by 1.5 million. 35 million patients were admitted in 2015.
Data Source: AHA
Admissions for small hospitals are decreasing, but large hospital admissions are increasing
Between 2011 and 2013, admissions for small hospitals fell while admission for large hospitals rose. Medium-sized hospitals saw an even steeper decline with admissions falling by 1 million between 2010 and 2013, from 16.2 million to 15.2 million.
Data Source: AHA
Why these charts matter
"When volumes go down, revenue goes down," Joshua Nemzoff, president of Nemzoff & Company and an expert on healthcare M&A, told Healthcare Dive, adding if volume goes down, then "you're in trouble."
Expenses, according to AHA, for all U.S. registered hospitals are currently $936 billion, up from $859.4 billion in 2013. More than a half of U.S. hospitals (52%) lost money on operations last year, Cleveland Clinic CEO Toby Cosgrove said in Washington, D.C. in March around the same time news broke that the organization – while turning a profit in 2016 – suffered a 71% decrease in its operating income. In part, hospitals are hiring more and more employees. A recent Health Affairs blog using Bureau of Labor Statistics data showed a 11% growth for hospital healthcare jobs from 2007 to 2017. While the proliferation of jobs is good for workers, some healthcare jobs that may be redundant could actually be adding to the cost of care overall.
This has also been a decade pinned with large technology purchases – with some EHR systems costing well into the millions – adding to hospitals' expenses.
Compounding a hospital's outlook is the uncertainty over reimbursement. "For a lot of hospitals and health systems...what they're seeing is their costs are going up and their reimbursements are going to stay pretty flat," Igor Belokrinitsky, healthcare strategist at Strategy&, a member of the PwC network of firms, recently told Healthcare Dive, adding it's a struggle to make margins work.
Rising expenses and declining admissions alongside flattening reimbursements – as well as alternative care settings competing for the one-and-done low acuity patient visits – make for an unfortunate financial reality for some hospitals. Some have found it best to put up a "For Sale" sign. "The reason hospitals merge or sell is because they're in trouble," Nemzoff said.
"When volumes go down, revenues go down. [Then,] you're in trouble."
President, Nemzoff & Company
Hospital M&A, a snapshot into recent history
Health systems have been taking advantage of the provider yard sale that has been occurring for the past few years. Since 2010, 561 hospital mergers have occurred and almost half of hospital markets are "highly concentrated," Gaynor, Mostashari and Ginsburg recently wrote in JAMA.
In 2016, hospital M&A activity booked $13.9 billion across 89 deals, according to an analysis earlier this year from PricewaterhouseCooper's Health Research Institute. While 2016 saw a decrease in hospital M&A activity compared to 2015 (-12.7%), hospital deals went up in value in 2016 compared to 2015 (47%). In April, PwC released data that found healthcare M&A was up (0.9%) while value was down (49.3%) in Q1 this year.
"The last couple of years we've seen [healthcare] consolidation continue," Thad Kresho, U.S. Health Services Deals Leader at PwC, told Healthcare Dive. "Whether it's been at the pace that people think it should be or would've been, I'll leave that to others to judge." The year 2015 was a banner year for M&A in the space and while volume may be down from two years ago, the space is hardly inactive. PwC's release came the same week Cardinal Health agreed to a $6 billion buyout of Medtronic's product line while Rhode Island's Care New England positions itself for an acquisition by Partners. Two other major hospital M&A transactions included HCA signing a letter of intent to buy Memorial Health for $710 million and Northwell Health signing a strategic affiliation agreement with Rothman Institute to create orthopedic care centers in the New York metro area.
This last transaction is an example of a trend Kresho sees in the market, where more and more "alternative transactions" such as affiliations or ventures among nonprofits and faith-based entities could surface. "Hospital providers are doing new types of deals," Kresho said. "M&A is going to continue to chug along."
Hospital consolidation and its effects on competition
Because the healthcare industry is weird and complicated, mergers in the space lead to differing real-world results to competition in markets depending on the agreement.
For one, there are different kinds of mergers in the hospital industry, Nemzoff stated. In the most general terms, there's horizontal consolidation where Hospital A buys Hospital B outright where costs are cut from the system with layoffs and a true consolidation of resources. Vertical consolidation occurs when Hospital A purchases Hospital B but Hospital B continues to operate with new capital/ownership as it always has with the same staff, etc. In return for cash, Hospital A's is affiliated with Hospital B's services and branding.
"Almost [by definition] horizontal consolidation is antithetical to competition," Katherine Baicker, C. Boyden Gray professor of health economics at the Harvard T.H. Chan of Public Health, told Healthcare Dive. (Baicker was recently appointed as the next dean of the University of Chicago Harris School of Public Policy.)
In contrast, "vertical consolidation is a little less clear," Baicker said. "Vertical consolidation need not reduce competition in that there might still be the same number of hospitals." Still, vertical consolidation can present an anti-competitive force as it can be difficult for patients to flow across hospitals or providers in a self-contained system. While such consolidation doesn't threaten competition as much as horizontal consolidation, there is such a risk involved.
"It's important to have policies in place that enable and support competition so healthcare markets can work as well as they possibly can."
E.J. Barone Professor of Economics and Health Policy, Carnegie Mellon University
Why competition matters
Healthcare and hospital prices will ascend to the level a market can take on. If a provider has a large monopoly in a market/region, prices can actually rise to offset rising expenses and declining patient volume since they have greater power at the negotiating table over insurers.
In their recent report, Gaynor, Mostashari and Ginsburg posit market power can drive price variation. "Hospitals that face little in the way of effective competition are able to extract higher price concessions in their negotiations with insurers, and do," they wrote. "Hospitals without local competitors are estimated to have prices nearly 16% higher on average than hospitals with four or more competitors, a difference of nearly $2,000 per admission."
Should more consolidation be expected under new efforts like MACRA?
The short answer
The longer take
While the industry is definitely in a speculative phase over the long term impacts a measure such as MACRA may have for the industry, one area experts are following is whether consolidation may continue. The story thus far shows evidence that new payment models under the ACA are not associated with accelerating provider consolidation.
"Looking at ACO contracting and provider consolidation, we found that type of APM has largely not been associated with any acceleration of consolidation. Consolidation was already going on for a variety of reasons and has continued unabated," Dr. J. Michael McWilliams, the Warren Alpert Associate Professor of Health Care Policy at Harvard Medical School and practicing general internist at Brigham and Women's Hospital, told Healthcare Dive. McWilliams noted his research did find signs of potential "defensive consolidation" in hospital and specialist markets to either rebuff pressure from payers to enter risk contracts or to preserve their market base/power.
McWilliams also noted the general lack of relationship between ACO contracting and consolidation may not be surprising given evidence that independent medical groups have outperformed large health systems in terms of savings so far.
McWilliams stated MACRA has the potential to accelerate consolidation involving smaller practices as the legislation presents two market forcing factors: Advanced payment models (APMs) could benefit larger consolidated entities under MIPS with the certainty of a 5% rate increase "essentially giving large providers a price increase in Medicare on top of higher prices they command on the commercial side." In addition, reporting requirements and fixed costs required to meet those requirements are going to be substantial and not within reach for many small practices, he said.
It's that greater perception of burden associated with quality reporting that Travis Broome, health policy lead at Aledade, worries will lead to smaller practices throwing in the towel and selling their practice to larger players who can take care of all the reporting. "Yes, it's new but if you were doing quality reporting before, you're doing quality reporting now," Broome told Healthcare Dive. Broome feels MACRA could be the final straw for physicians fed up with administrative tasks and that "one more thing" could lead to consolidation.
Joseph Lupica, chairman at Newpoint Healthcare Advisors and an expert in hospital M&A, agrees. He said MACRA probably could lead to more consolidation because it's complex and "requires an infrastructure that is often beyond rational expenditure for a smaller" practice.
Baicker reminded Healthcare Dive that MACRA won't really drive hospital consolidation, rather it would be operating through physician participation and APMs so, if such action occurs, it will be through an indirect route. Stand-alone and small physician groups may feel pressure to join bigger groups, she said. "I think there may be changed physician incentives to participate in vertical consolidation so I would watch for that. [S]eeing which APMs end up attracting a substantial share of physicians is something to watch."
"I wake up now every day like I did before thinking 'I'm waiting for that newspaper to say M&A in healthcare is dead' [but] there's still a lot of activity happening."
U.S. Health Services Deals Leader, PwC
Evidence is largely out on how effective payment reforms such as APMs and value-based pricing are. Paul Levy, former CEO of Beth Israel Deaconess Medical Center recently wrote a thought-provoking blog on the topic but many, including Lupica, believe value-based care is in the industry's DNA now.
Whether value-based efforts continue in the long term is somewhat up for debate, though leaders note that such initiatives may require better competition in the healthcare space, tying back to way the continuing trend that provider consolidation matters.
"While the ACO programs have certainly been a good start, I don't think we really should expect the fruits of payment reform to grow as we would like until we figure out a way to encourage competitive market structures that allow smaller risk-bearing organizations to exploit and drive competition among hospitals and specialists," McWilliams said. "One step forward is to eliminate the payment differentials that have been driving at least some of the consolidation between physicians and hospitals so far, but ultimately it may require some form of price regulation so that higher prices are not as strong of an incentive to consolidate anymore."
Gaynor, Mostashari and Ginsburg recently proposed suggestions on how to encourage competition in the industry from a policy level, including:
Increasing scrutiny on mergers;
Stop paying more for the same outpatient services;
Encouraging provider competition;
Ending anti-competitive practices, such as anti-tiering and anti-steering; and
Allowing lower-risk Medicare ACO contract options for independent provider groups.
“Ensuring that markets function efficiently is central to an effective health system that provides high quality, accessible and affordable care. There is an opportunity for political leadership and bipartisan support for policies that will make markets work better,” the researchers wrote.
While President Donald Trump's administration has its hands full with the future of the Affordable Care Act, consolidation may continue, perhaps more slowly than two years, as providers are finding their best options for success in the future. "I don't think things are going to get easier per se to do transactions but I also don't think the transactions are just going to stop," Kresho said, adding networks are moving toward becoming more closer knit. "I wake up now every day like I did before thinking 'I'm waiting for that newspaper to say M&A in healthcare is dead' [but] there's still a lot of activity happening."