From 2014 to 2015, the number of hospital mergers, acquisitions, and other forms of partnerships grew by 18%, according to a Kaufman Hall analysis. There were 112 transactions in all, compared to 95 in 2014 and 66 in 2010.
Hospitals are claiming that bigger is better for a number of reasons, including:
- Reduced operating costs;
- Increased bargaining power with insurers, drug companies and medical supply companies; and
- Improved quality through better data sharing and coordination of care.
“Hospitals and health systems are facing extraordinary pressure to reduce costs, manage care more effectively across the continuum and improve patient engagement and experience,” said Patrick Allen, Managing Director at Kaufman Hall. “To achieve these goals, hospitals and health systems will continue to pursue strategic partnerships designed to achieve clinical alignment, network breadth and depth, operational efficiency and other critical capabilities.”
Are federal regulations driving hospitals to merge?
The Federal Trade Commission (FTC) has challenged a number of mergers because they can lead to less competition, particularly in geographic areas where there isn’t much competition initially. However, many hospital administrators believe that the Affordable Care Act's push for economies of scale is contrary to the FTC's mandate to regulate competition.
In an interview with Health Leaders Media, Deborah Feinstein, director of the FTC, rejected that notion. “We can come up with examples of providers who are accomplishing the same goals in different ways, without consolidating, without joint negotiations with payers,” she said. “They do them in collaborations that allow them to compete and collaborate at the same time.”
U.S. District Judge John Jones disagrees. In a ruling denying the FTC’s request to temporarily block the merger of Penn State Hershey Medical Center and PinnacleHealth System, he said, “We find it no small irony that the same federal government under which the FTC operates has created a climate that virtually compels institutions to seek alliances such as the hospitals intend here.”
Are the partnerships achieving their professed goals?
According to data from a PwC report, “most transactions have failed to deliver the promised benefits of scale.”
The researchers analyzed patient encounter data from the Centers for Medicare & Medicaid Services (CMS) for more than 5,600 individual facilities and 526 healthcare systems nationwide; their analysis included data from for-profit and nonprofit organizations, and both teaching and non-teaching hospitals.
According to the data:
- For individual facilities, larger hospitals have a lower cost per encounter than smaller hospitals. However, for healthcare systems with multiple facilities, there is no relationship between size and cost.
- There is no correlation between quality and cost per encounter.
- There is no relationship between facility size and quality.
Performance improvement strategies
The PwC researchers said they believe healthcare systems can improve performance and realize scale benefits that will help them reduce costs by 15 to 30%. To do so, organizations will need to standardize both administrative and clinical procedures.
Additional strategies from the PwC report include revamping operating models to emphasize overall system performance; establishing appropriate decision rights; measuring progress and accommodating separate, dissimilar cultures during consolidation.