Acquired hospitals save an annual average of $176,000 (1.5% of total costs) after a deal, but evidence is mixed on savings by acquirers, according to an analysis by the National Bureau of Economic Research.
Savings seen by target hospitals are primarily driven by "geographically local efficiencies in price negotiations for high-tech physician preference items" (PPIs) — expensive branded medical devices, usually implantable, to which physicians are partial.
Researchers examined ECRI Institute data containing supply purchase orders from more than 1,200 U.S. hospitals from 2009 to 2015 and cross-checked to match facilities with outside information from CMS, the American Hospital Association and a merger roster. The resulting analysis estimated the effects of horizontal hospital mergers on marginal cost efficiencies — a perennial merger justification in the sector — along with investigating underlying "buyer power" economic mechanisms (factors such as buyer size, structure, etc.).
This research is doubly topical given the current rash of consolidations. The second quarter of 2018 was the 15th in a row with more than 200 M&A deals according to PricewaterhouseCoopers, and the value of said deals in the first half of the year alone reached $315.74 billion.
Deloitte forecasts that, if consolidation patterns persist, only 50% of current health systems will remain in the next decade.
The effects of consolidation are the topic of an ongoing War of the Roses between providers contending that M&A reduces costs through scale economies, reduced costs of capital and clinical standardization, and some critics who argue the negative effects of less choice and higher costs for consumers are far-reaching.
The study showed yearly merger target savings of 1.5% ranging across costs for 47 supply categories. Yet, on a yearly basis, the buyer hospital pays an average of $302 more. These figures translate into acquired hospitals saving a mere 10% of the amount that may be claimed in a merger justification, according to the study — and acquirers saving 0% of that initially-touted figure.
The savings for target hospitals stem from a 2.6% decrease in PPI expenditures, an effect the researchers said was due to targets being able to negotiate lower prices on the items due to their newfound bargaining power.
The effect was most prominent for small, local mergers, reaching up to 6.3%.
By contrast, acquiring providers saw 6.4% savings on average on less expensive hospital commodities, suggesting that smaller systems have a more limited focus on managing inexpensive commodity costs. However, the 6.4% savings in this arena were counterbalanced by a 1.1% increase in more burdensome PPI costs following the merger.
The NBER report highlighted two consistent trends that could be contributing to its results. First, buyer power driven by returns to scale that are "more local in PPIs" and more "national in commodities," and second, fixed adjustment or renegotiation costs "making cost savings in commodities more beneficial for large acquirer systems."
Though past research is mixed and can be skewed to either side, a 2017 Charles River Associates study found that mergers enabled hospitals to reduce annual operating expenses by 2.5%, as well as expand services without sacrificing quality or any increases in revenue that would signify price increases.
However, market concentration worries many industry researchers and regulators, worried that overzealous M&A staunches choice and escalates prices for patients. Hospital mergers are a constant focus of Federal Trade Commission merger investigations, a trend expected to continue.