Health Care: More Challenges, More Consolidation

In 2011, consolidations continued to climb, up nine percent over 2010. According to Irving Levin Associates, 980 healthcare-related mergers and acquisitions with a total value of $227.4 billion occurred in 2011. Consolidations reached their last peak of $268.4 billion in 2006.

Hospitals reflected the same trend. The value of the top ten hospital mergers and acquisitions for 2011 increased from $3.8 billion in 2010 to $5.6 billion. For all hospital consolidations, the value was approximately $7.3 billion.

As financial pressures continue to grow, more hospitals are likely to join forces to meet challenges such as decreased Medicare reimbursement, cuts in state Medicaid spending, investment in electronic medical records, movement toward forming accountable care organizations, increases in uncompensated care and uncertainty about health care reform.

According to Moody's Investor Services, hospital consolidations have a positive effect because they increase competition in local markets, improve efficiencies and provide added leverage with payers. Conventional wisdom about economies of scale supports their conclusion.

However, a 2006 study of the previous wave of more than 700 hospital mergers and acquisitions in the 1990s presents a different picture. It demonstrated that when hospitals merged, prices increased by 5 percent or more and quality remained unchanged or decreased slightly. The hospitals were able to save costs, but the amount saved was proportional to the degree of integration achieved. Many times operational, financial and cultural barriers impeded effective consolidation and its benefits. Based on my experience as a marketing consultant with hospitals that merged and "demerged," I've seen how disruptive and counterproductive consolidation can be. The process is enormously complex and emotionally charged.

As hospitals join forces to meet challenges, they face an entirely new set of challenges.  Researchers at Boston University identified eight factors that are essential to successful integration: strategic vision, governance, leadership, organizational culture/values, financial systems, clinical services, information systems and support functions. Hopefully, hospital leaders can learn from the past and reap greater benefits from consolidation.

— Tom DeSanto

Sources: American Hospital Association data; , "How has hospital consolidation affected the price and quality of hospital care?", Research Synthesis Report No. 9, Willian B. Vogt, PhD and Robert Town, PhD, 2006; "A Conceptual Framework for Successful Hospital Mergers,"Alan Cohen, ScD, Boston University. Image: Google Images