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Fall 2023 - Innovation

Pros and Cons of Healthcare Consolidation

Do mergers help or hurt the healing industry?

The healthcare industry is changing, and it’s changing fast. Independent practices and community hospitals are being snatched up by larger, more robust health systems; large local hospital systems are crossing state lines to create “premier” healthcare destinations; hospitals systems are buying up outpatient centers and merging with health plans; private practices are joining forces to stay afloat; insurance providers are even linking arms as a strategy to remain competitive ­ — the list goes on and on. Private equity firms are even getting in on the trend.

Reports of healthcare mergers and acquisitions flood news feeds, with announcements of new partnerships seemingly every week. In fact, 20 deals generating more than $13.3 billion were announced in the second quarter of 2023 alone, the highest number since before the COVID-19 pandemic.1

Perhaps it’s not surprising. After all, the healthcare industry as a whole continues to strain to meet the ever-increasing demand of rising costs, provider burnout and patient expectations, among other things, and teaming up to face an uncertain future sounds like a good idea.

But not everyone sees healthcare consolidation as a good thing. Arguments for and against healthcare consolidation agree access to quality patient care at an affordable price in an efficient, reliable organization is the goal, but while some believe consolidation is the key to moving forward, others raise very real concerns about it.

A Bird’s Eye View

In broad terms, healthcare consolidation is the practice of two or more healthcare companies coming together to form a new, more robust entity.

Horizontal consolidation refers to the merger of entities that perform similar functions such as when two hospitals merge into one or when two or more physician practices come together to form a larger group.2

Vertical consolidation, or integration, occurs between companies 1) that do business with each other or 2) whose services complement each other such as when a hospital purchases an outpatient center or a health plan merges with a hospital system.3

Cross-market consolidation refers to hospital systems’ expansion into broader geographical locations, often in multiple states, by acquiring entities in that location. Notably, a recent analysis shows that 55 percent of the 1,500 hospitals targeted for merger or acquisition between 2010 and 2019 were located in a separate geographic market than the acquirer.4

Private equity roll-ups refer to when private equity firms acquire and merge multiple small businesses into one larger company.5 These “megadeals” have grown increasingly common in the healthcare sector, especially in nursing homes and rural hospitals.5

Proponents of healthcare consolidation in all forms sing its praises, saying things such as hospital mergers increase access to resources that smaller hospitals wouldn’t otherwise have, making better patient care available at a lower cost.6 But critics disagree, saying consolidation decreases quality of care and raises prices. So far, studies have been largely inconclusive as to which side is “right.”

Pros of Consolidation

The rationale for healthcare consolidation seems logical enough: When existing or potential competitors such as physician practices, hospitals, surgery centers, insurance companies or pharmacies join forces, it creates new, more financially sound entities better able to meet the needs of a larger population. The partnerships increase access to capital and other important resources; reduce costs; standardize clinical protocols; aim to improve efficiency; and emphasize the promise of increasing access to care. Some large companies are merging their already-robust entities to become premier destinations with the promise of offering patients best-in-class care.

The launch of Risant Health, for example ­— the result of a 2023 merger between Kaiser Foundation Hospitals and Geisinger Health — is an “innovative move designed to improve the health of communities, achieve better healthcare outcomes and improve healthcare affordability,” according to a Geisinger Health press release.7 On its heels came an announcement from BJC HealthCare of St. Louis and Saint Luke’s Health System of Kansas City, which released a letter of intent to consolidate the companies into one entity. The announcement touts the companies’ shared vision of “becoming the premier Midwest destination for patient care, clinical research and medical education and the region’s most exceptional place to work and practice medicine.”8

Mergers such as these appear to have clear advantages, including:6

  • Augmented access to capital and resources. When entities merge, the smaller entities have access to the larger entity’s capital, and the larger company has access to the smaller company’s resources. This can benefit both parties. For example, if a specialty practice merges with a large medical system, the large system covers the costs of the smaller specialty practice, which keeps the practice financially viable, while the larger system benefits from having specialists in-house.
  • Shared financial burden. Mergers take advantage of economies of scale. Sharing the cost of property, utilities, facility maintenance and equipment, and staff salaries and benefits reduces overhead for both entities. This makes it possible for both entities to be more financially viable.
  • Improved workflow. From human resources to inventory management, day-to-day operations strain hospital systems. Mergers give struggling hospitals access to proven protocols that streamline policies, workflow and management.
  • Better bargaining power. Large systems with higher patient populations have more power to negotiate lower costs with insurers and pharmaceutical companies than systems with lower patient populations.
  • Upgraded access to care. Mergers expand the type of care and services a given entity is able to offer patients. For example, when a large healthcare system acquires a small specialty practice, existing patients automatically have access to the specialists acquired by the health system. Mergers give patients more comprehensive options for care.
  • Improved care coordination. Mergers reduce duplication of clinical services. Standardized clinical protocols are thought to help minimize patient expense and maximize patient experience.

Cons of Consolidation

But critics are skeptical, saying consolidation will hurt patients, both in terms of value and outcomes. In fact, a new study from Harvard University and the National Bureau of Economic Research investigated whether claims that consolidation will improve healthcare are actually bearing out. “One of the key arguments for hospital mergers and practice acquisition was that health systems would deliver better-value care for patients,” said Nancy Beaulieu, PhD, the study’s lead author and a research associate in the Blavatnik Institute at Harvard Medical School.9 “This study provides the most comprehensive evidence yet that this isn’t happening.”9

The biggest problems with consolidation seem to be:

  • Decreased competition and higher costs. When there are fewer healthcare entities, patients have fewer options. Highly concentrated markets enable hospitals to charge higher prices and negotiate higher prices from health insurance plans.10 A recent study found that the prices of hospitals that do not have competitors within a 15-mile radius are 12 percent higher than markets with four or more competing hospitals.10 Further, a study published in Health Affairs in May 2022 found that vertical consolidation between physicians and health systems led to a 12 percent increase in primary care physician prices and a six percent increase in specialist prices between 2013 and 2017.10 Further, “Evidence is accumulating that cross-market mergers may sometimes enable hospital systems to increase prices through cross-market power such as from tying hospitals across markets that have common customers (primarily insurers) or because of multi-market contact that leads to mutual forbearance.”4
  • Diminished access to and quality of care. Decreased competition increases incentives to raise costs to patients while decreasing incentives to create value for patients. Patient choice becomes limited, quality of care goes down and patients’ overall experience is worsened. A study published in 2020 in the New England Journal of Medicine illustrates this: The study showed that hospital mergers were associated with worsened patient experiences and no significant changes in readmission or mortality rates.11
  • Workforce challenges and inefficiencies. Mergers are often viewed as a sign of financial instability and, as such, retaining reputable physicians isn’t easy: They often seek employment elsewhere in the wake of consolidation. Also, it’s hard to recruit top-tier talent when systems are in a state of flux.12 Further, transforming two distinct entities with unique workflows into one unified company with a smooth, new workflow is challenging. Supply chain concerns, autonomy of units, clash of corporate cultures and regulatory compliance all contribute to the hiccups.12
  • Movement away from mission. A study looking at the impacts of consolidation in Pittsburgh, Pa., showed concerns that acquisition by large health systems fundamentally shifts smaller hospitals away from their original mission, most notably for nonprofit hospitals. “Stakeholders claimed that hospitals acquired by systems are less mission-driven, especially in terms of providing care, regardless of ability to pay. Some brought up the [University of Pittsburgh Medical Center’s] acquisition of the only remaining independent faith-based healthcare provider [in the area], Mercy Hospital. Even though the acquisition was sanctioned by the Pittsburgh Catholic Diocese and is now overseen by it, stakeholders claimed that they perceived less charity care provided at Mercy than before.”13

Consumer Cost vs. Value and Delivery

Misgivings about healthcare consolidation are gaining traction, so much so that the U.S. Senate Committee on Finance held a hearing on June 8, 2023, to discuss the growing concern. Of primary importance: the effect healthcare consolidation has on consumer cost versus value and delivery. Specifically, the committee examined whether healthcare consolidation and private equity investments are favoring mega-corporations at the expense of patients and taxpayers.

“Too many hospital mergers lead to jacked-up prices and diminished care for patients most in need,” said Federal Trade Commission (FTC) Office of Public Affairs Director Lindsay Kryzak.14 R. Shawn Martin, the executive vice president and chief executive officer of the American Academy of Family Physicians, who provided testimony at the hearing, agrees, saying there is sufficient evidence showing that vertical integration also leads to higher prices and costs, including insurance premiums, without improving quality of care or patient outcomes.15 Zach Cooper, PhD, associate professor of public health and associate professor of economics at Yale University, also provided testimony at the hearing, adding that increased consolidation “raises provider prices (thus increasing health spending) and harms access to healthcare services (by increasing insurance premiums and out-of-pocket costs).”16

In July 2023, the FTC and the Department of Justice (DOJ) announced they are working to update federal merger guidelines. “Unchecked consolidation threatens free and fair markets,” said U.S. Attorney General Merrick B. Garland. The goal of the update is to better reflect how both FTC and DOJ determine a merger’s effect on competition in the modern economy, as well as evaluate proposed mergers under the law.17 According to Mr. Garland, updated merger guidelines will help protect Americans from the effects of anticompetitive mergers.17

Concerns Continue

While healthcare consolidation aims to make medical companies better-equipped to serve patients, as well as more financially secure, critics say it doesn’t achieve the goal and ends up costing patients much more than just money (but it also happens to cost them a lot of that, too).

Consolidating healthcare entities for the altruistic sake of improving access to and quality of healthcare seems reasonable, even ideal. And some mergers bear out that mission. But in practice, the change is benefiting large corporations, not patients. It is causing very real challenges, perhaps the most profound of which is carrying out the act of actual caring. At its heart, healthcare is an act of stewardship: It’s the responsible overseeing and protection of something considered worth caring for and preserving — people’s lives. Finding the best way to do that remains elusive.

What lies ahead for healthcare consolidation and the true value it brings to patients remains to be seen. “We need to examine the drivers of consolidation, as well as its effects on care quality and costs, both for patients and taxpayers,” said Senator Mike Crapo, ranking member of the U.S. Senate Finance Committee. “As we look to strike a productive balance, we should consider not just consolidation, but also quality, access and innovation.”18

References

  1. Bailey, V. Q2 2023 Hospital Merger and Acquisition Activity Hit Pre-Pandemic Levels. Revcycle Intelligence. Accessed at revcycleintelligence.com/news/q2-2023-hospital-merger-and-acquisition-activity-hit-pre-pandemic-levels.
  2. Schwartz, K, Lopez, E, Rae, M, et al. What We Know About Provider Consolidation. Kaiser Family Foundation, Sept. 2, 2020. Accessed at www.kff.org/health-costs/issue-brief/what-we-know-about-provider-consolidation.
  3. McMonagle, M, and Quincy, L. Addressing Consolidation in the Healthcare Industry. Altarum Healthcare Value Hub, Research Brief 10, January 2016. Accessed at www.healthcarevaluehub.org/advocate-resources/publications/addressing-consolidation-healthcare-industry.
  4. Muoio, D. Cross-Market Hospital Consolidation Is on the Rise and Understudied, Researchers Say. Fierce Healthcare, Nov. 7, 2022. Accessed at www.fiercehealthcare.com/providers/cross-market-hospital-consolidation-rise-and-understudied-researchers-say.
  5. Pifer, R. New Antitrust Merger Guidelines Could Have Significant Chilling Effect on Healthcare Deals. Healthcare Dive, July 21, 2023. Accessed at www.healthcaredive.com/news/ftc-doj-merger-guidelines-healthcare/688392.
  6. MBA Healthcare Management. 5 Benefits When Hospital Systems Merge. Accessed at www.mba-healthcare-management.com/lists/5-benefits-when-hospital-systems-merge.
  7. Kaiser Permanente and Geisinger Come Together to Launch Risant Health and Expand Access to Value-Based Care. Geisinger Health press release, April 26, 2023. Accessed at www.geisinger.org/about-geisinger/news-and-media/news-releases/2023/04/26/15/46/kaiser-permanente-and-geisinger-come-together-to-launch-risant-health.
  8. BJC HealthCare and Saint Luke’s Health System Sign Letter of Intent to Form Integrated Missouri-Based Health System. Saint Luke’s press release, May 31, 2023. Accessed at www.saintlukeskc.org/about/news/bjc-healthcare-and-saint-lukes-health-system-sign-letter-intent-form-integrated-missouri.
  9. Bendix, J. Healthcare Consolidation Not Producing Expected Benefits. Medical Economics, Jan. 25, 2023. Accessed at www.medicaleconomics.com/view/health-care-consolidation-not-producing-expected-benefits.
  10. How Hospital Consolidation Hurts Americans. AHIP, Aug. 26, 2021. Accessed at www.ahip.org/news/articles/how-hospital-consolidation-hurts-americans.
  11. Beaulieu, ND, Dafny, LS, Landon, BE, et al. Changes in Quality of Care After Hospital Mergers and Acquisitions. The New England Journal of Medicine, 2020 Jan;382:51-59. Accessed at www.nejm.org/doi/10.1056/NEJMsa1901383.
  12. MBA Healthcare Management. 5 Challenges When Hospital Systems Merge. Accessed at www.mba-healthcare-management.com/lists/5-challenges-when-hospital-systems-merge.
  13. O’Hanlon, CE. Impacts of Health Care Industry Consolidation in Pittsburgh, Pennsylvania: A Qualitative Study. Inquiry, 2020 Jan-Dec;57;46958020976246. Accessed at www.ncbi.nlm.nih.gov/pmc/articles/PMC7691888.
  14. Statement of FTC Office of Public Affairs Director Lindsay Kryzak on District Court’s Decision to Grant Preliminary Injunction Halting New Jersey Hospital Merger. Federal Trade Commission press release, Aug. 4, 2021. Accessed at www.ftc.gov/news-events/news/press-releases/2021/08/statement-ftc-office-public-affairs-director-lindsay-kryzak-district-courts-decision-grant.
  15. Martin, RS. Statement of the American Academy of Family Physicians to U.S. Senate Committee on Finance, June 8, 2023. Accessed at www.finance.senate.gov/imo/media/doc/Shawn%20Martin%20Written%20Testimony%20for%20Senate%20Finance%20Hearing%20on%20Consolidation_Final%2006.06.23docx.pdf.
  16. Cooper, Z. Written Testimony to the Senate Committee on Finance, June 8, 2023. Accessed at www.finance.senate.gov/imo/media/doc/20230605_sfc_testimony.pdf.
  17. FTC and DOJ Seek Comment on Draft Merger Guidelines. Federal Trade Commission press release, July 19, 2023. Accessed at www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines.
  18. Crapo Statement at Hearing on Health Care Consolidation, June 8, 2023. Accessed at www.finance.senate.gov/imo/media.
Rachel Maier, MS
Rachel Maier, MS, is the Associate Editor of BioSupply Trends Quarterly magazine.