Hospital Consolidation

Editor’s Note: See this CRE study which debunks a number of the claims made in the following article.

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Recent hospital mergers are creating super-sized health systems that immediately gain leverage over insurers when negotiating managed care contracts

Experts say the nation is experiencing its biggest surge in hospital mergers in more than a decade. Moreover, this latest wave of deals is creating supersized hospital systems that are expected to dominate healthcare and possibly lead to higher healthcare costs.

The ongoing consolidation of hospital ownership means further consolidation of the hospital laboratories that find themselves merged into larger health systems. That will have both good and bad consequences for pathologists and medical laboratory managers working within these organizations.

Large Health Systems Can Negotiate Higher Prices with Payers

Further, experts are concerned that the continuing concentration of hospital ownership into fewer and larger health systems has the potential for these mega-health systems to increase their prices, thus raising the cost of healthcare. In fact, this was the theme of a story published in the New York Times.

Higher prices were also one conclusion in a report from Pricewaterhouse Coopers (PwC). PwC suggested higher prices for consumers will follow consolidation of hospitals nationwide. That consolidation is likely to continue. Booz & Company, a global management and consulting firm, predicts that 1,000 of the nation’s approximately 5,000 hospitals may seek mergers over the next five years.

Largest Hospital Mergers of 2013

For its part, Modern Healthcare published a story that identified the top proposed hospital deals so far this year. They include:

New York Mount Sinai Medical Center and Continuum Health Partners, both non-profit hospital systems, completed their merger on September 30 to create one of the largest hospital networks in New York. The new system has 3,300 beds on seven campuses throughout Manhattan, Brooklyn and Queens;
Dallas-based Tenet Healthcare Corp. (NYSE: THC), a for-profit hospital system that operates hospitals in 10 states, acquired Vanguard Health Systems (NYSE: VHS) of Nashville, Tennesse, which includes 28 hospitals and facilities, for $1.8 billion. Combined, Tenet now has a network of 77 hospitals in 30 markets;
The $7.6-billion merger of two for-profit hospital systems, Franklin, Tennessee-based Community Health Systems (NYSE:CYH), which operates 135 hospitals in 29 states; and Naples, Florida-based Health Management Associates (NYSE: HMA), which operates 71 hospitals and 580 clinics in 15 states. The combined entity now operates a network of 206 hospitals; and,
The merger of Newtown Square, Pennsylvania-Catholic Health East (CHE) and Livonia, Michigan-based Trinity Health. This deal formed a non-profit, Catholic hospital network of 82 hospitals in 21 states, with operating revenue of $12.8 billion annually.

Mergers Improve Operating Efficiency, Quality Care, Say Hospital Execs

Another article published by Modern Healthcare noted that a Moody’s Investors Service report that pointed out how blockbuster tie-ups among for-profit providers, such as the Tenet-Vanguard deal, give big hospital systems advantages over smaller, stand-alone facilities. Large hospital systems are in a better position to recruit physicians. They also have greater leverage to negotiate with payers and can offer a wider diversity of service to attract patients.

In fact, these are the reasons why smaller, independent, not-for-profit facilities are increasingly forming alliances with large hospital networks. It gives them a way to achieve similar purchasing clout, hiring power, and economies of scale.

Community Health Systems Chairman and CEO Wayne Smith (pictured) says that one benefit for his company in merging with Health Management Associates is the addition of 472 medical clinics and 1,000 physician practices. This expands patients’ points of access to the hospital network. (Photo copyright Community Health Systems)

Mergers also expand the flow of new patients into the system. Besides adding 71 hospitals, the proposed deal with HMA, for example, adds 472 clinics and 1,000 physician practices to Community’s network, stated Community Chairman and CEO Wayne Smith in an interview with Modern Healthcare. He explained that building these networks increases the points of entry for patients to access the system, which is a major benefit at a time of falling inpatient volumes.

Mount Sinai Medical Center Expects Improved Efficiencies

Dr. Kenneth L. Davis, President and CEO of Mount Sinai Medical Center, told the New York Times that the merger involving his organization will provide greater operating efficiencies. It will also make up for the inability of federal and state governments’ to pay for the healthcare people have demanded in the past.

Additionally, the combination of Mount Sinai’s specialty care and medical school and Continuum’s primary care would create “an integrated system that can take care of the patient for the whole lifecycle for all degrees of problems.”

Kenneth L. Davis, M.D., President/CEO of Mount Sinai Medical Center (pictured) stated that, by combining his hospital’s specialty care and academic medical resources with Continuum Health Partners’ primary care resources, the result is an integrated system capable of serving patients’ changing medical needs throughout the course of their lives. (Photo copyright Mount Sinai Medical Center)

Mount Sinai Board Member Richard Ravitch also pointed out that the merger was a response to anticipated changes in how health is delivered and the new reimbursement policy that will come with implementation of the Affordable Care Act. This is particularly the replacement of fee-for-service with a bundled payment system. “To be successful with that [bundled payments], you need a population that’s larger than what any one of these institutions has itself today,” he said.

Super-sized Hospital Negotiating Clout May Increase Healthcare Costs

The negotiating clout giant hospital systems bring to bear on payers is what impacts consumer prices. Martin S. Gaynor, Ph.D., Professor of Economics and Health Policy at Carnegie Mellon University in Pittsburgh, told the New York Times that the question is whether the merger strongly enhances a hospital system’s negotiating power, so that insurers must have it. “The strong evidence is that these kinds of mergers raise prices anywhere from 20%, 30%, 40% up to 50%.”

Karen Ignagni, President and CEO of the health insurance industry’s trade association, America’s Health Insurance Plans, concurred, calling hospital consolidation “one of the most important health policy issues today. There’s a mismatch between the promise and the reality. The promise is usually greater efficiency. The reality is higher prices for consumers,” she observed.

AHA Report Refutes Contention that Consolidation is Anti-Competitive

The American Hospital Association, (AHA), however, released a report recently refuting the conjecture that hospital mergers are anti-competitive, noted yet another article published by Modern Healthcare. The report argues that consolidation transactions benefit patients and communities, as well as hospitals.

The AHA study analyzed 316 transactions involving 551 hospitals between 2007 and 2012. In transactions where hospitals were more likely to be suffering financially, “there were clearly tangible benefits that accrued to the community,” stated AHA Executive Vice President Richard Pollack at a press conference. He told reporters that efforts to improve quality and increase efficiency are driving realignment of the healthcare system. “One of the key elements in this transformation are hospitals that are strengthening ties with each other and hospitals that are strengthening ties to physicians in an effort to provide coordinated care across the whole health care continuum,” Pollack said.

Hospital Consolidation Will Affect Clinical Labs and Pathology Groups

As multiple hospitals and health systems in a community or region merge, one consequence will be the interest of health-system administrators to further consolidate clinical laboratory testing services within their organizations. Similarly, post-merger, the multiple pathology groups serving the health systems’ member hospitals may be asked to consolidate into a single practice entity. This would make it easier for the health systems to negotiate for anatomic pathology services.

—By Patricia Kirk

Related Information:

New Laws and Rising Costs Create a Surge of Supersizing Hospitals

The big squeeze

Largest healthcare merger-and-acquisition deals through June 2013

AHA says most hospital mergers not anticompetitive

New Report on Hospital Mergers and Acquisitions Shows the Benefit to Patients and Communities

Factors affecting 2014 Medical Cost Trend