Upside? Downside? Debating the value of hospital M&A
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By Ethan Popowitz
Across the country, hospitals and health systems are turning to mergers and acquisitions (M&A) to navigate the changing healthcare landscape.
According to a 2021 report by Kaufman Hall, M&A is one of the most important tools that healthcare companies of all shapes and sizes have in their arsenal. Consolidating can help reduce costs, increase competitive advantage, and even keep the doors open and the lights on. But consolidation may also have some negative consequences for patients, providers, and even hospital management.
There have been countless studies and articles published about the benefits of healthcare M&A for the acquired facility. My colleague Emma Gosselin and I have also contributed to the discussion in our blogs “Is M&A the key to survival?” and “Coming soon…a wave of M&A in biopharma?” However, we haven’t touched on how consolidation impacts hospitals and health systems.
In this blog, we’ll examine some of the negative—and positive—effects that M&A can have on hospitals, including:
- Consolidation can raise prices or diminish competition (or both)
- Patient care quality may suffer
- M&A can contribute to staffing shortages
Consolidation can raise prices or diminish competition (or both)
Hospital consolidation presents a tradeoff. While many mergers are motivated by network and cost efficiencies, they can also increase the market share (and power) of the newly merged hospital system.
The Washington Policy Center argues that hospitals tend to create monopolies and increase prices following a merger. Their research found that when hospitals in the same geographic location merge, their combined charges increase by 20%-40% over what they charged previously as separate entities.
The Kaiser Family Foundation also reported similar findings. In their report, hospitals with no competitors within a 15-mile radius priced services 12% higher than hospitals in markets with four or more competitors. The KFF also reported that consolidation between hospitals operating in different markets can impact competition and prices. Their analysis found that prices at hospitals acquired by out-of-market health systems increased by about 17% more than their independent competitors. When hospitals merge, their power and influence over the local market go up, and so do prices.
Despite these findings, there is a sizable amount of evidence that indicates M&A can be beneficial for hospitals. In 2021, the American Hospital Association (AHA) found that hospital M&A correlated with a 3.3% reduction in facility operating expenses between 2009 and 2019. The AHA also reported that hospitals experienced $9.5 million per year in acquisition-related savings.
Some studies suggest that M&A offers appealing advantages to hospitals and other healthcare organizations that may be in financial trouble. A report by NCCI Insights found that mergers can reduce operating costs for acquired facilities by 15%-30%. However, the same study also found that the average price of hospital services increased by 6%-18% following M&A.
Patient care quality may suffer
While some healthcare executives advertise that hospital mergers and acquisitions may lead to millions of dollars in savings while improving access to and quality of care, some evidence suggests that no improvement is happening.
One report from researchers at Harvard University found that acquired hospitals experienced little change in mortality rates or readmission in three to four years after the facility changed hands. However, the report also found that acquired hospitals were associated with decreased performance on the patient experience measure of the HCAHPS survey, which is used to measure patient perceptions of their hospital experience. The patient experience at these facilities fell from the 41st to the 50th percentile.
On the flip side, some studies found that patient care quality improved after a merger. Hospitals serving rural communities may especially benefit from M&A, according to a study published in the Journal of the American Medical Association. This study found that mortality rates for acute myocardial infarction, heart failure, stroke, and pneumonia all decreased by about 5% a year after a merger.
Many rural hospitals also face serious health and financial challenges, made more difficult by COVID-19. With hundreds of facilities at risk of closure, consolidation could potentially be the saving grace that keeps these hospitals open.
M&A contributes to staffing shortages
If you’ve found yourself waiting longer to see your primary care physician than you’re used to, you’re not alone. Getting a timely appointment with your doctor or a specialist can take weeks right now, and the healthcare staffing shortage is primarily to blame.
The U.S. is currently experiencing a staffing shortage, and it’s likely to get worse. Research from the Association of American Medical Colleges (AAMC) predicts a shortage of between 37,800 and 124,000 physicians by 2034—and that’s not accounting for nurses, therapists, advocates, and other members of the healthcare workforce.
The staffing shortage is a complex crisis. There are multiple driving factors behind it, such as the effects of COVID-19 and an aging population. It can also lead to burnout and poorer health outcomes for many patients. And studies suggest that mergers and acquisitions negatively contribute to the staffing shortage.
According to Athenahealth’s 2021 Physician Sentiment Index, healthcare providers in 2020 were more likely to leave their practice and experience burnout following major organizational changes like mergers, layoffs, furloughs, or transitions to new technology platforms. Twelve percent of physicians surveyed said that a merger was disruptive to their work, making them feel less safe and supported by their organizations.
Consolidation among healthcare providers can be disruptive in multiple ways. Executives may change staff hierarchies and leadership roles, or lay off employees to lower costs or reduce redundancies.
A technological transition into a new EHR platform might also follow an M&A as data systems get decommissioned and replaced. IT system transitions frequently contribute to feelings of frustration among healthcare workers, as additional training is necessary. Research from the Agency for Healthcare Research and Quality has also linked EHR systems to dissatisfaction, worsened patient outcomes, and a higher likelihood of 30-day readmission.
While these studies discuss the negative impact of EHR platforms at a general level, a merger could magnify the effects further. Each facility has a different workflow for every type of encounter; the introduction of a new EHR during a merger can harm productivity as staff must grow accustomed to a new system of data collection and storage.
The effects of hospital mergers and acquisitions are nothing new. Studies have shown there is the potential for both positive and negative effects on patients, facilities, communities, and competitors.
While M&A activity may negatively affect patients and providers, it plays an important role in the healthcare ecosystem. Healthcare is a business after all, and it’s essential for hospitals and other organizations to make deals and move strategically to adapt and overcome future challenges.
Catch up on the latest M&A trends influencing the biopharma industry in our recent blog post. Start a free trial of our solutions today to get the latest M&A news across the industry.