Deloitte on Hospital Mergers

By November 2, 2017Commentary

There have been a lot of hospital mergers in the last few years, over 750 between 2008 and 2014, and a new paper by Deloitte’s Center for Health Solutions analyzes the effects of those mergers on the institutions.   (Deloitte Paper)   The authors looked at available financial data on hospital operating performance and conducted surveys of hospital financial executives.  A primary driver of merger activity was a desire among acquired hospitals to improve their access to capital, and a large majority of acquired hospitals expanded capital investments following the merger, with upgrading clinical information systems the top single use of capital.  Another primary driver was pursuit of cost efficiencies, and most acquired hospitals reported reaching at least some cost saving goals.  But from a bigger picture, most acquired hospitals had lower revenue, expenses and operating margins, lasting on average for two years after the transaction.  There was also no evidence that quality measure performance improved following the merger.  Among hospitals that did experience better operating margins after the deal, executives reported spending more time on integration planning and execution.  The Deloitte authors further identified a set of characteristics around the acquisition process that appeared to be related to getting better outcomes.

Especially in urban areas, hospital consolidation has been rapid and pervasive.  And this report says that the actual main reason for hospital M & A activity is a desire to increase market share.  Like most acquisitions, they rarely achieve financial and other goals.  But one thing they clearly have done is enhance market power, which frankly then lessens pressure on the hospital system to manage expenses better.  In fact, it appears that the higher the market share, the more prices go up and the less need the system feels to lower expenses.  That really shows up in management compensation.  And very embarrassingly, this is as bad or worse in supposedly non-profit systems as in for-profit ones.  Really, the worst of all possible worlds.

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