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Hospitals M&A Impact on Patient Care February, 2014 BLOG POST


Hospitals M&A a Double Edged Sword for Care Cost & Quality Hospitals M&A Landscape: The continuing wave of hospital mergers since the last decade is creating a landscape where some health care stakeholders are worried about how consolidation will affect market dynamics including lesser competition, higher prices and lower quality of care. The provider acute sector is under financial and operational stress, and consolidation is likely to accelerate as hospitals seek sustainability. The impact of the ongoing implementation of the Patient Protection and Affordable Care Act (ACA), including the expansion of Medicaid and the launch of the Insurance Exchanges, may further spur consolidation.

Announced Hospital Mergers and Acquisitions, 1998 – 2012 300

287

200

247

175

150 139 100

249

236

250

125

118

110 86

156

149

132

101

83 58

50

88 38

56 59

51

57

58

60

78 52

80 72

90

100

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Number of Deals

Number of Hospitals

Source: AHA TrendWatch Chartbook 2013

Hospitals M&A Pitfalls According to The Robert Wood Johnson Foundation, when hospitals merge in already concentrated markets, price increases can often exceed 20 percent. Large systems with a number of hospitals tend to charge higher prices in areas where they outnumber their competitors, according to health economist James C. Robinson of the University of California, Berkeley (UCB). While integrated health systems make it easier to coordinate health care across providers, they may also drive out competition between hospitals and among specialists, and drive up prices. A system of hospitals has greater bargaining power with insurance companies than a single hospital and can therefore demand higher prices for its services. In 2011, Robinson of UCB studied prices for six major cardiac and orthopedic surgery procedures in hospitals in eight states, and found that private insurers paid 13 to 25 percent more for procedures in areas where there was less competition. As a result of this, patients end up paying these higher costs of consolidation through higher insurance premiums, co-payments, deductibles and hospital bills. Hospitals M&A Impact on Patient Care

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Hospitals M&A Benefits In spite of the pitfalls stemming from hospitals M&A, consolidation can still lead to substantial value creation. Consolidation provides the opportunity to gain operating efficiencies and operating expense reductions. Studies find that consolidation may lead to realignment of services and a reduction in excess capacity as well as slower cost growth and increases in economies of scale and scope. This reduction in costs and operational efficiencies can be passed on to patients in form of better quality of care and lower cost of treatments. Dranove and Lindrooth (2003)1 undertook a study to determine if hospital consolidation leads to cost savings. The results suggest that the median hospital merger resulted in a cost reduction of 14 percent and that these cost savings persist. The savings were evident in the followup period extending two, three, and four years following the consummation of the transaction. Similarly, Spang et al. (2009)2 do find significant cost savings resulting from system acquisition. Their results suggest that pre-consolidation, hospitals in their sample had both higher costs and higher prices than the average hospital in the comparison group. They postulate that these factors may have driven these firms toward consolidation in an effort to become more efficient and competitive by reducing costs and lowering price. Conclusion Evidence of the impact of M&A on cost and quality of care is mixed and limited. Additionally, some studies maybe dated and its methodology might not be relevant in today’s health-reform driven landscape. General consensus among stakeholders is that consolidations do end up driving overall costs for the customer. This is mainly because even though larger hospital systems may be able to pass on cost savings and better quality to patients, the consolidated health systems also squeeze insurers for favorable reimbursements and, these insurers, in turn, pass on the costs to patients in form of higher insurance premiums.

1,2

Federation of American Hospitals

Hospitals M&A Impact on Patient Care

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Hospitals m&a impact on patient care