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4 Ways That Consolidation Hurts Healthcare

November 23,2015

This year and last have been characterized by big mergers and acquisitions (M&A). Marriott-Starwood, Walgreens-Rite Aid, Comcast-Time Warner, AT&T- Direct TV to name a few. And healthcare has been right there in the mix. Think Aetna-Humana, Allergan-Pfizer and Anthem-Cigna.

The Affordable Care Act has created merger mania in the healthcare industry. In 2014, mergers and acquisitions in healthcare reached record highs with the value of the transactions hitting $438 billion, or about 14% of all business M&A activity. With independent community hospitals finding it increasingly difficult to compete, one in five U.S. hospitals will seek a merger by 2020 as for- profit chains and large health systems swallow up independents. (1)

Hospital consolidation is being fueled by several forces including:

New payment structures and incentives for meeting quality, efficiency and patient satisfaction goals requires building a continuum of care that includes leaner hospitals and a more closely aligned medical staff.

Hospitals are seeking economies of scale and believe that a larger system can operate more efficiently than a single hospital.

Improved bargaining power and leverage with payers as a result of a larger geographic footprint and expanded market share through consolidation.

A shift from volume to a value-based system will reward hospitals for better care management. Under the same ownership, it is assumed that hospitals and physicians' interests can be aligned to develop patient-centered initiatives that improve care coordination and outcomes. (2)

The Downside Reality of Consolidation

While healthcare payment structures and reform may be the reason given for the “need” to consolidate, these are just 4 of the reasons why I believe hospital system buy-ups of regional hospitals and community clinics are actually hurting healthcare.

1. Consolidation impedes innovation. Competition is the catalyst for innovation. With extensive M&A activity resulting in a single player having a corner on the market, innovation suffers- just ask HP. Competition increases awareness of a product or service and that drives demand. Competing products and services force organizations to innovate through differentiation. Without competition the dominant player will determine the products and services offered rather than the market forces, and that might mean that innovative solutions take a back seat.

2. Consolidation adds layers of bureaucracy. Consolidation often does not result in a more streamlined, more efficient workforce but rather in superfluous decision makers. Bureaucracy increases and decision-making processes slow down. Stakeholders with various opinions necessitates that there be meeting after meeting to reach consensus, often at the expense of a window of opportunity. The organization becomes too big to manage and too big to be nimble.

3. Consolidation raises prices. While the intent of consolidation is to reduce costs and improve quality, large consolidators can use their size and market share to drive up prices. A Robert Wood Johnson Foundation study concluded that when hospitals merge in concentrated markets, price increases can be dramatic, often exceeding 20%, with these increases often matched by competitive hospitals. (3)

4. Consolidation affects culture. What works in Pittsburgh may not necessarily work in Pocatello. Hospital system consolidators often started with their assets in a defined geographic market, which they were intimately familiar with, but then bought up market share in regions that are vastly different than its core business. Decisions which were once made by local hospital leadership with a keen sensitivity to the community culture are now being shifted to a corporate entity which do not translate into affordable and relevant product contracts and management systems.

What Should Be Done?

The healthcare industry is in the midst of a re-engineering powered by the mantra that consolidation will improve care coordination, lead to better patient outcomes, streamline operations and reduce costs. It hasn't thus far and I don't see it happening. Instead, healthcare should change its acquisition model and do what it hasn't done to date. Rather than buying market share, invest in technology that will drive its innovation and make patient care better, faster and cheaper and, as a result, improve its competitive advantage and profitability. Until this happens, consolidation will continue to hurt healthcare.

Dana Allison

Chief Operating Officer

IM Your Doc

(1) Fierce Healthcare, Aug. 19, 2015, “How Healthcare Merger-Mania Hurts Competition, Care Access”

(2) Stratasan, July 10, 2013, “5 Forces Driving Hospital Consolidation”

(3) Robert Wood Johnson Foundation, June 2012, “The Impact of Hospital Consolidation”