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Dr. Robert Pearl: This is why some recently announced hospital mergers will fail

As part of a longer series for Forbes, Robert Pearl, MD, former CEO of Oakland, Calif.-based Permanente Medical Group, examines why recently announced merger and acquisition deals — like that of the proposed merger between San Francisco-based Dignity Health and Englewood, Colo.-based Catholic Health Initiatives, "look more like deals of desperation than long-term growth strategies."

According to Dr. Pearl, M&A typically serve one of two purposes: to create a more efficient organization or to build negotiating clout and raise prices for consumers.

While executives at both Dignity and CHI have said the proposed merger will increase operating efficiency and decrease costs, Dr. Pearl claims there is "little evidence … the hospital systems will accomplish either as a combined entity." In fact, he says the health systems are poised to do the opposite. Based on information released by both organizations, the merger will not result in any job cuts and retain co-CEOs, a move Dr. Pearl claims is "more politically expedient than operationally effective."

"So far, none of these prospective health systems have demonstrated a willingness to make the hard decisions necessary to improve operational performance," he writes. Instead, the organizations opt to raise prices and improve their negotiating power. While the move may have worked in the past, today's healthcare consumers are searching for alternative sources of care and turning to walk-in clinics instead of traditional emergency rooms because the cost of care is more affordable, Dr. Pearl says.

"Few organizations in any industry find consolidation and downsizing attractive. But the alternative, being disrupted by others, will prove far more painful for hospitals," Dr. Pearl notes. "Unless CEOs are willing to embrace strategies that focus on operational efficiency, their bottom lines will continue to erode as patients pursue more convenient and lower priced care elsewhere."

To read Dr. Pearl's full op-ed, click here.

More articles on transactions and valuations:
Massachusetts DOH to host hearing on Vibra hospital closure
Massachusetts DOH holds meeting on proposed Beth Israel-Lahey Health merger
4 hospital deals to watch in 2018

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