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Point-Counterpoint: Is the Rush to Hospital Consolidation Rash?

Over the past couple decades, consolidation has become one of the most highly discussed business strategies in almost every industry — and with it, there have been varying results.

Consolidation has shown positive trends in some areas; for instance, when large organizations merge with smaller, local ones that may otherwise go bankrupt.

However, mergers and acquisitions have also had questionable results. The AOL-Time Warner merger in 2000 — the largest merger in U.S. history and hailed as "visionary" at the time — led to a flurry of layoffs, large financial losses and multiple run-ins with federal oversight agencies. Similar situations have been logged among airlines, communications firms and, most infamously, banks.

As the debate continues to rage over whether the M&A uptick is good or bad for healthcare, one thing is relatively certain: It's not going away. Data from Irving Levin Associates shows that in 2011, the latest year available, there were roughly 90 hospital mergers or acquisitions — the highest number in the past decade.

Here, several healthcare M&A experts and hospital executives try to pick apart what is happening in the M&A market, why it's happening and whether it will benefit the healthcare setting in the long term.

Point: Hospital mergers and acquisitions are natural. They are resulting from healthcare reform and could lead to system efficiencies.

When President Barack Obama signed the Patient Protection and Affordable Care Act into law three years ago, hospital leaders knew their industry would need to change. The new emphasis on accountable care, preventive measures and population health has led to the creation of accountable care organizations and clinical affiliations — in a way, ACOs and affiliations are soft versions of the M&A market and may be the stimulus to actual mergers.

"One of biggest problems in the next five to 10 years is the risk of transforming the culture of healthcare organizations," says Howard Peterson, founder and managing partner of consulting firm TRG Healthcare. "How do hospitals go from fee-for-service to global risk? How do they finance that? How do they change their practices and policies and people and structure? Particularly problematic is that smaller organizations simply are not going to have the wherewithal to manage transformation."

Healthcare reform has not been the only impetus, either, as sequestration and other proposed governmental payor cuts are forcing many hospitals to look for a partner to weather the storm.

"It's hard for me to answer whether I see [consolidation] as a positive or negative. I think it's a natural outcome of what we see happening in the industry," says Stephen Kimmel, CFO of Hendrick Health System in Abilene, Texas. "With healthcare reform, sequestration and all of these cuts, as in any other business enterprise, hospital systems are going to look at ways to find efficiencies through scale. I think what you see happening with mergers is a natural result of pressure that's being applied through all of the changes."

The efficiencies and economics of scale that Mr. Kimmel mentions are another frequently touted reason behind mergers. If hospitals are able to join forces under one umbrella, work together to buy supplies in bulk, and consolidate the revenue cycle and information technology departments, then consolidation may be a positive move. In addition, small hospitals are suddenly able to access more capital at cheaper interest rates and negotiate better deals with private payors due to the sway of a larger parent organization.

"When people look at hospital consolidation within the lens of lowering healthcare costs, there are some that look at it differently," says Brian Sanderson, managing partner of healthcare services for Crowe Horwath LLP, who has worked extensively with academic medical centers and independent hospitals. "It's not about, 'Let's capture more market share.' Hospitals that benefit are more focused on efficiencies, levering purchasing contracts and the actual financial aspects."

Mr. Sanderson adds that the current environment may lead to other societal efficiencies, such as reducing duplicative service lines, which had proliferated in the previous two decades.

"I do think there's going to be a lot of forced efficiency," Mr. Sanderson says. "For example, two hospitals with duplicative services within a reasonable driving distance — is it realistic to keep both services at both locations open, or do you focus one on orthopedics and one on cardiology?"

Mr. Peterson of TRG Healthcare has served in various hospital executive roles over the years. He was CEO of Penn State Milton S. Hershey (Pa.) Medical Center and COO of the University of Michigan Medical Center in Ann Arbor. He says, ultimately, hospital consolidation will affect every healthcare environment even though community hospitals want to stay independent. Three small hospitals had already declared bankruptcy this year, as of March 20, and for others in the future, merging with another organization may be the answer to avoid going under.

"Healthcare is local. If you lose sensitivity to the local market and what its needs are, then you're going to do a worse job of fulfilling those needs," Mr. Peterson says. "Small hospitals want to stay independent because they want that sensitivity, but being sensitive to local needs of a local market is not the same thing as maintaining local control."

Counterpoint: The current rate of consolidation will lead to market monopolies and oligopolies, which may not benefit patients, and hospitals may be in over their heads.

In March, a panel discussion hosted by the American Enterprise Institute featured three health policy academics who found that since 1994, there have been more than 1,000 merger and acquisition deals in the hospital market. This shift, the panelists argued, has allowed providers to charge skyrocketing prices and has led many to believe there is a "humongous monopoly problem in healthcare."

A report from America's Health Insurance Plans, the lobbying arm of health insurers, found a similar picture, saying inpatient hospital prices have risen an average of 8.2 percent between 2008 and 2010 — right as hospital mergers have picked up to historic levels.

In addition to pricing questions, Paul Levy, former CEO of Beth Israel Deaconess Medical Center in Boston, recently wrote there are a few underlying issues with the increased merger and acquisition activity among hospitals and health systems. A McKinsey study found roughly 70 percent of mergers fail in some fashion, some mergers can be achieved through looser affiliations or alliances, and many hospital leaders aren't prepared to run big systems that are the result of big mega-mergers.

"There is little in the training of people who have become CEOs of single hospitals to run groups of hospitals and associated physician practices," Mr. Levy wrote. "By the time they (or their boards) figure out what they don't know, they have wasted millions and reduced the overall effectiveness of the component organizations within the system."

Joe Lupica, chairman of Newpoint Healthcare Advisors, a consulting group that advises on community hospital acquisitions, agrees, especially on the point of affiliations. He says freestanding community hospitals, in particular, still have a lot to offer, and when problems arise, "merger" should not be a default answer.

"You can collaborate or affiliate on certain programs and have limited joint ventures, but this brute-force hammer of selling your hospital or doing a balance sheet merger is not always a solution," Mr. Lupica says. "Sometimes it is, but leaders can find a carefully designed collaboration path that does not rely on the brute force of a merger. You can have a laundry affiliation with another hospital because they have better equipment, all the way down to full balance sheet integration."

While community hospital acquisitions represent a majority of the M&A market, mega-mergers have made the biggest headlines in the hospital world as of late. Scott & White Healthcare in Temple, Texas, and Dallas-based Baylor Health Care System announced a merger. Newtown Square, Pa.-based Catholic Health East and Livonia, Mich.-based Trinity Health did the same. Beaumont Health System in Royal Oak, Mich., and Henry Ford Health System in Detroit are exploring a merger as well. These types of deals have begged the question: Will these health systems become synonymous with the notoriety of airline and banking mergers gone awry?

"Generally speaking, we know this with most industries — be it airlines or healthcare or pharmaceuticals — consolidation always has a promise of savings, but rarely do the savings make it back to consumers," says Mark Meyer, CFO of Grady Health System in Atlanta. "The few [providers] that are left have more control over the market, and there is less competition to allow demand to control pricing because there are fewer competitors in the market."

"Is [consolidation] going to improve healthcare? I'd be skeptical," Mr. Meyer adds. "There are enough initiatives under way that will improve the quality of healthcare and focus on the patient experience without consolidation…Are these moves going bring about better quality or patient satisfaction or more of a focus on employee engagement? Some might say that, but I have my doubts."

Not so cut-and-dried

It's difficult to break down the debate of hospital consolidation into two areas because, as Mr. Sanderson of Crowe Horwath says, a large gray area occupies the space between the black and white extremes. For small rural hospitals and independent community hospitals, leaders don't want to be left alone when the healthcare reform party is in full gear.

"There are organizations that are taking the dance when they are asked, because [other systems] may not ask you again," he says. "You don't want to be without a dance partner."

At the same time, hospitals executives that decide to pursue any type of deal — from a merger to a loose affiliation — have to explore every angle of the issue, especially how it will impact their communities and patients' access to care. Regardless of whether the M&A market is booming, hospitals cannot oversimplify their individual circumstances and immediately run to the nearest buyer.

"There are several data points to consider before hospital leaders make a long-term decision that could change the quality of life in the community, and they have to think carefully," Mr. Lupica says. "There may be a good reason to merge or affiliate if you're in a quest for excellence or managing risks — operating risk, capital risk, reimbursement risk. But there's also the risk of picking the wrong partner. The idea here is, keep the short-term and long-term in perspective."

More Articles on Healthcare Consolidation:

Private Equity and Non-Profit Hospitals: Strange Bedfellows or Saving Grace?
Is Bigger Always Better? Exploring the Risks of Health System Mega-Mergers
More Than 1k Mergers Recorded in U.S. Hospital Sector Since 1994

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