Q: Do you think hospitals will find success with this approach?
RC: I believe we will see a mixed bag. Being able to integrate these assets and operate them effectively is key to the ultimate success of the recent strategy. Some institutions may experience a bit of acquisition indigestion. Realizing the benefits of an integration strategy requires painstaking, detailed work. You need to remember that there’s a cost of management aspect controlling volumes and controlling usage and supplies. There’s also a cost associated with the IT piece of that in terms of integrating technology, EMR, etc. It’s not easy. Your typical hospital — it’s like an aircraft carrier. It’s a huge business enterprise with revenues from $80-$300 million. Some of the larger hospitals systems are billion dollar enterprises! These are large/middle market companies at the end of the day.
So you’re this big aircraft carrier and you’re trying to pick up a bunch of dinghies that have a completely different operating model. For hospitals, some instrument costs and other costs [associated with these acquisitions] are just rounding errors on the financial statement, but to make things work for these acquisitions of ASCs and practices, they have to capture the best of small and large business thinking.
I think what they are finding, as I speak to hospital executives and doctors alike, is that it’s often a different model to manage these sort of small operations compared to running the aircraft carrier.
Q: What other challenges are hospitals facing with these acquisitions?
RC: There’s the cultural change aspect. For example, running an efficient ASC-based outpatient surgery operation may require a change in mindset relative to the traditional hospital-based outpatient surgery approach. That has a lot to do with the culture of the nursing staff, the medical director, the physicians, etc. Efficiencies and driving patient throughput are critical performance drivers for ASCs and physician practices, but everyone needs to be pulling in the same and correct direction to achieve success.
Q: What is your outlook for hospitals taking this approach to acquisitions?
RC: Some institutions will find tremendous success as they reap the rewards of these bold strategic moves. My concern over the long term is will hospitals ultimately realize the strategic and financial benefits they are seeking via the recent run of acquisitions and asset accumulation?
Many hospitals were advised that if they want to compete in the next decade in healthcare, they need to buy or build x, y and z. They need to buy these practices, they need ASCs, they need EMRs and all of these different strategies. No matter what industry, healthcare or otherwise, vertical integration is not a “one size fits all” strategy. There’s currently a huge investment in construction, in the physical plant, by hospitals, but where some will miss the mark, I think, is it’s not just acquiring an ASC or buying practices and being done with them. You have to change the culture and properly integrate those operations into what you are doing to fully realize the value of the strategy.
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