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3 Reasons Hospital Mergers Fail

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Aggressive mergers and acquisitions have been the hottest trend in the hospital industry for over a decade. Administrators and national hospital associations have defended these deals by promising they will lower costs and improve patient care. They almost never do. 

For years, studies have shown hospital mergers result in higher prices by an average of 6% to 7%. This month, a study published in the New England Journal of Medicine found “no evidence of quality improvement” along with “modestly worse patient experiences and no significant changes in readmission or mortality rates” following hospital consolidation. 

To better understand the difference between what hospitals say and what they do, imagine this scenario: Your alma mater announces a merger with your school’s biggest rival. At a joint press conference, university officials say the merger will lower tuitions and improve the quality of education. However, in response to internal pressures, both schools promise to retain all faculty and staff, keep all current classes, and move ahead with all capital expansion projects. 

Given this operational strategy, would you expect tuition costs to go down? Do you think educational outcomes will improve? Of course not. Therefore, when merging hospitals employ the same approach, why would anyone be surprised when prices go up and quality suffers?

As hospital-merger mania continues, here are three reasons industry consolidation will fail to improve American healthcare in the future:  

1. Cost containment isn’t the goal    

Across the country, hospital groups are getting bigger and more powerful through M&A. Their multimillion-dollar acquisitions are often prefaced by big promises to reduce waste, bolster efficiencies and, ultimately, pass the savings along to payers. It’s naïve to believe any of it. 

Hospitals don’t consolidate to cut prices. They do it to gain market control, which gives them negotiating leverage over insurance companies. After all, when you own most or all of the hospitals within 50 miles, you get to tell the insurers how much they’ll reimburse you. 

If hospitals really wanted to lower prices, they’d find ways to increase productivity or eliminate clinical redundancies. And yet, merger deals rarely include plans to cut staff, reduce duplicate services, close facilities or curb capital purchases (i.e., fancy new technologies or brick-and-mortar expansions) that add no clinical value. 

From California to Pennsylvania to Connecticut, savings from mega mergers fail to materialize. That’s because lowering prices for patients and purchasers was never the real goal. 

2. Without changes in care delivery, quality doesn’t improve 

The new Harvard study in NEJM confirms what many long suspected. Hospitals that consolidate rarely make operational changes that improve care delivery.  

Two factors known to raise clinical quality in a hospital are (a) greater specialization and (b) higher surgical volumes per procedure. Put simply, patients experience better outcomes, fewer complications and faster recoveries when surgeons narrow their focus—doing fewer types of procedures while performing them more often.  

That’s why patient-safety watchdogs like Leapfrog Group have established volume standards for both hospitals and surgeons. These factors go into the group’s annual hospital quality and safety ratings

For example, take a highly complex operation like esophageal resection (removing the esophagus) for cancer. According to Leapfrog, if your surgeon does fewer than seven (or if the entire operating team in a hospital performs fewer than 20) each year, the risk of something going wrong goes way up. 

So, if improving clinical outcomes is the goal of M&A, why don’t hospitals require greater specialization, insist on higher surgical volumes per procedure, close low-volume facilities and create centers of excellence? The answer is that hospital administrators worry surgeons who prefer to “dabble,” doing many types of low-volume procedures, will leave the medical staff and take their patients to another hospital. Of course, that would hurt the institution’s bottom line. 

3. The technologies that improve patient care often hurt the hospital’s revenues

Thirty years ago, hospital advertising was illegal. These days, it’s almost impossible to avoid. All over the nation, hospital groups use billboards and TV commercials to promote “robotic surgeries” and “3D printed implants.” 

These technologies, which sound “cutting-edge,” help attract patients and fill hospital beds. But they do very little to improve clinical outcomes or overall patient care (measured in mortality rates, readmissions and overall hospital safety). 

By focusing on flashy med-tech that helps increase revenues, hospitals overlook technologies that improve quality, lower costs and solve a major problem for patients in the process. 

Here’s the situation: On nights and weekends, when physician offices are closed, most people with medical problems have two less-than-ideal choices: Go to the ER and wait for hours to be helped or call the family doctor in the morning. 

The Mid-Atlantic Permanente Medical Group (MAPMG) offered patients a better option. At no additional cost, patients could connect with a doctor (one assigned to an advice center) via video technology. From home, the patient could discuss the problem and work with the doctor to figure out the best course of action. In 60% of these “after hours” visits, the problems were either solved immediately or the patients were able to safely wait until morning to see their personal physician. 

This tech-driven solution prevented unnecessary (and expensive) ER visits, reduced hospital admissions and boosted patient satisfaction. But this kind of approach works best when patient care is prepaid (meaning, there’s no financial incentive to provide unneeded services). Of course, since most American hospitals get paid on a “fee-for-service” basis, hospital administrators and board members would likely consider this solution a threat to revenues.  

Good For Business, Bad For Healthcare

Hospitals are the most expensive part of the American medical system, accounting for $1.2 trillion in spending each year, with costs rising almost 5% annually. 

We didn’t need a detailed academic study in the NEJM to tell us the hospital consolidation model is failing to lower prices or improve patient care. But thanks to this new and unbiased research, we’re left with no doubt. 

Hospital systems don’t acquire adjacent facilities for the sake of their patients. They consolidate for the purpose of raising prices, generating higher revenues and strengthening the bottom line. It’s a brilliant business strategy, but a failed healthcare solution. 

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