There is a rapidly growing trend in the healthcare industry toward mergers and acquisitions, but not so much for financial reasons as most expect. Since 2010, there have been 561 hospital mergers, with the result being that healthcare markets are becoming more and more concentrated. Many of these are not small or insignificant mergers – all partners in the four 2017 mergers having annual revenue figures in excess of $1 billion.
There’s a different kind of strategy behind these mergers. Some medical centers that are bogged down with operations at or approaching full capacity are seeking partners within their respective communities to relieve some stress so they can focus on the more complicated cases with higher acuity.
Additionally, the consolidated health systems would have much greater bargaining power to negotiate better rates from insurance companies, which could result in a bigger revenue stream. The increased visibility and stature of mega-hospital systems makes them more appealing to potential patients, who would presumably have increased confidence in the care they receive.
As recently as August 2017 one of the largest mergers in the healthcare industry was announced. UNC Health Care is merging with Carolina Healthcare to create the biggest non-profit healthcare organization in the country, with 50 hospitals joining the combined network and a total of almost 100,000 employees. In effect, the two largest healthcare organizations in the state of North Carolina will now become its single largest healthcare entity, assuming a new corporate name and being jointly managed.
In July, a group of hospitals merged in Massachusetts for the purpose of having greater leverage in competing with Partners HealthCare, the state’s largest health organization. The signatories to the merger were: Beth Israel Deaconess Memorial Center, Lahey Health, New England Baptist Hospital, Anna Jacques Hospital, and Mount Auburn Hospital, with a total of 13 hospitals comprising the new healthcare entity. Interestingly, Partners HealthCare is itself attempting to acquire a new partner, Care New England Health System, although the transaction has been bogged down and has yet to be finalized.
In Minnesota, Fairview Health Services made a big merger move earlier this year, as did Pittsburgh’s UPMC Health System, both of which are multi-billion dollar health care companies. With several months still to go in the present calendar year, it seems likely that there will be more mergers and acquisitions to come in the healthcare industry because all organizations are beginning to see the value inherent with having at least a regional presence, if not a national one.
All these mergers sound great for patients and healthcare employees, with more services being provided for patients and more efficiency being gained by the organizations themselves. So where’s the rub? Some industry observers feel that the rise of the consolidated mega-hospitals will mean a general decline in the numbers of community-based hospitals, with outlying residents having fewer opportunities to reach available health care facilities.
In assessing a number of failed mergers among businesses of all types, the Harvard Business Review found that many failed mergers were simply due to inadequate due-diligence investigations and overly optimistic anticipation of combined revenues. With inflated estimates of combined earning power, the bidding for merger partners is often extended beyond the new corporation’s abilities to recover such revenues. The result is major harm to corporate health, if not outright collapse.
A study conducted by KPMG discovered that 83% of mergers do not increase the return enjoyed by shareholders and that about 66% actually lose market share following a merger. Even though there may be a strong connection between partners in terms of services and products provided, it’s not a given that their partnership will automatically create a stronger, more powerful version of both.
Two of the biggest challenges to huge corporate mergers is in maintaining adequate communications among all employees and establishing a common culture between the two formerly separate entities. These issues can then trigger a problem with employee retention, with workers from both companies feeling major uncertainty and stress about their futures, preferring to move to a different environment. It happens often that management groups do not get out in front of these issues before they begin to affect the company’s health, and then serious issues begin.
Future role of mergers
The pitfalls notwithstanding, when mergers and acquisitions are successfully coordinated and a strong new entity emerges, the benefits to patients can be considerable. The American Hospital Association has determined that the wave of recent mergers has indeed resulted in some very positive advantages for patients that includes savings in care costs and improvements in the quality of provided care.
Mergers have been shown to decrease costs (as expected) due to economies of scale, and because of standardization applied throughout the larger network. Quality of care has increased because facilities can be upgraded and more services provided at the larger hospitals. The strengths that individual partners had before merging are expanded and focused because they have greater resources to pursue improvements in those areas.
While there may be localized reductions in services or facilities, the overall effect of mega-mergers in the healthcare industry would seem to be a positive thing for both the organizations and for patients. Consolidation can better meet the needs of patients today and install a foundation for the healthcare systems of the future.
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