Resisting the Consolidation Frenzy
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This article appears in the December issue of HealthLeaders magazine.
Hospital consolidation is on a tear. Whether the trend is ultimately attributable to a need for health systems to work more collaboratively, to deliver economies of scale, to recapitalize, or, for the more skeptical, to develop greater contracting power with commercial insurers, the consolidation trend is collecting a huge number of hospitals under a dwindling group of operators and shows no signs of slowing.
But there are hospitals and health systems that are determined to stay independent. They may collaborate with other facilities to a greater degree and may borrow expertise from other systems in order to better integrate, but on a governance and asset-ownership level, they want to buck the trend for a variety of reasons.
Some see an element of panic in the recent wave of consolidation. As hospitals and health systems contemplate a drastic-though-slow-moving shift in their business models from volume- to value-based reimbursement, many leaders and boards wonder whether they will be able to survive that switch on their own. Based on a Booz & Company study and a conversation with Gary Ahlquist, a senior partner with the company, as many as 1,000 of the nation's roughly 5,000 hospitals will seek a merger within the next five to seven years. That shows that many leaders and boards don't appear to want to take the risk of continuing an independent existence. Ahlquist also predicts that hospitals can expect a revenue reduction of 20%–25% over the next 10 years, adding further fuel to the merger mania.
Hospitals and health systems seem to want to inoculate themselves against that revenue reduction by seeking safety in size. After all, it's reasonable that those most susceptible to pressure on revenues will be those that don't have the market clout to back up their reimbursement expectations. Of course, the merger trend puts different parts of the government at loggerheads, too, as the Patient Protection and Affordable Care Act seems to encourage consolidation based on the effect it's expected to have in coordinating care, while a possible negative effect of consolidation is its impact on rate contracting with commercial insurers, which draws the attention of monopoly-busting priorities of the Federal Trade Commission.
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