Using survey data provided by the American Hospital Association, a new report identifies benefits to hospital mergers and refutes the notion that consolidation raises prices.
Hospital mergers reduce operating costs with newfound efficiencies and economies of scale, according to a study paid for by the American Hospital Association.
"Hospital leaders consistently indicated in interviews that hospital mergers can result in substantial benefits, and their views are supported by our econometric analyses," wrote the report's authors, Monica Noether, PhD, and Sean May, PhD, vice presidents at Charles River Associates, a consulting firm that specializes in mergers and acquisitions, antitrust and regulatory support.
The report, based primarily on survey data provided by the AHA and supplemented by data compiled by Irving Levin Associates, identified three drivers in mergers and acquisitions that reduce operating costs:
- Achieving economies of scale
- Reducing capital costs
- Boosting clinical standardization
"While these cost reductions most greatly benefit the acquired hospitals, the benefits of scale inure to the acquirers as well. These views are confirmed in our empirical analyses, which find a statistically significant 2.5% reduction in annual operating expenses per admission at acquired hospitals," the report says.
Economies of Scale
Achieving economies of scale comes from reducing fixed costs such as supply chain, business office administrative functions, and facility management, the report says.
"One hospital leader noted that his system operates about 70 imaging centers; outfitting all of them with standardized equipment reduces the costs associated with parts, maintenance, and staff training as well as enabling achievement of lower prices on the equipment purchases," the CRA study says.
Capital Expenses
Hospital mergers cut capital costs through two mechanisms, the report says.
"First, the costs to access capital in municipal bond markets are lower because larger systems typically receive higher ratings (and many smaller hospitals and systems are not rated at all)."
"Second, mergers can often allow capital expenditures to be avoided. Frequently, the acquiring hospital is highly utilized and faces capacity constraints. This is particularly the case when the acquirer is an academic medical center (AMC) with a well-established brand."
Hospital executives "universally indicated that some of the most significant savings that they have achieved through mergers result from the standardization of clinical processes," the report says.
The study cites multiple financial benefits from clinical standardization, such as fewer avoidable patient complications, reductions in supply and equipment costs, and lower staff training costs.
Notably, the study contradicts one of the most widely posed economic criticisms of hospital mergers—the contention that medical-service pricing usually increases after hospital mergers because the transactions boost the bargaining power of the merged hospital organization with payers.
In recent years, opponents of hospital mergers have cited the risk of higher medical-service pricing to successfully block M&A deals. In a 2015 Massachusetts Superior Court ruling against Partners Healthcare's attempt to acquire several hospitals in the Boston area, the ruling cited the likelihood of higher pricing as a main justification for scuttling the deal.
The report acknowledges that the Federal Trade Commission "has stated that it believes that most benefits can be achieved through looser affiliations that do not involve meaningful financial integration or joint contracting."
Post-Acquisition Price Spikes Refuted
The report concedes that its finding on the impact of hospital mergers on medical-service pricing is statistically limited, but they report a "statistically significant decline in revenue per admission following acquisition, which appears inconsistent with studies that link hospital consolidation with higher prices paid by managed care organizations."
As noted above, they found that hospital mergers reduced operating expense per admission 2.5% at acquired hospitals. They also found that hospital mergers decreased net patient revenue per admission 3.9% at acquired hospitals.
"Although these estimates suggest that mergers are associated with larger decreases in revenue than in costs, the precision of the estimates is such that the magnitudes of the reduction in costs and revenue are not statistically different from each other," the report said.
Christopher Cheney is the CMO editor at HealthLeaders.