Healthcare Consolidation Lessons and a Prediction

There's a lot of interest in healthcare consolidation and what it takes to make them work these days. Many people, increasingly including myself, see a wave of consolidation coming to the healthcare industry. It might seem obvious that in an era of astronomical healthcare cost increases and the tsunami of healthcare reform looming, that consolidation might take hold.

But in healthcare, it's never happened to any momentum-shifting degree. Healthcare, despite many examples to the contrary, is still largely a mom-and-pop business compared to say, manufacturing or retail.

At the same time, healthcare hasn't faced a situation quite like this one before, if indeed as many expect, reimbursement is gradually ratcheted down over time. That, coupled with the high expense of data and clinical systems that help hospitals achieve better quality, safety, and efficiency, may well lead to a wave of consolidation unlike any we've previously seen.

Some experts I've recently spoken with are of the "I'll believe it when I see it," variety. These are the people who have seen the wars over the years. They remember failed predictions of consolidation from years past. They've seen the many times prognosticators have cried wolf over this issue and are in no rush to call for widespread consolidation simply because some commentator says it's different this time.

But what really sold it for me that this time it is different is the fact that so much growth is apparent in outsourcing the major functions of the hospital. If you haven't noticed, there's a high level of interest and commensurate capital raising that's going on in the private equity markets for companies that are essentially outsourcers of physician talent.

These 'hospitalist' companies, which manage a certain cadre of physicians for the hospital with which they have a contract of typically between three and five years—were mere startups a few years ago. Now they're big companies. And they're branching out into emergency and intensive care medicine. How long before they're employing teams of cardiologists on a scale unimagined in the past?

Never before have hospitals outsourced the management of such a key cohort to their success. What reason is there for a redundancy of administrative staff at such hospitals when that company can as easily manage their physicians as a large, multi-hospital system? There's money to be saved—and made.

I realize that my argument can cut both ways. Efficient outsourcing can also plausibly save the independence of the local community hospital and help it compete with its larger, more efficient peers. It's just that I think it's more likely to happen the other way around.