M&A Forecast: 1 in 5 Hospitals to Realign Over Next Decade

As senior leaders at hospitals and health systems make drastic changes to their business models, they face unprecedented upheaval. The level of disruption to this highly regulated industry is unmatched compared with previous shocks such as the move to DRG payments by Medicare in the '80's, or the HMO explosion of the '90's.

The fact is, the incremental changes that hospital boards and CEOs are implementing around cost control, coordination of care, and expansion of the primary care base are not likely to be enough to maintain independence for a large percentage of hospitals and health systems.

That's evident simply from reading the daily news. You can count on seeing a merger or two, and big ones, pretty much weekly, as hospitals and health systems try to adjust to drastic expected declines in reimbursement over the next 10 years or so.

The news is coming so fast and furious that we're doing frequent "M&A Roundup" stories to effectively report on them. There are four mergers in this story alone. Unprecedented. 

So what do we have to look forward to as reform progresses? More of these tie-ups, for one thing, just to adjust to the new revenue reality.

I had a revealing chat recently with Gary Ahlquist, senior partner with Booz & Company in Chicago. He had me flabbergasted when he suggested that hospitals can expect a 20%-25% decrease in revenue over the next 10 years.

And further, he predicted that up to 1,000 hospitals (that's around 20% of the number of hospitals in existence in the US) will be realigned or reaffiliated during that period of time. Given the pace of consolidation we've witnessed over the past few months, he may be underestimating those figures.

"The one caveat to that statement is uncertainty around what the posture of the feds will [adopt]  around consolidations," Ahlquist says. "However, there's some guidance from feds that the given margin pressures, we're talking now about survival."

Some hospitals and health systems will pursue these combinations from positions of strength and before they reach the point of doing deals only to ensure their survival. Part of that is because most acquirers won't be looking to your survival as the key to whether they decide to do a deal or not.

"The bottom line is that hospitals... standing alone... can't deliver quality of care that is appropriate and sufficient."

But mergers are not a panacea.

Outside the merger boom, hard work must take place on care solutions, Ahlquist says.

Another word for care solutions is so-called bundling, which is the subject of a lot of talk but not so much action outside of a few pilots and ad hoc arrangements between hospitals and health systems and employers, insurance companies and even Medicare.

But those solutions will become an imperative, Ahlquist says, and will become "a natural place to drive standardization from a consumer's standpoint."

Ah, the consumer. Many have long predicted that consumers would begin to shop for their healthcare based not only on quality, but on price.

Those predictions have proven, so far, to be premature. For one thing, the difficulty of comparisons between providers has thus far been a limiting factor, as has comparison of quality scores, although it's getting better.

The real driver may be the fact that as consumers foot more of their own healthcare bills through coinsurance and high deductibles, such comparability will be essential.

So while predicted revenue declines of 20%-25% are shocking, the news is not all bad. Absent internal reforms and repositioning, such declines would prove a death knell for many hospitals. Ten years is a long time—if you begin the work now.

"In order to make care solutions work, you need data from the payer and provider about the patient. The payer doesn't know much about what happens between patients and doctors," says Ahlquist.

"The provider doesn't know about patients because they get care outside the system. But together they do have the information they need. At one level, it's an absolute requirement in changing the system. More and more people are realizing that."