Despite recent news headlines about merger failures, many M&A deals are successful. Recently acquired hospitals improve their financial and operational performance more after a deal versus their non-acquired peers, one study shows.
Good news comes from the merger and acquisition front in healthcare this week. Deloitte has published a special report that shows hospital and health system mergers (PDF) in 2007 and 2008 have been increasingly successful—at least if the metric is significantly improved hospital profit margins. I encourage you to devote some time to it, because if other statistics are to be believed, some 20% of you will be directly involved in a merger or acquisition over the next decade.
Despite several high-profile merger flameouts of late—see here, here and, most recently, here—it's clear that healthcare has to consolidate. Smaller hospitals and systems are simply being priced out of the market, and not only from a competitive standpoint. Smaller hospitals and health systems are looking for partners because compliance with a raft of new incentive-based reimbursements, not to mention coding and other technology requirements, is much more difficult for them than it is for the big guys.
Think of what happened when Wal-Mart and a few others took over retail from smaller organizations over the past few decades. There's not a direct correlation, but the similarities are there. It's also clear from the Deloitte study that despite frequent news headlines about merger failures, many are doing it well.
Though Deloitte is far from the last word on the prospects of hospital mergers, its findings are that the financial and operational performance for recently acquired hospitals improved more post-deal than their non-acquired peers. This discovery flies in the face of evidence over a longer time period than the Deloitte study, that in using the same metric, less than half of mergers overall are successful. Why I even wrote about that very topic here in this space several months ago, based on another study that looked at hospital and health system mergers and acquisitions.
So two well-respected organizations, with reams of research to back them up have come to two seemingly opposite conclusions. What's the truth?
Likely, both are true, from a certain point of view. The Booz study (PDF) I cited in October looked over a much longer time period than Deloitte's more recent study. While Deloitte examined only mergers that occurred in 2007 and 2008, with information on the success of the mergers until 2010, the Booz study covered 1998–2008.
Assuming better performance in later years, as Deloitte's report suggests, shows that clearly, something has changed in that 10-year time period, skewing Booz's statistics negatively.
What is it? Unfortunately, the answer is not black and white. My best educated guess is that mergers lately seem more strategic—and more necessary, even if they fall through before completion. Systems are taking more chances in order to better prepare for an uncertain future.
The Deloitte study found that expansion of volumes is critical to value creation. Wait, you say, volumes have always been critically important to financial success. True, but volumes haven't been limited in the recent past in the way that CMS and increasingly, commercial payers, are limiting them.
Increasingly, there's good volume and bad volume. For lack of a better term at deadline, let's call this metric "volume quality." That is, 30-day readmissions are "bad volume," because no matter the payer, those readmissions are being punished financially in ways they haven't before.
And those punishments are real. Hospitals that readmit within 30 days for the same condition not only lose reimbursement for that admission, but they incur sometimes very high costs for treating those patients a second time.
Organizations with high "volume quality" seek others who have the same commitment and means to achieve it, or they seek bargains from those who are bad at volume quality, but just need the resources of a national chain that has figured out how to improve it without massive investment. Call it transferable institutional sophistication, whether it comes from scale or a proven track record, or both.
The "volume quality" metric is just one example of the increasingly complicated ways hospitals must compete with each other and with quality standards to achieve good reimbursement.
The Deloitte study also points out the increasing interest in acquisitions of hospitals not only by for-profit chains, but also by venture capital funds and other nontraditional acquirers, whose allegiance to shareholders outweighs any other influence.
Value creation, therefore, is now a central reason for mergers to take place. In healthcare it hasn't always been so high on the list of measured "outcomes" from a merger, if you will. Deloitte notes a significant difference in financial performance when the acquisition is by a national chain rather than a local or regional one.
Sure, increased merger success of late has something to do with the increased rigor, scale, and, yes, on accountability being forced on what has been largely a nonprofit industry for the past 100 years or so.
Whether they're designated for tax purposes as nonprofits or not, profits matter for every hospital—a lot—and hospitals are getting a lot better at extracting it. Especially those, it seems, who serve shareholders first. Whether that's good or bad for healthcare is another discussion.
Philip Betbeze is the senior leadership editor at HealthLeaders.