Regulatory barriers that once thwarted any pressure felt by hospitals and health systems to consolidate and uncover economies of scale or scope have eased. But consolidation doesn't always come via an acquisition.
This article appears in the June issue of HealthLeaders magazine.
It's difficult not to notice that healthcare is undergoing a consolidation boom. For years, waste and danger to patients in healthcare has been blamed on decentralized and antiquated operations. Many experts say the industry has been long overdue for a period of consolidation that countless other industries routinely and regularly undergo.
But healthcare, perhaps among the most regulated of industries, has always effectively resisted this pressure, at least until recently. That high level of regulation, along with a desire to protect the local hospital, often has thwarted any pressure to consolidate to uncover economies of scale or scope. No longer.
"We're committed to helping reform healthcare by reforming ourselves to deliver value rather than volume," says Michael Connelly, president and CEO at Cincinnati's Catholic Health Partners. "In order to make those changes, you need economies of scale."
CHP, a nonprofit health system with 2012 net operating revenues of $3.8 billion, is pursuing that scale through an aggressive look at new partnerships and acquisitions. With 24 hospitals in Ohio and Kentucky, CHP is one of many organizations that are effecting consolidation in healthcare, but it's not always by acquiring assets.
In fact, it may be through strategic partnership that saves capital and avoids many of the regulatory hurdles that must be overcome in a full merger of healthcare entities. In February, CHP signed a letter of intent to create a strategic partnership with neighboring Summa Health System in Akron, which owns or operates eight hospitals in Ohio and had total revenue of nearly $1.5 billion in 2011.
Like some other creative partnerships now proliferating in healthcare, CHP will acquire only a minority interest in Summa when the deal is completed. Summa will retain local ownership and control.
Sign of strength
Prognosticators are fairly consistent in predicting that an increasing emphasis on population health strategies—which is intended, among other goals, to keep people out of expensive acute care environments like hospitals—will heavily pressure hospital revenues. In fact, some expect hospital volumes to decline between 20% and 25% over the next 10 years, which would lead to similar revenue losses in real terms.
So in addition to the focus on preventive healthcare and connected care across multiple modalities, economics will play a significant role in this remaking of the industry. And the hospital piece won't necessarily be the high-value target it once was.
Rather, the growth will be in the outpatient arena and, more specifically, on an organization's ability to effectively connect care among a variety of sites and treatment modalities, such that patients are effectively managed, not treated episodically.
Experts have identified effective care management as the key to cutting the unsustainable high cost of healthcare, so future-focused healthcare entities know that success will be measured less in terms of volume and more in terms of patients under effective management, which is where value—long divorced from the healthcare business equation—comes in.
The number of hospitals that are part of systems has increased from 38% two decades ago to 62%, according to a Navigant Consulting study, and that trend shows signs of accelerating following the passage of the PPACA. At the same time, the total number of independent hospitals decreased by one-third (to about 2,000). The odds, especially if you are a small presence, are not good that you can remain independent. So the question is: Does a partner need you?