Mergers Make a Comeback

During the 1990s, a wave of hospital consolidations swept the nation, resulting in higher hospital prices for consumers, according to research Town and others conducted on behalf of the Robert Wood Johnson Foundation. Their work revealed:

• Consolidations between 1990 and 2003 raised hospital prices, which translated into higher insurance premiums for consumers. On average, premiums were estimated to be 0.5 percent higher than they would have been without the mergers of the 1990s.
• Price increases resulting from hospital mergers pushed people off the insurance rolls. Between 1990 and 2003, 3.8 million people did not purchase private insurance because of price increases attributable to hospital mergers.
• Consolidations do produce cost savings, although Town characterizes them as modest. The greatest cost savings come when hospitals merge operations, not just ownership.

"There are clearly a lot of potential efficiencies from these transactions," he says. "But most of them are associated with some sort of consolidation of services or departments, and that turns out to be politically very difficult."

In Muskegon, Mercy General and Hackley leaders have been careful not to set expectations of reduced costs.

"But we're going to hold the line on medical equipment purchases and capital investment rather than continue the arms race," Spoelman says. "That resonates with a lot of business owners, and they have been very supportive. We want to produce a consolidated entity that really is sensitive to the people who are paying the bills."

Lessons learned

The Federal Trade Commission first knocked on Evanston Northwestern's door two years after the Highland Park Hospital merger was completed. It filed its complaint two years later--and the final settlement came three years after that. Antitrust lawyer David Marx says the long-running case offers a cautionary tale to other would-be merger partners:

• Be careful how you say what you say. Avoid using words that emphasize anticompetitive benefits, such as increased bargaining power with payers or market dominance. Focus instead on procompetitive potential, such as cost savings, expanded market reach or the ability to offer additional services.
• Keep the consumer top of mind. "It doesn't mean that the parties should not consider the effect of the transaction on themselves as well, but think about it from the perspective of the consumer," Marx says, "because that's the way the agencies are going to look at the transaction and evaluate it."
• Don't get greedy. The ENH case shows that the FTC can challenge a merger after the fact. "When it does, the commission will be looking for evidence that the merged hospitals increased their prices above competitive levels, Marx says. "If you're going to increase prices or change your pricing structure, don't do it all at one time."

Look to the future

Several trends may prompt hospitals to consider consolidation. In its most recent five-year forecast, the Healthcare Financial Management Association warned that financial stress will force more hospitals to close or be acquired. That prediction is one of several in HFMA's Healthcare Financial Outlook, 2008-2013, based on a survey of more than 100 financial executives and industry advisers.

Other insights from the five-year forecast:

• Healthcare delivery will continue its dramatic shift to nonhospital treatment.
• Hospital costs will be driven up by new regulations or compliance requirements that increase the demand for healthcare workers.
• The cost of supplies and pharmaceutical products will spiral upward because of continued development and marketing of preference items and new technologies.
• Medicare and Medicaid expenditures will fall in response to federal budget pressures.
• An increasing number of states will mandate coverage for uninsured patients.
• Health plans will see their bargaining power increase.