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Consolidation Comes with Benefits (and Costs)

Philip Betbeze, for HealthLeaders Media, October 16, 2013

Still, even health system CEOs in relatively stable markets and who are not looking to grow through acquisition are not so sure monopoly is not on the minds of at least some players orchestrating merger activity in healthcare. After all, many hospital operators are for-profit companies, and allegiance to shareholders comes first.

And there has been an explosion of private equity operators in healthcare as these groups have acquired struggling hospitals and systems in an effort to turn around their finances and reap the benefits of consolidation. (See related story, page 14.) Even such nonprofit stalwarts as Cleveland Clinic and Duke University Health System have entered into affiliation agreements with for-profits, exemplified by Cleveland Clinic's "strategic alliance" with Community Health Systems and Duke's joint venture with LifePoint Hospitals, called Duke LifePoint Healthcare.

Bill Atkinson, president and CEO of WakeMed Health & Hospitals, an 1,100-licensed-bed nonprofit health system in Raleigh, N.C., says the insurance industry can serve as a cautionary tale for those who expect consolidation to reduce overall healthcare costs for the government, employers, and individuals.

"If you look at the insurance industry, there is stability in size," he says. "But the real snapshot is looking at insurance consolidation and asking if insurance costs went down. The answer is no, so what does that tell you? Where the money is going is changed, but it has ended up in the hands of the companies and has not generally trickled down to the people it should be about—the consumers."

"We'll all lose if consolidation is just an opportunity to squeeze out more margin," he continues. "You have to start with the assumption that the system needs to meet the needs of the patients in the community. This is not first and foremost in some organizations."

He says WakeMed, which reported 2012 total operating revenue of nearly $1.1 billion, with total margin of 8.10%, is content to focus on its local area, and if another system is looking to acquire it, it may have to wait a while.

"What it means is we're not always looking for the next economic angle," he says, and performing its mission of improving health in the local community "doesn't have to be about ownership."

He cites as an example Harnett Health System, a two-hospital system in nearby Harnett County that WakeMed manages and which just opened a new 50-licensed-bed hospital with help from WakeMed's A1 bond rating.

"We've not had to own it to make it a healthy system," he says. "We built that hospital with them. They wouldn't have had access to the loans to build it in our absence, but at the same time they didn't need us to own them to make that happen."

Still, Atkinson says the way his system operates isn't for everyone, and concedes that following "the economic angle" can produce value in healthcare as it has in other industries.

"There are plenty of organizations that have reduced cost and at the same time have produced value. Look no further than Amazon," Atkinson says. "The question is whether healthcare organizations will effectively use the resources they have to increase value overall. All of us have demonstrated time and time again in micro attempts that that can be done."

No longer hospital-centered

As Cleveland Clinic and others have demonstrated, integration and achieving economies of scale and scope are not dependent on ownership. In truth, the fact that headlines in healthcare are focused on hospital ownership is a bit of a relic. Inpatient care is no longer a growth area, given the focus on population health and treating patients in lower-cost settings engineered by both the Patient Protection and Affordable Care Act and commercial and employer emphasis on preventive care.

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