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Hospital Mergers, Acquisitions, and Partnerships Drive Several Benefits, Report Says

Analysis  |  By Christopher Cheney  
   October 14, 2021

Health systems and hospitals are under several pressures to increase their scale, Kaufman Hall report says.

A new report prepared at the request of the American Hospital Association (AHA) finds that there are several benefits generated from hospital mergers, acquisitions, and partnerships.

Many hospitals face challenges to maintaining their viability in a changing healthcare landscape. As of July 2021, the Cecil G. Sheps Center for Health
Services Research at the University of North Carolina reported that 138 rural hospitals had closed since 2010.

Mergers, acquisitions, and partnerships are often the best strategy for hospitals to pursue to continue serving patients and communities, AHA President and CEO Rick Pollack said in a prepared statement.

"America's hospitals and health systems—and the 6 million women and men who work there—are cornerstones of their communities, and that has never been more apparent than during the ongoing public health emergency. Some hospitals have found that partnerships, mergers and acquisitions were a necessary response to a changing environment in their community and have allowed them to maintain the vital services they provide each and every day to patients and communities," he said.

The new report, which was prepared by Kaufman, Hall & Associates LLC, says health systems and hospitals are under multiple pressures to increase their scale.

  • Demographic and economic factors are increasing Medicare's and Medicaid's share of the payer mix at hospitals. With Medicare and Medicaid paying below hospitals' cost of care, hospitals are under pressure to increase efficiencies of scale to reduce costs and control financial losses. With increased scale, hospitals can also spread fixed costs across more facilities, which lowers per unit costs of care.
     
  • Health systems and hospitals are entering value-based contracts that are crafted to reduce total cost of care. Assuming risk requires patient populations that are large enough to diversify risk.
     
  • The ongoing shift of care from the inpatient to the outpatient setting has led to disruptive competitors such as national retail chains that do not have the high costs associated with providing acute care. Health systems and hospitals need to achieve larger scale to ensure access to capital on competitive terms. Scale also allows health systems and hospitals to attract intellectual talent.
     
  • The coronavirus pandemic has had a negative financial effect on health systems and hospitals. According to Kaufman Hall, about a quarter of hospitals had negative operating margins before the pandemic. As of the beginning of 2021, the consultancy says patient volume decreases and increased pandemic-related costs have resulted in half of hospitals operating with negative operating margins.
     
  • Legislative and regulatory changes such as site-neutral payment policies and Medicare sequester payment cuts are likely to place new financial pressures on hospitals.

The increased scale achieved through mergers, acquisitions, and partnerships drives three key benefits for hospitals and the patients and communities they serve, the new report says.

  • Boosting patient experience by investing in consumer-centric strategies that increase care access and convenience
     
  • Enabling value-based arrangements with payers that increase the affordability of care for patients
     
  • Helping hospitals ensure the most efficient use of resources by obtaining funds for capital improvements, innovation, and intellectual capital at favorable rates

Addressing financial struggles

A significant percentage of hospitals involved in merger, acquisition, and partnership transactions face financial peril, the new report says.

Kaufman Hall analyzed 463 hospital transactions between 2015 and 2019, with some of the transactions including more than one hospital.

  • About 20% of hospitals (92) cited financial distress as a primary factor in the transaction
     
  • Of those 92 hospitals, 31 of the transactions involved hospitals that had declared bankruptcy
     
  • The 31 transactions involving bankrupt organizations featured a total of 34 hospitals and only six of these hospitals have closed after the transactions

"Although not necessarily the right choice for all hospitals, partnerships, mergers, and acquisitions have been an essential tool for adapting to a changing environment. Hospitals will need continued flexibility to seek partners as they work to recover from the pandemic's impacts on their staff, operations, and
financial health," the new report says.

Christopher Cheney is the senior clinical care​ editor at HealthLeaders.


KEY TAKEAWAYS

At health systems and hospitals, pressures to increase scale include assuming risk in value-based contracts, which requires a large enough patient population to diversify risk.

For health systems and hospitals, increasing scale helps ensure the most efficient use of resources such as obtaining funds for capital improvements.

A significant percentage of hospitals involved in merger, acquisition, and partnership transactions face financial peril.

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