Hospital Merger Mania Continues Unabated Signaling Permanent Market Shift
The New York Times recently reported news of a proposed merger between two of New York City’s largest hospital systems—New York University’s Langone Medical Center, which has 1,069 beds, and Continuum Health Partners, which includes Beth Israel and two campuses of St. Luke’s-Roosevelt and has a total of 2,180 beds. (New York Hospitals Look to Combine, Forming a Giant. A. Hartocollis, New York Times, June 6, 2012) Although not a done deal by a long shot—the hospitals must first receive federal and state regulatory approval—the proposed merger has garned a great deal of attention as it would create one of the largest health systems in New York City. Large health system deals like the prosed marriage between NYU Langone and Continuum as well as numerous others that have recently taken place across the U.S. have the power to significantly influence the market for health services. Thus, these deals are attracting increased scrutiny from the media, the public, and, of course, regulatory authorities.
Why Hospitals are Merging Now
There are numerous reasons why these deals are accelerating at this time. Like most mergers, the ultimate goal is to gain competitive advantage and increase market share among a dynamic and rapidly change marketplace. However, health care providers are usually reluctant to directly speak to such blatant business motives and generally prefer to play up the “integration drives quality” angle of these deals, which is certainly not untrue and must be considered in today’s environment where federal health reform law encourages greater integration and coordination. Yet, it is important to note that some studies by health economists show that hospital mergers actually have no effect on the quality of care, but do have a significant effect on the price that hospitals charge. According to a recent article by Avik Roy in Forbes (Goal of the NYU-Continuum Hospital Mega-Merger: Raising Prices), despite the fact that hospitals often claim that the reason for mergers is to improve care quality and integration while simultaneously reducing costs by creating economies of scale, the real driver behind most mergers is to force insurers and patients to accept higher prices. The potential for higher prices due to fewer market choices isn’t the only issue causing angst. Mergers in any industry are often accompanied by considerable disruption including staff layoffs, management and governance restructuring, and even changes in the organization’s basic mission and purpose. In the case of health care providers, proposed changes in womens’ health, reproductive services, and end of life care when religious-run health care systems acquire or form joint ventures with non-secular hospitals and health systems have resulted in public protests in several U.S. communities and have also given rise to public advocacy organizations like the New York-based MergerWatch, whose motto is “protecting patients when hospitals merge”.
Mergers Drawing Increasing Scrutiny
The health system consolidation trend has come come under scrutiny from the Federal Trade Commission (FTC), an independent agency of the U.S. government tasked with monitoring anti-competitive business practices that could potentially lead to monoplies. The FTC has recently taken a renewed interest in hospital consolidation and has ramped up efforts to look into how these deals might potentially lead to higher prices for patients and payers. The American Hospital Association (AHA), however, took a stand against the FTC in a recent letter to a House Judiciary subcommittee hearing on hospital consolidation. In essence, the AHA letter claimed that consolidation is the preferred method to build a necessary continuum of care and that anti-trust laws are outdated when applied to the reality of today’s health care market.
Potential Market Impact
Health system change and ongoing financial pressures are resulting in an increase in consolidation across the provider landscape. While we’ve seen this sort of merger mania among providers take place before—namely, around a decade ago at the height of the managed care trend--this time it’s different and we believe that provider consolidation is a signficant megatrend that will ultimately reshape the entire market landscape. According to Irving Levin Associates, there were a total of 86 hospital merger and acquisition deals in 2011, representing a 14.6 percent increase over the 75 deals that took place in 2010. In terms of total deal value, an article in HealthLeaders Media (Hospital M&As Continue Apace in 2011) puts the number at $7.3 billion, out of $236 billion of total health care-related M&A activity in 2011. There has been no sign of a let up in deal activity this year with a total of 23 deals reported in Q1 2012, an increase of 5 percent over Q1 2011, according to Irving Levin Associates. Thus, we think it is safe to presume that, whatever happens with the Supreme Court in June, the next two to three years willl be significant in terms of provider deal activity as hospitals and physicians brace for inevitable market transformation and increased cost pressures. In today’s “merge or die” environment, struggling non-profit and small hospitals and many physician practices, particularly small practices consisting of solo/partner and groups of five and under, are becoming more amenable to sacrificing their independence in order to come under the umbrella of a larger organization. Larger hospitals and medical groups generally have more robust capabilities with regard to overall clinical and financial operations, including financing options and capital spending, range of clinical services, IT infrastructure and facilities, staffing, and, especially, the purchase and management of advanced technology including health information technology (IT) systems.
How Mergers Affect Health IT Implementation
With regard to health IT, there are pros and cons to provider consolidation. In terms of the cons, the merges are coming on at a time of unprecedented pressures. Due to health IT requirements stipulated by MU as well as the prospect of the Patient Protection and Affordable Care Act (PPACA), both of which result in numerous complex IT projects with tight timeframes, most hospitals are well underway with IT projects regardless of whether a merger is in their future or not. Thus, hospital IT staff are completely tapped out trying to get their electronic health record (EHR) systems up and running to meeting Meaningful Use (MU) requirements. In order to quality for MU, some hospitals are doing system upgrades including installation of new applications and others are facing complete rip and replace including substantial IT infrastructure overhaul. At the same time, hospital CFOs, administrators, and HIM staff are struggling with ICD-10 implementation and changes in revenue cycle due to the prospect of value-based purchasing and bundled payments with widespread implications for IT applications and workflow processes. Add mergers to the mix and you have a situation that can substantially complicate the transition to EHRs and new RCM systems when two or more organizations with different vendors, IT infrastructures, cultures, workflows, and so on, come together in a merger. Hospital mergers seeking to create true integration and cost efficiencies often seek a single-vendor strategy, thus complicating IT system implementations and even potentially disrupting EHR upgrades and or even new installations resulting in wasted time and efforts. On the plus side, as previously stated, for some hospitals, the prospect of more resources to help rationalize and drive all of the various IT initiatives is a signficant benefit. This is particularly the case with small community non-profits and rural hospitals.
Disruptive market forces guarantee a bumpy ride for health care providers and the vendors who serve them. We believe that it is unlikely that the FTC and/or other disgruntled stakeholders will be successfully in significantly stemming the tide of hospital mergers. Ownership changes are inevitable and will result in considerable healht IT vendor displacement in the next few years.