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In the past 12 months, Definitive Healthcare tracked more than 330 reports of merger and acquisition activity among U.S. hospitals and care facilities. The healthcare market continues to consolidate at a rapid pace, with megamergers like CVS-Aetna and CHI-Dignity Health (CommonSpirit) becoming increasingly common.
Why are payors and providers investing in acquiring and merging with their peers? We've compiled the top three trends in hospital market consolidation to help you understand this complex and interconnected industry.
Cost reduction for patients and providers is arguably the primary driver for healthcare mergers and acquisitions. Interestingly, mergers may benefit the acquired facilities more than the buyer. According to a report from NCCI Insights, acquired hospitals reported reductions in operating costs between 15 and 30 percent through the economiesof scale. In addition to coordinating care delivery between inpatient and outpatient centers, consolidation can also help prevent patient leakage through referrals. Mergers and acquisitions reduce the need for out-of-network referrals, keeping patients and payments in-network.
However, lower operating costs do not always equal lower prices for patients receiving hospital services. The same NCCI report claimed hospital mergers increased the average price of hospital services by 6 to 18 percent. Additionally, an analysis of 25 metropolitan areas with high consolidation rates showed that the average price of a hospital stay increased by 11 to 54 percent, according to a study commissioned by the New York Times. Of the 19 metropolitan areas highlighted in a graphic from the report, only 5 showed a decrease in the cost of an average hospital stay.
In theory, healthcare consolidation should improve care outcomes by coordinating care delivery, reducing the frequency of duplicate clinical services, and improving preventative service provision – particularly for conditions like diabetes and stroke.
According to a 2015 study, hospital mergers may increase the likelihood of intensive surgery without improving patient outcomes. This is in contrast to another study from 2017, which reported 30-day readmissions rates for heart attack, heart failure, and pneumonia all dropped by about one percent. In addition, studies have shown that competition in the healthcare market actually has positive effects for patients, particularly in areas such as care access and mortality rates.
Hospitals are under constant pressure to keep costs down and pass those savings on to patients. These financial incentives, spurred by value-based reimbursement, are encouraging hospitals to prioritize efficiency, cost management, and sustainable practices. Consolidation enables provider organizations to have tighter control over care costs and outcomes across facility types, as there is minimal need for out-of-network referrals, potentially improving VBC performance.
Two of the greatest expenses for hospitals are supply chain spending and staffing and labor costs. Larger networks have more power when negotiating pricing with suppliers. Rather than relying on regional GPOs, a bigger health system can leverage its size and cut out the intermediary. Additionally, partner facilities and health system members could share physicians, reducing the need for hiring new staff in a market that is already seeing provider shortages.
Another common trend is that of similarly sized organizations merging -- usually large health systems and payors. In 2017, five megamergers were valued at more than $5 billion, and ten hospital mergers and acquisitions were valued at $10 billion or more. Between 2016 and 2017, the value of healthcare consolidation activities increased by nearly 150 percent, for a total of $175 billion.
In 2018, Walmart and Humana made headlines when the shopping center announced a plan to acquire the insurance provider, following in the footsteps of CVS and Aetna. Experts believed this new partnership could sharply impact the cost of pharmaceuticals for Humana subscribers, as well as improve the care offerings at Walmart's retail clinics. The announcement was met with antitrust concerns, like that of the failed merger attempt between Aetna and Humana in 2017.
Last year also saw several mergers and acquisitions between prominent pharmaceutical companies. In June 2018, Amazon acquired personalized medicine delivery service PillPack, improving the convenience of pre-packed and shipped prescriptions for consumers. The CVS-Aetna merger was finalized in November, after nearly a full year of fighting antitrust concerns and ironing out other details. Walgreens made a series of smaller splashes in 2018 and early 2019 with announcements beginning with the acquisition of Rite Aid and including a strategic partnership with Microsoft.
With initiatives like the Affordable Care Act, the federal government is offering care providers greater incentive to shift care delivery to the outpatient setting. The shift from inpatient to outpatient care for routine treatment and less complicated surgical procedures is well-documented, and for good reason: outpatient care tends to be less expensive and often leads to better outcomes than inpatient care.
Hospitals and health systems are investing in ambulatory surgery centers (ASCs) to capitalize on the shift in patient preference to outpatient care. Advancements in technology, such as arthroscopic surgery and telemedicine, are enabling the rapid growth of ASCs and the services they provide. These new capabilities, coupled with the removal of total knee replacements from the CMS inpatient-only list, are empowering patients to take control of where they seek care -- making the cost and convenience of outpatient centers even more appealing for patients and the organizations looking to acquire these facilities.
In addition to acquiring ASCs and clinics, hospitals and health systems are consistently buying physician groups. Incorporating physician groups into a hospital network offers physicians and other care providers flexibility in scheduling, which could help prevent physician burnout and turnover rates. Like with outpatient centers, physician group acquisitions expand service offerings available to patients, reducing patient leakage and increasing revenue flow.
How can you use this knowledge of market consolidation to win contracts with hospitals and health systems? Join us for our Webinar: Selling to Hospitals in the 2019 Landscape on Tuesday, June 18 at 11am. Presenter Bobby Gleavy will discuss his most effective selling methods:
Want to learn more? Definitive Healthcare tracks intelligence on more than 8,800 hospitals and health systems in the U.S., including daily updates on industry news. Identify new opportunities by reviewing the latest merger & acquisition announcements and sort your target hospitals and IDNs using clinical and quality metrics.