Under New Management: The Rise of Consolidation in Healthcare

Hospital consolidation is on the rise. Hospitals, private practices, and doctors’ offices are merging or being acquired at a rapid rate, changing the healthcare landscape in a myriad of ways. Hospitals often merge to create a hospital system, while other facilities may acquire physician practices to improve and simplify the treatment process. Between 2015 and 2016, hospitals acquired 5,000 physician practices. Consolidation can be a positive and negative for both patients and providers. Let’s explore the reasons behind this trend and what consolidation means for the healthcare industry as a whole.

The Rise of Healthcare Consolidation

Healthcare consolidation increased dramatically during the 1990s, only to slow at the beginning of the 21st Century, but today consolidation is on the rise once again. Between 2002 and 2009, hospital mergers and acquisitions averaged 55 deals per year. 2017 was a banner year for consolidation, resulting in a record 115 deals.

Consolidation can take many forms in the healthcare industry, including mergers, acquisitions, affiliation agreements, and facility closures. Mergers and acquisitions tend to be the most common forms of consolidation. In horizontal consolidation, two facilities that perform similar services will merge to create a hospital or provider system. In vertical consolidation, two companies performing dissimilar services will merge to create a pipeline of care. These companies are usually upstream or downstream of one another. For example, a hospital will acquire a physician practice to streamline the treatment and consultation process.

What’s Driving This Trend?

Changing financial incentives, the Medicare Access and CHIP Reauthorization Act (MACRA), and the Affordable Care Act (ACA) of 2010 are the main drivers of this growing trend. To reduce costs and the number of hospital readmissions, large hospital systems have started buying up physician practices as a way of moving patients from an inpatient to an outpatient setting. This increases outpatient revenue for the parent company, while securing referrals from individual physicians.

Recent legislation has also led to the formation of Accountable Care Organizations (ACO) within the Medicare program. Groups of doctors, hospitals, and other healthcare providers come together to create an integrated care system with the goal of improving patient outcomes and financial compensation.

  • The Case for Consolidation

Proponents for consolidation often say that it improves efficiency while reducing the number of duplicate procedures and tests. Studies show that hospital mergers can lead to operating cost reductions for acquired hospitals of 15%−30%.

If a patient sees multiple providers or specialists, all operating within different systems, information can easily get lost in the shuffle, leading to poor communication, increased costs, and duplicate procedures. Consolidation also makes it easier to implement the latest technology and new models for care.

  • The Case Against Consolidation

Opponents of consolidation say the resulting hospital systems have too much power in the market. Large corporations will own enormous swaths of the marketplace, putting the health of the nation in the hands of the few.

The recent merger of Beth Israel Deaconess Medical Center, Lahey Health, and several other hospital systems in Massachusetts has led to one of the largest hospital systems in the country, which now controls nearly one-half of all patient admissions in the state. Overall, this can lead to decreased competition and innovation in the healthcare industry.

While consolidation can help save these companies money, it can often lead to an increase in service prices. Studies show that hospital mergers increase the average price of hospital services by 6%−18%. With greater control of the market, hospital systems can increase their prices without worrying about competition.

What This Means for Patients and Providers

The rise of consolidation has led to a change in where physicians practice medicine. Once their practice has been acquired by a hospital system, providers will often practice inside the hospital. Before 2009, most physicians practiced in an office-based setting. Today, just 40% of physicians are office-based, while the percentage of hospital-employed physicians has grown from 40% to 48% of all physicians. Additionally, providers may have to adjust their operations once they’ve been acquired by a larger company.

With consolidation on the rise, patients may be forced to pay higher prices. Consumers may have fewer options when it comes to choosing a healthcare provider or hospital system. They may have to visit the local hospital instead of driving to their doctor’s office.

The rate of consolidation continues to climb at a steady pace within the healthcare industry. With pros and cons on all sides, this trend will likely affect consumers and providers in different ways.

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