Tuesday, November 12, 2013

Fwd: qotd: Deloitte’s take on hospital mergers and acquisitions

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-------- Original Message --------
Subject: qotd: Deloitte's take on hospital mergers and acquisitions
Date: Tue, 12 Nov 2013 12:41:31 -0800
From: Don McCanne <don@mccanne.org>
To: Quote-of-the-Day <quote-of-the-day@mccanne.org>

Health Care Current
November 12, 2013
My Take: The art of becoming big: the dilemma of mergers & acquisitions
in health care
By Mitch Morris, MD, Vice Chairman and National Health care Provider
Lead, Deloitte LLP

Consolidation has transformed nearly every U.S. industry—manufacturing,
retail, life sciences and hospitality — you name it.

The U.S. health care industry is well into another round of
consolidation. Already, according to the American Hospital Association,
3,007 hospitals (roughly 53 percent) are part of a health system. The
industry went through a round of consolidation in the 1990's but many
would say that, other than better access to the debt market, the
resulting health systems were, for the most part, holding companies and
not operators that had a focus on economies of scale or reduced costs.

According to Irving Levin Associates, in 2012 there was twice the number
of hospital mergers as compared to 2009 and this shows no sign of
slowing down. The Affordable Care Act (ACA) has served as a catalyst to
accelerate the consolidation movement, which seems to have taken on a
life of its own. Several trends are beginning to emerge across the industry:

* As reimbursement rates continue their downward trend and the costs of
maintaining infrastructure and regulatory compliance march ever higher,
the acute care industry seeks scale to better manage costs. Many acute
care players are beginning to reduce costs through economies of scale,
including the implementation of shared services, programmatic
integration and consolidation, selective sourcing and addressing
clinical effectiveness. The hope is that costs can be shaved by as much
as 30 percent, which is certainly not a goal that can be achieved simply
by headcount reduction.

* The stand-alone hospital may be an endangered species—many smaller
organizations simply cannot afford to invest in keeping up with
facilities, upgrading IT capabilities, attracting the best clinicians,
or playing an active role in the emerging payment model innovation game.
Nor do they all have the market clout to be considered essential players
in narrow health plan networks. As margins shrink and access to capital
becomes more difficult, even hospitals in affluent communities are
feeling the pinch.

* Health plans, which also continue to consolidate, are dipping their
toes into the provider business through the acquisition of medical
groups. Many are also developing capabilities to manage population health.

So is bigger better? How big is big enough? And can a system be too big?

It's not uncommon for mergers to fail to produce expected benefits for
the new organization or the communities they serve. But there is some
data to suggest that, by some measures of performance, hospital
acquisitions do produce a benefit. A Deloitte Center for Health
Solutions report, Hospital Consolidation: Analysis of Acute Sector M&A
Activity, recently studied hospitals that were acquired in 2007 and 2008
and found that, over several years, the acquired hospitals had increased
volumes and improved margins compared to a cohort of similar size (case
mix adjusted) that was not acquired. The benefit was most pronounced
when the acquirer was a national chain as compared to a regional system.

We are quickly moving toward needing a larger scale to successfully
compete. In the 90's we did not have the same economic or legislative
imperative to achieve higher value in a lower cost structure. Now we do.
And those organizations that don't get both the art and science of this
transition are likely to find themselves in a difficult position.


An online poll of Health Care Current readers (results as of 11/12/13,
1:47 PM EST):

There are many factors driving consolidation in health care, but I
believe the greatest is...

37.84% Margin constraints such as declining reimbursement rates and
costs of infrastructure

10.81% The increasing complexity of regulatory compliance

51.35% Companies vying to remain in a competitive market position

00.00% Consumer demand

00.00% Innovation and new technologies


Deloitte report: "Hospital Consolidation: Analysis of Acute Sector M&A
Activity" (26 pp):

Comment: This Deloitte report reveals that hospital merger and
acquisitions are occurring at an accelerated pace. Is that good or is
that bad? The answer depends on whether you believe that hospitals
should be run like businesses, trying to obtain competitive advantages
in the health care marketplace, or if you believe that they should be
run as a service organization, emphasizing patient care as its
predominant role in the community.

Consolidation through merger and acquisition increases market clout. It
is anti-competitive, giving the merged entity a larger share of the
market. Because of the ability to negotiate better rates, prices go up
without the need to provide additional services and amenities that might
be more attractive to patients. There is less need to improve quality
when competitors are less able to increase revenues that might be
allocated for their own quality improvements. Private sector
consolidation leading to oligopolies or monopolies result in the
opposite of what markets are supposed to bring us. They result in lower
quality and higher costs. Yet health care reform is supposed to bring us
higher quality at lower costs.

Maybe we overuse the example of a fire department, but it is a useful
analogy. We think of the fire department as a service organization,
always there when we need it to put out fires or to perform other
community service functions. We don't think of it as a business that
competes in the marketplace. We don't shop for fire services based on
price and quality. We simply pay for them through the tax system, and we
expect that the fire personnel will continue to take pride in the
services that they provide to the community.

Health care should be the same. Hospitals should be service
organizations, always there for when we need them. Instead of us
shopping prices, whether directly or through our insurers, they should
be financed through the tax system - using global budgets just as fire
departments do. And quality? That is automatic and stems from the
fundamental moral fiber of dedicated health care professionals, as long
as they are not corrupted by the business element that is increasing its
presence to fulfill its mission of using private market business tools,
such as consolidation, to maximize market share. Yet, consolidation of a
public service entity can be used to improve efficiency, quality, and value.

The readers of Deloitte's Health Care Current likely represent the
business oriented element in health care. It is interesting to see the
response of the online poll of what they believe is the greatest factor
driving consolidation. A majority believe that it is due to the business
goal of trying to achieve a better market position. A large minority
believes that it is due to declining margins - lower payment rates and
higher infrastructure costs. A few believe that it is due to greater
regulatory complexity. In general, these concerns that encourage greater
consolidation are more business concerns rather than patient service

What is particularly revealing is what these health care businessmen do
not believe are contributing to efforts to consolidate. They do not
believe that innovation and new technologies are primary drivers, though
they continually tout them as being one of the great products of a
business economy. When service is the goal, new innovation would be
adopted based more on patient benefit rather than on business
opportunities afforded by the technology. In a service model, efficiency
could be improved by consolidation if efforts are made to improve
efficiency by assuring optimal capacity - neither excess nor deficient

Most impressive in the current phase of health care evolution, wherein
the health care business community is foisting on us consumer-driven
health care, is that not one of these businessmen believe that consumer
demand is a major reason for consolidation. It is not about the patient;
it's about businesses and markets. We need to change that. We could if
we adopted our own single payer national health program, dedicated to
patient service.

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