Are Hospital Mergers Good for Patient Care? Or Just Good Business?
By Jack Yoest, The Catholic University of America
Small community hospitals, in the face of financial pressures, have recently been asking themselves some tough questions. Should these institutions sacrifice their independence and merge with other health care facilities? Would federal regulators work with them?
The fact of the matter is, in many cases mergers are now the only available option for a hospital to survive, treat patients and to improve patient care in a cost-effective manner. Today, bigger is better.
Years ago, when I worked as a company representative selling medical devices to hospitals, I witnessed first-hand the struggles that small independent hospitals face and how their business model makes it difficult to keep up with the competition.
One of my clients was a struggling small Community Hospital. A major employer in the county, it was beloved by the citizens. Even if their technology was dated, the devoted clinicians worked to maintain standards of care for the county’s aging patient population. The facility, however, was at risk of closure due to financial pressures.
Miles across the state meanwhile, the big and bustling general hospital was networked, and the medical staff were well-connected. Their Biomedical Engineering Department was busy installing state-of-the-art equipment and advanced upgrades.
Although both medical facilities worked equally hard to serve their patients, I, along with other vendors, treated the hospitals differently. The small Community Hospital paid one-third more for supplies than did the big General Hospital. Same products and services. Different prices.
I loved my customers., but the buyer at the larger hospital earned a deep discount for volume purchasing. I didn’t feel guilty. Big General was a part of a large system of hospitals linked together, enabling purchasing power and prestige, where I competed with other vendors. The whole was bigger than any single hospital and certainly commanded more attention than the modest Community Hospital.
Today, medical care facilities are merging to negotiate not only better pricing but to enjoy other competitive advantages in human resource management. Hospital consolidations can attract experienced senior executives to lead large enterprises. A common management structure is more efficient across multiple sites.
Even a larger hospital could benefit from restructuring. Years ago, one of my accounts was infected with political corruption where,
“[T]he organizational culture is one in which inefficiency and resistance to innovation have become entrenched; one in which incompetence is regarded with complacency and in which excellence is not rewarded…”
These problems could have been avoided under new management. Larger health care administrative systems also enjoy the pooling of standard protocols, and implementation and oversight of the best management and clinical practices among individual member facilities.
Human resource management and staff development are more efficient in the combined hospitals. And the economies of large-scale delivery of services have other patient benefits. The American Hospital Association (AHA) notes that, “results suggest that third-party payors appear to benefit from lower prices at acquired hospitals.” How might an insurance company be interested in care-giving consolidation?
There are significant cost savings of over 2%. in annual operating expenses. Improved patient care is documented in merged hospitals through reduced re-admissions, reduced length of stay in the hospital, better patient outcomes, and lower mortality rates. In, fact merging is a life saving move. According to a peer-reviewed article in the Journal of the American Medical Association reporting on rural communities; “in-hospital mortality among AMI [acute myocardial infarction] stays decreased from premerger to postmerger at merged hospitals (9.4% to 5.0%)…”
Indeed, rural areas might benefit most from hospitals combining resources. In 2020 a record-setting high of twenty rural hospitals closed. More than one-third of community hospitals are in these settings serving some 20 percent of the US population. Mergers keep hospitals open, increasing access to medical care and bringing increased investment for local community growth. Rural hospital investment attracts retirees and jobs.
The solution which carries the lowest risk and best results is allowing natural market forces to be managed through mergers. Critics remind us that concentration of power in a political or commercial environment can lead to abuse. But this risk can be reduced with transparency and accountability.
Fortunately under government oversight, “merger guidelines do not need major revisions.” Still, the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice have concerns about these consolidations. These agencies should consider research and minor updates to reflect changing market conditions and permit more mergers. The American Hospital Association wrote,
“Mergers enable hospitals to improve clinical care, lower costs, upgrade facilities, and offer new and higher quality services…it is essential that the antitrust agencies employ analytically sound merger guidelines that fairly account for the lifesaving benefits that hospital mergers produce. Changes to the guidelines should reflect years of scholarship that have documented these pro-competitive efficiencies.”
Politicians will speak of “bending down the cost curve of healthcare.” Hospital consolidations are the first step in effective cost containment. This will ensure that sales representatives — like my former self — will treat hospitals, large and small, the same.
Jack Yoest is an Assistant Professor of Leadership & Management at The Catholic University of America in Washington, DC. He is a former Assistant Secretary of Health and Human Services for the Commonwealth of Virginia and spent over two decades in the medical device industry.