Summary

Mergers and acquisitions can be effective tools for hospitals to improve access, quality, and efficiency of care. By partnering with other healthcare organizations, hospitals can expand their service offerings, access a wider network of specialists, and better serve their patients. Additionally, consolidating allows health systems to achieve economies of scale that can help reduce the costs of medical services and supplies, including prescription drugs. On the other hand, the hospital network consolidation process is complex, expensive, and carries a high failure risk. A systemic approach, including a platform software technology strategy, helps mitigate those risks.

Why Mergers of Hospitals?

Kaufman Hall’s analysis reveals that 40% of affiliated hospitals have expanded their services following mergers and acquisitions [1]. For financially struggling hospitals, these arrangements can be vital in keeping them open and avoiding bankruptcy or closure. Integrating with health systems can also strengthen the continuum of care for patients and the community, leading to better outcomes and reduced hospital readmissions [2].

To elaborate further, the complexity and fragmentation of the healthcare system can also contribute to financial pressure as providers may struggle to find resources that are necessary for quality care. This problem is compounded by the fact that the US has one of the highest healthcare costs in the world. In addition, health systems often face challenges in attracting and retaining highly skilled clinicians and staff, which can lead to a reduction in the quality of care they provide. The list of significant challenges for healthcare providers also includes complying with local, state, and federal regulations, dealing with excessive administrative requirements from commercial payers, and implementing new care delivery and payment models prioritizing value-based care. Additionally, chronic underpayments by Medicare and Medicaid continue to place significant financial pressure on hospitals today. Despite ongoing discussions about payment reform, many industry experts agree that neither program currently provides adequate reimbursement for the full cost of providing care to its beneficiaries. Consequently, hospitals often grapple with these financial losses and search for ways to make up the difference.

The American Hospitalealthcare Association’s analyses of hospital acquisitions have found that the average acquired hospital experiences a statistically significant 3.3% reduction in annual operating expenses per admission, as well as a 3.7% decrease in net patient revenue per adjusted admission [3]. These findings are particularly noteworthy because they suggest that hospital acquisitions could be an effective tool for reducing costs in an industry where expenses continue to rise year over year. Recent research studies have also shown improvements in specific performance measures, such as mortality rates and patient satisfaction. For example, one study published in the Journal of Health Economics found that hospitals acquired through mergers experienced a 1.3 percentage point reduction in readmission rates compared to their non-acquired counterparts [4].  Other studies found that mergers and acquisitions were associated with improved patient outcomes and reduced hospital stay length [5, 6].

Risks of Acquisitions

Recognizing that being financially sustainable and providing high-quality care are not mutually exclusive goals is important.  On the other hand, several studies have shown hospital mergers result in higher prices by an average of 6% to 7% [7]. They found “no evidence of quality improvement” and “modestly worse patient experiences and no significant changes in readmission or mortality rates” following hospital consolidation [8, 9, 10, 11].

One of the biggest financial risks associated with an acquisition strategy is that the larger hospital network acquires revenue but then experiences a delayed exit at a lower multiple because of a delayed next acquisition. Longer Return on Investment (ROI) is a potential risk. Acquiring companies takes time and resources, and it may take a while to see a positive financial return on investment. With a longer ROI, the opportunity cost may increase in a domino effect as other potential investment opportunities are missed too.

Lower average Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) can also be a risk associated with acquiring other companies. The disparities in the systems and services between the merged companies can be very large and complex.  It may take a long time to integrate these systems and services, which may result in decreased profitability in the short term.

A Platform Business is the Base for the Systemic Mitigation of Acquisition Risks 

To mitigate these risks, a well-planned acquisition strategy starts with a strong, growing Platform Business. It forms the foundation to bolt on future acquisitions and build upon the existing value.

Platform businesses employ various tools to manage the risks effectively, including financial modeling to optimize the business case, due diligence to identify key drivers of success and failure, and talent management to ensure the best people are retained post-deal. By strategically planning and executing acquisitions, platform businesses systematically improve their chances of success, accelerate their ROI, and increase their EBITDA.

The Technology Requirements for the Platform System

With the acquisition of each new network participant, the healthcare network platform must adjust accordingly. As the healthcare network grows, it becomes increasingly important to identify and track centrally the enterprise-level cost and quality KPIs. The platform must be able to track these KPIs across all healthcare organizations to monitor the overall success of the network under a unified platform.

Scalability is not the only requirement for a healthcare network acquisition platform. The platform must also have centralized enterprise-level reporting and be able to process claims arriving from multiple EHRs and billing systems in real time. Centralized reporting not only helps with maintaining an overview of all healthcare organizations but also simplifies the process of managing, analyzing, and making solid operational decisions from the wealth of data obtained through the acquisition process.

A platform that can handle multiple EHR and billing systems is essential to remaining competitive in the healthcare market. By providing this integration functionality, patients’ information can remain streamlined and up-to-date, and healthcare providers can offer optimal care.

In addition to the critical elements listed above, the healthcare network acquisition platform must prepare for the next acquisition and address the challenges that come with it, such as an increase in average billing costs.

One of the most significant challenges faced with healthcare network acquisition is dealing with different EHR and billing systems. Creating cohesion between disparate systems can be challenging, delaying workflow streamlining and communications improvements that are necessary to handle the complexity of a growing healthcare network.

In conclusion, healthcare network acquisition strategies require state-of-the-art platform capabilities, including scaling up with every acquisition, centralized enterprise-level real-time reporting, and processing claims from multiple systems. Healthcare providers can offer seamless patient care in a complex and continuously expanding environment by providing all these features under a single platform.

References

1. KaufmanHall, Partnerships, Mergers, and Acquisitions Can Provide Benefits to Certain Hospitals and Communities, October 2021
2. Anu Singh, 2022 M&A in Review: Regaining Momentum, January 12, 2023
3. Fact Sheet: Hospital Mergers and Acquisitions Can Expand and Preserve Access to Care, American Hospital Association, Accessed on May 31, 2023
4. Jiang et al. Quality of Care Before and After Mergers and Acquisitions of Rural Hospitals, JAMA Netw Open. 2021;4(9):e2124662
5. Bruch et al., Changes in Hospital Income, Use, and Quality Associated With Private Equity Acquisition, JAMA Intern Med. 2020 Nov; 180(11): 1–8.
6. May et al., Hospital Merger Benefits: An Econometric Analysis Revisited, American Hospital Association, August 2021
7. Melanie Evans, Hospitals Merged. Quality Didn’t Improve, The Wall Street Journal, Jan. 1, 2020.
8. Zack Cooper et al., The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured, The Quarterly Journal of Economics, Volume 134, Issue 1, February 2019, Pages 51–107, https://doi.org/10.1093/qje/qjy020
9. Arthur H. Gale, MD, Bigger But Not Better: Hospital Mergers Increase Costs and Do Not Improve Quality, Mo Med. 2015 Jan-Feb; 112(1): 4–5.
10. Robert Pearl, M.D., 3 Reasons Hospital Mergers Fail, Forbes, Jan 28, 2020,
11. Beaulieu et al., Changes in Quality of Care after Hospital Mergers and Acquisition, The New England Journal of Medicine, Jan 2020

A Future Book Publication Note: 

This article is a chapter in the forthcoming 2nd Edition book “Medical Billing Networks and Processes,” authored by Dr. Yuval Lirov and planned for publication in 2024.  We will post more chapters on this blog soon.