Healthcare Merger And Acquisitions Guide
Tuesday, November 28, 2023
For health systems and hospitals, mergers and acquisitions (M&A) and other partnerships present opportunities to consolidate and maximize resources, scale operations, expand service lines, broaden reach into other markets, and better compete for healthcare consumers.
These transactions can also help fund health system investments in technology, ancillary services, or shared services by spreading expenses across a broader enterprise.
Mergers in healthcare can lead to significant shifts in patient care quality, access and costs, in some cases, not for the better. One recent study found hospital acquisitions led to increased readmissions and higher costs for patients. Healthcare industry consolidation can also catch the critical eyes of regulators, raising concerns about the violation of antitrust laws within a specific market.
Let's take a closer look at mergers, hospital consolidations and similar health care business transactions, the benefits of operational, financial and clinical integration of resources, healthcare acquisition challenges, and the role of technology in paving the way for successful partnerships.
Table of contents
- Overview: trends driving healthcare M&As
- Types of merger and acquisition transactions
- Benefits of M&A for the healthcare industry
- Challenges and risks in M&A transactions
- The role of technology in M&A integration
- Key considerations for leaders
Overview: what's driving the mergers and acquisition trend?
Health system and hospital mergers have increased in the U.S. market over the past decade. Some of the main drivers of hospital mergers are economies of scale, higher revenue generation, competitive advantage, and the desire or need to expand service lines in the same market or across new geographic markets. The reasons for health systems and hospital mergers vary based on the organizations involved, their operational and financial situations and their goals for hospital consolidation.
- Increasing network or market share: It is common for larger hospitals or health systems to engage in M&A transactions with smaller hospitals and other healthcare provider facilities to meet changing patient needs. With patient care increasingly shifting from acute care hospitals to outpatient settings to reduce health care costs, a health system might acquire a local hospital that has ambulatory surgery centers or an extensive network of clinics in its market. In doing so, the health system can continue to provide health care to the community but in a more cost-effective manner.
- Financial pressures: For acquired hospitals struggling financially, ownership by a health system or larger hospital can be a way to keep the lights on and doors open to patients, while the larger entity gets a foothold in new markets, gain access to more patients and/or physicians, or tap into specific expertise (e.g., oncology, cardiology). The Kaufman Hall M&A Q3 2023 Activity Report revealed how more than one-third of announced healthcare M&A transactions "involved a party for which financial distress was cited as a driver for the transaction."
- The April 2023 announcement that California-based Kaiser Permanente was acquiring Pennsylvania-based Geisinger Health falls into the category of value-based care mergers. Under the agreement, Geisinger is becoming the first health system to join Risant Health, a new nonprofit organization created by Kaiser Foundation Hospitals to expand and accelerate the adoption of value-based care.
Types of hospital consolidation and mergers
Given the current economic climate, hospital mergers can enable peer hospitals or health systems to reduce expenses by sharing services, staff members and other resources. When two health systems or hospitals offering similar services merge, this is referred to as a "horizontal consolidation."
Another type of consolidation, called a "vertical merger," is when one healthcare organization purchases another offering different healthcare services, in most cases, to access new patients and sources of revenue. An example of a vertical merger is a hospital acquiring physician practices, with 54% of health leaders surveyed identifying these "highly sought after" practices as acquisition targets.
Private equity investment
Another trend in mergers and strategic partnerships in health care is the rise in private equity firm capital investment. "For the past decade, private equity (PE) firms have invested more than $750 billion in a wide range of U.S. healthcare initiatives, including funding research and development in life sciences and providing capital for physician practices," reported advisory firm Grant Thornton.
Benefits of healthcare mergers & acquisitions
Research and analysis has offered evidence of healthcare merger trends and the resulting benefits from a cost, quality and competitive perspective among acquired hospitals. In May 2023, the American Hospital Association (AHA) described mergers and acquisitions as "one of the most important tools that some hospitals use to manage financial pressures and increase access to care for patients" for the following reasons:
- Lower health care costs: Hospital acquisitions and mergers are associated with a statistically significant 3.3% reduction in annual operating expenses per admission at acquired hospitals, along with a 3.7% decrease in net patient revenue per adjusted admission.
- Improved quality: One study found that a full-integration approach is associated with improvements in mortality and readmission rates, among other quality and outcome improvements; another study found significant reductions in mortality for a number of common conditions — including acute myocardial infarction, heart failure, acute stroke and pneumonia — among patients at rural hospitals that had merged or been acquired.
- Better access to care: Nearly 40% of affiliated hospitals added one or more services post-acquisition; almost half of all hospitals acquired by an academic medical center added one or more service; patients at hospitals acquired by academic medical centers or large health systems also gained improved access to tertiary and quaternary services.
M&A challenges and potential risks
Although health system and hospital mergers and acquisitions can reduce costs, drive quality improvements, and provide patients access to a broader array of providers and services in their markets, success is dependent upon the entities involved, how they structure their transactions, and how they provide care long-term..
While the benefits of mergers have been documented, so have the negative consequences on hospitals, providers, patients, insurers and other stakeholders. Consider the following research and analysis results:
- Costs: System-based hospital services cost 31% more, on average, compared with care delivered by independent hospitals; private equity ownership has is often associated with harmful impacts on costs to patients or payers (e.g., Medicare, private insurers).
- Quality: Hospital acquisition by another hospital or hospital system was associated with modestly worse patient experiences; mergers and acquisitions increased readmission rates for cardiac patients by 10-12% and remained elevated for three years after the acquisition.
- Care access: Healthcare consolidation can restrict care access when partnerships drive up costs, result in the closure of hospitals in rural and other underserved areas, prevent physicians from working for other health systems and local hospitals.
The U.S. Federal Trade Commission (FTC) and Department of Justice (DOJ) have stepped up efforts to combat healthcare mergers and consolidation that toes the line of antitrust laws in this country. For example, in 2022, the FTC blocked the following four hospital mergers, arguing that they could negatively impact prices and quality of care for patients:
- Lifespan and Care New England Health System in Rhode Island
- Hackensack Meridian Health and Englewood Healthcare Foundation in New Jersey
- RWJBarnabas Health and St. Peter's Healthcare System in New Jersey
- HCA Healthcare and five hospitals in Utah that are part of the Steward Health Care System
Supply chain integration
"IT should be a primary consideration from the very beginning, including defining the IT strategy in supporting the M&A and defining the expected benefits."
Healthcare Mergers and Acquisitions, The IT Factor, Deloitte (2018)
Supplies are the second largest area of expense for hospitals, behind labor, which is why successful integration of supply chain systems is a critical component of success. When health systems attempt to integrate acquired hospitals' supply chain processes into their own, they are often faced with disjointed legacy systems and processes that are highly reliant on manual intervention.
When considering a merger or acquisition, here are some supply chain components and systems that should be integrated:
How technology facilitates hospital consolidation
Technology has evolved to support seamless supply chain process and data integration among health systems and hospitals, most notably the developed of cloud-based solutions. Leveraging cloud-based ERP systems and supply chain solutions that integrate with EHR and financial systems, healthcare supply chain leaders are more efficiently and cost effectively managing acquisitions of legacy processes and data and transforming them into a unified approach to supply chain management.
In doing so, they are establishing a foundation for supply chain strategy and management that can address market factors (e.g., higher prices for supplies), support quality improvements through clinical collaboration and data sharing, leverage evidence based insights, help maximize revenue, and operate at a more strategic level in the interest of their health systems, local hospitals, providers and patients.
In a July 2023 survey of cloud adoption in the healthcare industry:
- Nearly 80% that have transitioned to cloud supply chain management characterized the move as positive.
- 45% have already moved to cloud supply chain management, and many more plan to do so over the next 24 months.
- Nearly three-quarters noted that expansion of their organization (such as acquisitions of other hospitals and health systems) influenced the decision to incorporate cloud technologies for supply chain management.
Cloud-based digital technologies and automated processes
Key areas where advanced supply chain solutions can improve the success of health care M&A performance:
- Procure-to-pay automation: Leveraging cloud-based technology, supply chain leaders can consolidate the procure to pay (P2P) process within a single digital solution that automates transactions with business partners for all acquired hospitals. Touchless transactions boost efficiency, accuracy by minimizing or eliminating time and labor intensive, error prone human intervention.
- Success story: A midwestern university medical center engaged GHX to standardize and extend automation in its order management process, boosting efficiency across its order transaction process and significantly increasing electronically received purchase order acknowledgements (POAs) to 99% from suppliers that historically responded via fax or email.
- Contracting and pricing: GPO and supplier contracts present significant opportunities for savings but only if acquired hospitals transact using accurate contract, product and pricing data. Leveraging automation and data synchronization across medical/surgical products purchased by all acquired hospitals in all geographic markets streamlines data management, supports buyers in contract compliance, and helps health systems maximize contract savings.
- Success story: Prisma Health, the largest health system in South Carolina, had merge two regional systems into one combined cloud-based ERP. The team worked directly with GHX and Workday to implement the system. The project went live within 30 days, a fraction of the time typically required for similar integrations. The new system is helping Prisma reduce its costs for manual interventions on item data by approximately 80%.
- Inventory management: With supply costs rising and shortages continuing, health systems need real-time visibility across all their Med/Surg inventory out to products stored in acquired hospitals and other care locations. With cloud-based inventory management solutions, they can better manage inventory enterprise-wide, maintaining adequate levels to avoid stockouts, and shifting products to where they are needed to minimize waste.
- Success story: In a recent webinar, Dave Graul, Director of Supply Chain Management at Rady Children’s Hospital, shared the benefits his hospital achieved through a phased approach to inventory management optimization, starting in distribution where processes were previously 100% manual.
- Clinically integrated supply chain: In a world of value-based care and payments, health systems must find ways to deliver higher quality care at a lower cost. To do so, providers must understand how individual supplies impact cost, quality and outcomes. The integration of supply chain, clinical and financial data is critical to these efforts. When value based care teams have a clear picture of supply impact, they can make informed choices to improve quality while saving money.
- Success story: RWJBarnabas established 22 collaboratives across the enterprise focused on improving value, each of which has supply chain representation. Over the course of about 18 months, the health system implemented nearly $2M worth of savings through these collaboratives by standardizing clinical practices and the supplies associated with them.
Below are key considerations for health systems and hospitals when approaching health care mergers and acquisitions from leading industry experts:
Common FAQs about healthcare M&A
Q. Why are M&A transactions common in the healthcare industry?
A. In the last decade, rising costs, shrinking reimbursements, and increased competition for patients in different markets are some of the factors that have positioned M&A as a vital tool for health care in our country. Health systems and their acquired hospitals can scale their efforts and operate more efficiently and cost effectively, potentially leading to a rise in reimbursement.
Q. How can M&A transactions benefit patients and providers?
A. M&A can boost patient care quality improvement by broadening market access to physicians, service lines and additional sites of care. The ability for healthcare facilities to operate more efficiently can also lead to lower costs for patients.
Q. What are some potential challenges or downsides of healthcare M&A?
A. Research and analysis has shown that in some cases, M&A in healthcare leads to price increases/higher prices for healthcare services, less market access to critical services (such as when an M&A results in closure of a hospital in a rural or underserved area), and lower care quality.
Q. How have M&A trends evolved over time?
A. Immense financial struggles, driven by the COVID-19 pandemic, have prompted hospitals on the verge of closing their doors to seek acquisition by health systems. The shift from acute to non-acute patient care has also driven health systems and hospitals to engage in acquisitions that broaden their service offerings into new care sites and markets (e.g., home care, clinics).
Q. What should stakeholders consider during a healthcare M&A transaction?
A. Key factors for consideration include the culture of the merged entities, executive leadership support, how regulators view the merger, and technology to overcome the challenges of healthcare acquisitions and post-merger integration.
Healthcare Industry Contributor