With the share of hospital beds that are part of a health system in the US rising from 58% to 81% from 2000 to 2020, ...
With the share of hospital beds that are part of a health system in the US rising from 58% to 81% from 2000 to 2020, the healthcare industry is rapidly consolidating. How do healthcare mergers and acquisitions work and why has this become a trend?
Healthcare acquisitions and mergers refer to the legal process of combining two healthcare organizations into one. Mergers and acquisitions are similar but have some key differences.
When hospitals merge, they join together to form a new organization. Mergers often involve similarly sized organizations joining together to form a larger organization.
When a merger is complete, the two companies become one legal entity. Mergers are less common than acquisitions because it is rare for two healthcare organizations to benefit equally from combining into one.
With an acquisition, one healthcare organization takes over another. Once the acquisition is complete, the acquiring company absorbs the acquired company, which ceases to exist. Most commonly, acquisitions involve larger companies acquiring smaller ones.
The acquiring company takes over the operations of the company it acquired. As a result, the new organization may have different operating hours, hire new staff, and change its internal procedures.
Acquisitions can be hostile or friendly. In a friendly acquisition, the leadership of the acquired organization approves the acquisition and the two companies work together.
In a hostile acquisition, the acquired company's leadership did not approve the takeover. In some cases, they attempt to block the acquisition.
Once an acquisition is complete it is critical to develop a plan to ensure success in the post-merger integration process. There are also instances where mergers and acquisitions fail due to a myriad of factors.
In 2021, Headspace and Ginger closed a merger, creating a mental health company valued at $3 billion. The merger combined Headspace's meditation and mindfulness app with Ginger's teletherapy services, increasing the new company's reach to 100 million consumers and expanding the services the new organization could offer.
There are four main types of healthcare acquisitions and mergers:
A horizontal consolidation involves two hospitals that offer similar services merging. This allows peer hospitals to cut costs by pooling resources.
In a vertical acquisition, one healthcare organization buys another that offers different services. This allows the acquiring company to expand its patient base and offer more services.
A cross-market merger involves healthcare providers that operate in different geographic locations. These mergers may involve healthcare systems located in neighboring markets or in markets that are far apart. Expanding into new geographic regions increases an organization's customer base.
Private equity acquisitions are similar to other acquisitions, except instead of one healthcare organization buying another, a private equity firm is the purchasing party. Private equity firms invested $1 trillion in healthcare acquisitions between 2010 and 2020.
There are several reasons healthcare organizations choose to consolidate:
Larger organizations often acquire small ones to expand the size of their customer base by branching out into new geographic regions. This allows them to acquire the existing customers of the smaller organization while also expanding their marketing reach to make gaining new customers easier.
An acquisition by a larger health system or hospital is a way for many financially challenged hospitals to avoid declaring bankruptcy or closing. About one-third of healthcare merger and acquisition transactions occur because of financial distress.
Hospitals can't always pass on the rising costs of supplies, medications, labor, and technology to payors. Many organizations seek out mergers and acquisitions to increase their pricing power due to the impact of inflation on operating costs.
About 75% of organizations say economic uncertainty plays a role in their decisions to pursue consolidations. Some companies attempt to reduce costs by purchasing another company that produces equipment or provides the services they need. Organizations can also sometimes reduce costs by eliminating redundant employees and sharing physical spaces.
Hospitals in rural and underserved areas often struggle to recruit employees. Consolidating with larger organizations can increase access to staff.
Some organizations acquire a company that provides a service that they don't already offer so that they can then offer this service to new and existing patients. These types of healthcare mergers and acquisitions may reduce costs and increase the attractiveness of a provider to potential patients.
Larger healthcare organizations that offer more services can be beneficial to patients who no longer need to travel to multiple facilities or worry about whether their insurance will cover various providers. This may improve the overall patient experience.
Mergers have multiple advantages for healthcare organizations and patients but also come with some drawbacks.
Pros:
Cons:
By combining resources, healthcare systems can offer more services to a wider range of patients after a merger or acquisition and invest more heavily in technology. This may increase patients' access to specialists and improve the overall quality of care.
Larger organizations take advantage of economies of scale and increased purchasing power to reduce operating costs. Lower operating costs may result in lower prices for patients.
Additionally, the pooled resources make it easier for healthcare companies to cover the costs of complying with state, federal, local, and commercial payer requirements. Larger organizations can often cope better with underpayments from Medicaid and Medicare programs that result in financial losses.
Healthcare mergers and acquisitions sometimes prevent hospitals that are struggling financially from filing for bankruptcy or closing. This helps keep more healthcare facilities in smaller and rural communities.
Some studies have found that mergers and acquisitions improve inpatient readmission rates, outcomes, and mortality. This is particularly true in rural areas.
Studies suggest that struggling rural hospitals may benefit from mergers and acquisitions. However, financially stable hospitals may face an increased risk of closure.
While some organizations see improvements in quality of care and lower costs, others experience the opposite. Studies have implicated private equity ownership as particularly likely to result in increased costs for patients and third-party payers.
In cases where consolidation causes higher costs, hospitals in underserved and rural areas are more likely to close. A Harvard study indicates that while consolidation leads to marginally better care, it also leads to significantly higher costs.
However, the study also notes that the potential for beneficial outcomes exists when executed properly. Acquisitions that result in large reductions in staff are the most likely to result in poor outcomes.
Due to concerns about rising costs and reduced competition, the Federal Trade Commission and the Justice Department jointly issued new merger guidelines in 2023. The new guidelines are not legally binding, but clarify the FTC and DOJ's regulatory process. Healthcare organizations wishing to consolidate must consider whether regulators are likely to consider the potential merger or acquisition as a threat to competition or a violation of antitrust laws. Before undertaking any merger or acquisition a proof of concept should be performed to ensure the desired outcome will be achieved when the necessary data migration steps are performed.
Healthcare systems that consolidate are increasingly turning to cloud-based solutions to support the need for seamless supply chain processes and data integration. It is always a good idea to work with an organization who has significant experience with mergers and acquisitions, like Cloudficient. Automated software solutions from Cloudficient can make your healthcare mergers and acquisitions process more cost-effective and efficient. If you would like to learn more about how to bring Cloudficiency to your migration project, visit our website, or contact us.
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