Ford Merger Likely To Disappoint
When Henry Ford Health System and Beaumont Health System announced their intent to merge last week into 10-hospital system expected to dominate much of the healthcare landscape of the Detroit area, officials with both systems said that it was expected to cut costs and leverage prices from area insurers.
Although it is too early to know what the impact of the merger might be on the community, history and studies have shown that hospital mergers often don’t achieve the positive results often expected by both parties.
Brian Peters, executive vice president of the Michigan Hospital Association, said his organization has been monitoring the trend of independent hospitals linking up with systems. The “next shoe to drop” will be mergers like Beaumont and Henry Ford – larger systems merging into integrated organizations, he said.
“This is a newer trend and one that will accelerate given the pressures of the Affordable Care Act,” he said. “Also by healthcare reform more broadly speaking – some of the things in the private sector like moving away from reimbursement structures that reward volume to those that reward quality and efficiency.”
But Cory Capps, an economist at Northwestern University’s Kellogg School of Management, in Evanston, Ill., said that, while the ACA is the reason most frequently attributed to consolidation, it really isn’t a cause.
“ It may be an easy thing to point to, but it is not clear that these mergers would not be pursued if was still no ACA,” he said. “If the election had turned out differently, I don’t think we would have seen a sudden stop to it.”
Peters said there are a handful of reasons why hospital mergers are a good idea. One reason is the economy of scale – having a larger organization can reduce costs for things like health IT. Peters also said shared learning is incredibly important. Having a wider range of clinicians to share with and learn from “goes a long way toward improving performance.”
“Only time will tell how these decisions play out and whether they meet the needs of their communities and are effective in containing cost and quality,” Peters said. “There is every reason to believe they will do exactly that.”
The new, combined organization will be more than large enough to use its scale. It will have 10 hospitals, two medical schools and 200 patient care sites. But Robert Town, a healthcare economist and professor at The Wharton School, said it can be difficult to use economies even during large mergers.
“On paper it seems plausible – you reduce services and consolidate services – but it is hard to implement that,” he said. “There are a lot of political decisions.”
Capps said there are clear exceptions to the rule, but costs often do not go down after a merger. Those with “tight plans” to consolidate licenses, integrate staff and close certain service lines can sometimes see reduced operational costs. Those that retain local control aren’t changing their operations enough to cut costs.
The second consideration is quality, which Town said is very difficult for a hospital to improve – “If it were easy, everyone would do it.”
He said hospitals might have even less incentive to invest in quality improvement if they have fewer competitors.
Town produced a 2012 report looking at five studies of major hospital consolidations across the country for the Robert Wood Johnson Foundation. He found that, after mergers, there is no evidence that quality is improved that it often remains the same, and sometimes worsens.
“There is no evidence that it improves,” he said.
As for sharing knowledge, Capps said hospitals in particular regions usually follow what he calls “persistent geographic practice” patterns. If they really want to learn new ways to practice, he said organizations are better off merging with organizations in different areas of the country.
Price is the third leg of the health economy stool. Literature shows that mergers, particularly with closely competing nearby rivals, actually raise prices hospitals charge insurers. This can, in turn, trickle down to consumers if insurance companies raise their premiums to compensate.
“The magnitude of price increases when hospitals merge in concentrated markets is typically quite large, most exceeding 20 percent,” he said.
“I think the motivation (to merge) is financial as with most things in healthcare,” he said. “Strategic behavior by anyone in this sector is going to be driven by money.”
