The healthcare industry struggled in 2022 as gross operating revenues were down and expenses were up – while supply and drug costs rose and more than two-thirds of hospitals were operating in the red.
A Kaufman Hall flash report that sampled data from more than 900 hospitals cited four grim findings in its November edition: margins remained negative during the previous month as they had throughout the year, expense pressures were driving poor performance, hospitals were struggling to discharge patients due to labor and post-acute setting shortages, and emergency department visits and operating room minutes increased slightly, putting further strain on hospitals that were unable to admit patients needing in-patient care due to staffing shortages.
Not surprisingly, the current climate is favoring larger health systems in the wake of declining funding and the impact of inflation on labor and supplies. So, amid all these struggles some hospitals and health systems are exploring merger and acquisition activities as a way to combat these challenges.
Two Pittsburgh-region health systems – one with 4,300 employees and another with 3,000 – announced in early 2022 that they would consolidate. The combined total revenue for the previous year for the health systems was more than $1 billion – as opposed to the more than $400 million and $600 million that each garnered separately.
But that merger was one of only four recent ones among health systems in the geographic area encompassing Pittsburgh and parts of West Virginia. Likewise, the region’s largest health system employer has, in recent years, acquired hospitals and other healthcare providers across three states that might not have survived on their own in the current climate.
There are numerous reasons why smaller – often rural – hospitals are merging with larger health systems. Challenges that smaller hospitals often face include limited budgets, having a tougher time negotiating with insurance companies, an inability to spread costs across multiple hospitals or benefit from scale in labor and supply costs, and difficulty attracting and retaining specialists.
The benefits for smaller hospitals to merge with larger ones include a reduction in costs, an improved access to capital, and better outcomes for patients.
A recent Kaufman Hall report on mergers and acquisitions noted that 17 announced transactions in the fourth quarter of 2022 – of a total of 53 for the entire year – was one of the most active quarters for consolidations since the pandemic began. The report cited the resiliency of larger health systems, in which operational risk was distributed across multiple markets and resources could be moved to where they were needed.
Although these benefits are often cited as the reasoning behind smaller community hospitals merging with larger health systems, some studies have shown that such partnerships have historically yielded mixed results.
A 2020 study on hospital mergers found that the quality of care had either remained the same or gotten worse following a series of consolidations around that time. That study cited earlier findings showing that mergers often increased prices – but more expensive care didn’t necessarily mean higher-quality care.
On the other hand, other studies have shown that health system consolidation improves the integration of care and reduces the duplication of clinical services. Reductions in operating costs for acquired hospitals has typically ranged from 15% to 30%.
The U.S. government has undertaken efforts to prevent hospital consolidations on the grounds that experts have argued that large conglomerates and hospital networks have driven up U.S. medical costs, which are the highest in the world.
However, during the past three years – which have included a pandemic that has strained most hospital systems, inflation, and major supply chain disruptions – the need to consolidate with larger health systems has become more urgent for many smaller hospitals.
Improving ROI & Outcomes
The current atmosphere in the healthcare supply chain industry has been challenging for most healthcare organizations – and even as one difficult situation (the pandemic) has been on the decline, others (such as inflation or product shortages) remain. These challenges can become overwhelming for smaller health systems and as a result, from both a financial and care receiver standpoint, may lead to joining forces with larger, more robust health systems.
Prodigo Solutions can help health systems that are struggling with financial pressures as well as those that have joined forces with others. Prodigo enables health systems to achieve two of the most important healthcare objectives – lowering costs while providing better patient outcomes.
Prodigo provides supply chain analytics for healthcare merger and acquisition activities to drive ROI, direct smarter sourcing, and make data-powered decisions. Prodigo’s analytics inform health systems involved in these activities by identifying product sourcing, pricing, and contract standardization/consolidation opportunities. This helps to keep the work off the supply chain teams’ plates, so organizations can focus on delivering positive financial and patient care impact from the merged entities.
It can be expected that more consolidations will continue amid the current climate, so partnering with the right technology provider is instrumental to combat financial pressures and ensure successful outcomes. Learn more about how Prodigo is supporting community hospitals and healthcare mergers and acquisitions by connecting the supply chain ecosystem with accurate and actionable data.