Have Mergers and Acquisitions among Hospitals Improved Our Lot?

Compared with the perspective of a few decades ago, there are many differences in the way that Medicine is being practiced today.  Many are probably for the better.  Care is being delivered to individuals with greater precision in both the diagnostic and therapeutic realms.  Patients are encouraged to take better care of themselves to decrease the risk of developing disease.  Smoking has been reduced and with that, smoking related illnesses, including heart and lung diseases, have been significantly ameliorated. Public health has improved both with sanitation and air quality measures.  Vaccines are available and many potential infections are avoided.  The organizations that help practitioners deliver health care have also changed.   Hospitals, because of their size and ability to combine resources, have become a central provider of costly device-oriented care. Diagnostic and therapeutic radiology, as well as major complex surgical procedures for both common and uncommon conditions, are concentrated in hospitals.  In addition, hospitals have changed their organization from a single provider to large mullti-institutional conglomerates. This is often done through the merging of several individual hospitals to a corporation, or the merging of the organizational structures to create a large system. Whether the aggregation of hospitals into mega organizations has been of benefit to the delivery of better health care is less clear.

From the time of the founding of hospitals in the Americas, as early as 1639, most were independent. Many were started by various religious or ethnic organizations, and were loosely united through the religious orders (both Roman Catholic and Protestant). Some hospitals were built and underwritten by private citizens, and some begun by doctors. Multiple hospital systems were uncommon. At those times much of funding of the operating expenses of hospitals appeared to come from philanthropy and endowments[1]^, [2]. Individual hospitals often sponsored at least some free patient care in addition to intramural research, which was largely supported through philanthropy, not through proceeds of care delivery.  Most often these hospitals were charitable organizations formed for a public good.

When the delivery of healthcare became a business, business processes often became a driver of organizational culture.  Mergers have increasingly become a part of the American business landscape.  By 1970 in Chicago, there were approximately 100 distinct hospitals, with only one coming from a successful merger (Presbyterian – St. Luke’s’ in 1956).  In 1972, Northwestern Memorial Hospital was formed by the merger of the Passavant and Wesley Memorial Hospitals. It has been said that in the 1980’s and 1990’s businesses went through the fourth and fifth merger waves[3].  In the early twenty-first century hospitals began to undergo multiple mergers, so that the individual elemonsary institution is now a rarity. In 1995 several small “Evangelical” Hospitals and Christ Hospital merged with Lutheran General Hospital leading to a name change to “Advocate”. Today, multi-Hospital organizations are the dominant “business model” in healthcare, as well as in the general business communities.  This is referred to as horizontal integration. Currently in Chicago there are 8 hospital systems accounting for about 51 hospitals (out of approximately 70 hospitals in the area)[4].  In addition, hospital organizations have increased their employment of physicians and surgeons as a form of vertical integration.  Certainly, some of this M&A activity in the 21^st century was partly an unanticipated consequence of some provisions of the Patient Protection and-Affordable Care Act[5].  One might now ask whether these M&A activities are consistent with the “triple aim” for Health Care:  1) Better care for individuals, 2) Better health for populations, and 3) Lower per capita cost both per patient and for the community”[6]?

One might ask, “Is health care appropriately subject to the incentives of other businesses”.  In 1970, Milton Friedman in a NY Times article, differentiated the potential goals of Hospitals or Health Care institutions from “other” businesses[7]. He said that while the major raison d’être for most business was to make a profit for the stockholders, but in health care, mission and service may predominate; “A group of persons might establish a corporation for an elemonsary purpose – for example a hospital or a school.  The manager of such a corporation will not have money profit as his objective but the rendering of certain services …” “

It is difficult to enunciate a single goal for M&A activities.  There may be nine, or more, goals proposed for pursuing a merger in health care:

1. Participate as a Group Purchasing Organization, to try to negotiate lower prices with suppliers. There are already commercial GPOs that often consolidate several groups again[8].
2. Negotiate for higher payments from payers (insurers and employers)
3. Increase margins (“Profits”) for the overall system.
4. Help define “best practices” across the entities of the merged organization. This should help bring about uniformity (not heterogeneity) in outcomes and other quality measures.
5. Develop a referral base for more efficient provision of tertiary care services in a single hospital
6. Develop a culture of excellence in delivery of Primary Care.
7. Increase the stature/status of the group, including individual hospitals, Medical staffs and administrator group/cadre.
8. Have the Ability to provide different types of care.
9. Provide a vehicle for “growth” in the system. The reason for “growth” in delivery of care as a single driving force is not clear.

Once a merger has been consummated, one should be able to look at whether the stated goal(s) for the activity have been accomplished.

In looking at four of the major hospital systems in the Chicago area one would hope that some quality measures might be uniform throughout the system.   In fact, in heart disease, the systems have quality metrics for cardiac care that have wide variations between system hospitals:

MI – Myocardial Infarction (heart attack)

These ranges would suggest that hospital systems are not delivering a single quality of care throughout.  If the hospitals had been effective at sharing expertise, one would not expect such a wide variation[10]. Some hospitals do significantly (statistically and pragmatically) “better” than the national average, while others are “worse”.  In many instances “Best Practices” apparently are not being delivered throughout the system.

Many authors note that after a merger or acquisition, prices at either the acquiring or acquired hospital will go up.  This may lead to higher margins (profits) which are infrequently then channeled to providing better care.

A 2020 Kaiser Foundation review on consolidation and costs and quality of care[11] concluded that both Horizontal and Vertical Mergers in Health Care were associated with higher costs at both acquiring and acquired hospitals.  Neither was there an associated improvement in quality.

Hospital systems rarely develop community improvements (such as health clubs, or purchasing cooperatives for healthy foods for example). There are some exceptions in which some hospitals in a system have tried to help community members acquire more “healthy” foods[12]. In some instances, system acquisition of a nearby facility is used as a pretext for closing the acquired one[13].  While such activities might have been appropriate from a “business” perspective, the influence on the surrounding community and its overall “health” might not have been beneficial.

Mergers or Acquisitions in health care provider organizations have been and will continue to be controversial. Recently. hospitals have reorganized their operating model to be “multi-hospital systems” through the processes of Mergers and/or Acquisition.  It is not clear in the majority of instances that these reorganizations were planned with an eye to the “triple aim for health care”. Other than “growth”, there does not seem to be a clear delineation of what the outcomes might be to improving the health or welfare of the community as a result of M&A activities. There appear to be few postmortem evaluations of the subsequent effect of the M&A activity. In many instances one or more of the senior management of the merged organizations are given a higher salary, commensurate with the increased size of the organization that they are expected to manage. In the future, perhaps any health care related M&A activity might have as a condition of approval an evaluation of improvement in individual hospital as well as community health metrics. If the organization is unable to justify its size by acquisition, it could be required to divest.  In instances where a M&As have reversed, there don’t appear to be adverse health care related effects after the divestiture. This would suggest that the premise that once done, a merger in health care cannot be reversed is not born out by existing data. Thus, one might look for increasing scrutiny of M&A activities in the provider sphere of health care.  Specifically, such scrutiny might look at “monopolistic behavior” relating to negotiations with payers and employees, in addition to looking at the subsequent pricing of services[14].

End Notes:

[1] Much of the building of the Presbyterian – St. Luke’s facilities, in the 1950’s, were funded through philanthropy (see Good Medicine around p 145), based on Booze, Allen & Hamilton consulting.When there was more payment from patient insurance, philanthropy may have slowed.

[2] Evanston Hospital at its inception was largely supported through church collections.

[3] Gaughan, PA: “Mergers and Acquisitions; An Overview” https://catdir.loc.gov/catdir/samples/wiley031/2001045451.pdf

[4] There were 9, but the Amita system which was formed from a merger of the Alexian and Adventist systems in 2015 dissolved in 2022.

[5] Public Law 111-148, also called “ObamaCare”

[6] https://www.ihi.org/communities/blogs/the-triple-aim-why-we-still-have-a-long-way-to-go  Accessed 7/17/2023

[7] “The Social Responsibility of Business Is to Increase its Profits”.  New York Times Sunday September 13, 1970:  p32 https://timesmachine.nytimes.com/timesmachine/1970/09/13/223535702.html?pageNumber=379 accessed 7/7/2023.

[8] The suppliers among others may include:

1. PhRMA (their prices have continued to go up (said to be blunted by “discounts”). PhRMA prices are now often negotiated through Pharmacy Benefit Managers (PBMs)
2. Device providers/manufacturers
   1. Implantable devices (Pacemakers/Joints)
   2. Monitoring Devices
   3. IT (EMR)
3. Service Providers such as Food and Laundry

[9] North Shore System has renamed itself as “Endeavor” as of 1/1/24.  Announced 12//6/23

[10] Using MacDonalds as an example, one expects essentially the same hamburger from each of the franchises.

[11] Schwartz, K; Lopez, E; Rae, M; Neuman, T: What we know About Provider Consolidation. 9/2/20:  https://www.kff.org/health-costs/issue-brief/what-we-know-about-provider-consolidation/  accessed 10/30/2023

[12] Sanders, H; “Advocate Health Care  grows its fresh food service”  In Chicago Tribune November 16, 2023/  https://www.chicagotribune.com/suburbs/daily-southtown/ct-sta-advocate-healthcare-launches-produce-distribution-st-1115-20231114-6igopt5bzjdtvhaw6x6ibgdb6i-story.html

[13] In 1980, the Evanston Hospital organization bought In a struggling Community Hospital. Shortly after the hospital was closed.  In 1986 Henrotin hospital, which was near a “blighted” region of Chicago was acquired by Northwestern Memorial Hospital.  Within months Henrotin was closed.

[14] Such scrutiny might begin with a requirement to justify the pricing of services in individual hospital “Charge Master” documentation as suggested by Steven Brill in his TIME magazine issue, “The Bitter Pill”, of March 4, 2013