PwC: Large hospital systems fail to achieve economies of scale

Bigger hospitals are able to operate more efficiently than smaller hospitals, but those cost savings and economies of scale don't carry over to larger healthcare systems operating multiple hospitals, according to a new market analysis from PwC.

The problem is that large healthcare systems don't always operate as integrated organizations, continuing instead to run as a group of autonomous hospitals in which individual leaders believe their strength is in their local brand, PwC says. To improve their financial performance, large healthcare systems need to standardize procedures and revamp their operations, potentially cutting costs per patient encounter from 15 percent to 30 percent.

"They will also need to revamp their operating model to emphasize overall system performance, establish appropriate decision rights, measure their progress and accommodate separate, dissimilar cultures in any consolidation," according to the report.

PwC outlines five preliminary actions hospital leaders can take to realize benefits of scale:

1. Redesign the operating model to bring more accountability and control at the system level--the corporate core, shared-services centers and operating units--rather than at individual facilities.
2. Standardize clinical processes, engaging doctors as change leaders to collaborate on the standardization.
3. Eliminate redundant service lines by analyzing both supply and demand for markets and disease-specific activity.
4. Measure performance on a system level.
5. Don't underestimate the power of culture, which can be "a powerful tool for driving change."

The firm looked at Centers for Medicare & Medicaid Services data on patient encounters for more than 5,600 individual hospitals and 525 health systems. The analysis also showed that there is no correlation between quality and the cost per patient encounter.

An analysis by Accenture last year, as reported by FierceHealthFinance, showed that the factors driving hospital mergers and acquisitions include the transition from volume-based to value-based care, competitive pressures, a push to broaden IT capabilities, and the desire to achieve economies of scale.

The massive shift toward consolidation is expected to continue, chief financial officers believe. While consolidation has led to traditional administrative roles being eliminated or restructured, site-level financial leadership is still needed.