Are hospital mergers destined to fail?

Although hospitals and health systems continue to forge ahead with mergers and acquisitions in an effort to reduce costs and improve care, if history is an indicator, most of these partnerships will fail, according to one expert, speaking at the American Hospital Association's annual meeting in Washington, D.C., on Sunday.

Many of the mergers in the 1990s failed as organizations became too big, too fast, James Orlikoff (pictured right), president of Orlikoff & Associates, Inc., a Chicago-based healthcare consultancy, told the audience.  

History and studies show that the motivating factors behind these partnerships--providing more care at less of a cost--don't work, he said. In fact, the cost of care typically increases as a result of a merger. Partnerships that took place between 1989 and 1996 often resulted in an average 40 percent price hike for neighboring hospitals within seven miles. Prices were even higher for hospitals in closer proximity to each other.

Furthermore, he said, studies show that quality didn't improve in 8 out of 11 mergers. Only two of the mergers demonstrated substantial quality improvement.

In many cases, Orlikoff said hospitals and systems that are considering mergers "use it as a substitute for strategy and succession planning."

Common drivers for mergers include declining reimbursements and volume; tight credit and a need to access capital for initiatives such as population health and physician acquisition; more leverage with payers; fear; and the pressure that "everyone else is doing it," Orlikoff said.

Many organizations believe that mergers make sense because they need to spread costs for technology and administration over a larger revenue base and strengthen their market penetration by adding service lines and physicians.

It's not that different from the theory behind the wave of mergers in the 1990s. The idea then was to increase market power and gain pricing power against commercial insurers. But this strategy won't work for much longer and may even backfire, Orlikoff said. After years of failing to block hospital mergers, the Federal Trade Commission is now taking a harder stance against consolidations for market and pricing power.

Before agreeing to a merger, Orlikoff urged healthcare leaders to consider what will happen after the deal. Think about what the combined organization and governance structure will look like; how the overall integration strategy will impact each functional area; whether the new organization will have the right resources to support integration planning and execution; and how the overall integration strategy will translate into operational details.