Industry Voices—Mergers aren't the prescription to health systems' revenue fears

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Rather than spending time pondering mergers that are unlikely to resolve underlying problems, hospital leaders should accelerate and intensify their efforts to improve operations so they can succeed in a value-based world that relies upon technological innovation. (Getty/LIgorko)

Ever since the Affordable Care Act became law, hospital executives have worried about maintaining revenues in the face of government cutbacks to Medicare and Medicaid payments.

Declining reimbursement rates from private insurance payers and a steady drop in hospital utilization have added to their worries. 

These threats to revenues, as costs continue to climb, have led dozens of hospitals to leap into each other’s arms, hoping they can merge away their problems through deals that will instantly grow their footprint and share of the market.

But merging has proven to be a flawed strategy for many hospitals and perhaps has slowed progress toward value-based care. Both sides typically underestimate the culture clash that occurs when two distinct organizations are squeezed into one; mergers frequently suffer from a lack of strong vision, integration and execution; and the purchaser often discovers a need to add staff at the acquired hospital to improve quality.

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Rather than wiping away financial worries, mergers, more often than not, exacerbate them, because acquired hospitals, on average, experience a two-year decline in profitability following a deal closing. In spite of what fee-hungry investment bankers argue, mergers often generate little strategic value and are a poor response to shrinking revenues. 

Rather than trying to preserve revenues and market share, hospitals are better off concentrating on improving performance and operational efficiency. Hospital executives should focus on the bottom line instead of the top line.

Like taxi companies focused on their crosstown rivals, hospitals must widen their view of the true threat to their business. The real danger is coming not from down the street, but from innovative entrepreneurs harnessing Silicon Valley technology. Just as Uber is threatening the entire taxi industry, the Amazons and Apples of the world may develop into devastating disrupters of traditional hospital care. We’ve yet to see how the Amazon-Berkshire Hathaway-JPMorgan Chase partnership, Haven Healthcare, will achieve its objective of reducing the cost of care for employees of the three companies, but however Haven proceeds, you can bet the results won’t be promising for traditional fee-for-service hospitals.

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For too long, hospital leaders have stood by as innovative entrepreneurs have been nibbling away at their revenues with walk-in urgent care centers, after-hours clinics, standalone radiology centers and ambulatory surgery centers or “surgicenters” that offer outpatient procedures at a fraction of the price hospitals charge. Now, cost-effective technology has made telehealth a reality, enabling doctors to provide routine checks via video call, including checking vital signs through mobile monitoring devices. To avoid becoming the Kodaks of their industry, hospitals have no choice but to embrace this new technology. Increasingly, healthcare will center on ambulatory care that is proactive and preventive, so hospitals need to invest in technology that maximizes their capability to provide such care and enables “hospital at home” services. 

At the same time, they need to slash unnecessary expenditures and dramatically improve efficiency. This requires hospitals to diligently collect data on their patients, before and after treatment, so they can accurately analyze which tests and treatments are worthwhile. This is essential knowledge, because millions upon millions of dollars are spent on unnecessary or duplicate tests, ineffective or unused medications and supplies, and excessive overhead, contributing to waste of about 30 cents of every healthcare dollar. Consequently, hospitals need to identify and address overtreatment, ineffective care, poor coordination, administrative complexity and fraud. They need to consolidate duplicative clinical services, slash overhead, and seriously consider closing underperforming locations.

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These tough but necessary decisions will help achieve the shift from fee-for-service toward value-based care, which is the future of American healthcare. Hospitals that thrive will make smart use of technology in their quest to be as patient-centric as possible, relying upon interdisciplinary teams that improve coordination and convenience and take a proactive approach to care that delivers better outcomes at lower cost.

Rather than spending time pondering mergers that are unlikely to resolve underlying problems, hospital leaders should accelerate and intensify their efforts to improve operations so they can succeed in a value-based world that relies upon technological innovation.

The key to success for hospitals in the new healthcare landscape is in building an innovative, efficient, patient-centered provider organization that emphasizes new ways of delivering quality care to its community.

Bret Schroeder is a healthcare expert at PA Consulting