Hospital mergers continue as managed care pressures mount nationwide
Experiences of major IDS mergers offer guidelines to success
Reminiscent of the banking and airline industries, health care entities are consolidating at a rapid-fire pace, data from a recently released Hoechst Marion Roussel report shows.
Driven by the same forces that hit the banking and airline fields more than a decade ago - strong market competition and shrinking profit margins - many hospitals and physician practices are combining forces by consolidating.
But not all mergers are created equal, experts say. Managed Care Strategies has found that although the wave of mergers is not likely to abate anytime soon, potential merging partners need to take many factors into consideration before signing on the dotted line. (See story on merger pitfalls, p. 100.)
"There's no doubt that we're seeing and will continue to see broad-based consolidation in the business," says Tom Kelly, president and chief executive officer of Mercy Health Plans in St. Louis. Mercy Health Plans is a subsidiary of the Sisters of Mercy Health System.
"Health care had a remarkably long run where there was little if any pricing pressure from the government or indemnity-type of insurers," Kelly adds. "It's the managed care conversion that's caused the competitive pricing conversion in the past 20 years."
Integrated delivery systems and other health systems nationwide increasingly are merging their operations with competitors and regional partners in hopes that bigger will be better financially.
For instance, the nonprofit Sisters of Mercy Health System has nearly doubled its number of hospitals through mergers with facilities in the same urban markets and through the acquisition of rural facilities. The health system also has physician groups with more than 900 physician employees. Sisters of Mercy's acquisitions have helped to create a large regional health system with 24 hospitals in eight markets in Missouri, Arkansas, Texas, and Oklahoma, Kelly says.
The number of highly integrated health systems rose by 20.6% in 1997, up to 228 from 189, according to data collected by Chicago-based SMG Marketing Group for a study published in the 1998 Hoechst Marion Roussel Managed Care Digest Series on integrated health systems.
The study defines highly integrated as those health systems with at least three health care components, including an acute care hospital and a physician group. And these highly integrated systems exist in most states, but are especially prevalent in California, Florida, Michigan, and Texas. (See map of integrated health systems, p. 99.)
The number of health systems that are in the process of integrating climbed slightly from 570 in 1996 to 578 in 1997. (See chart on integrated systems, p. 100.)
"The pace of mergers continues to be very high, but it will eventually slow down," says Robert B. Giffin, PhD, president of Health Care Strategy Associates Inc. in Washington, DC. The firm provides marketing and assessment services for managed care companies, other payers, hospitals, and physician groups.
However, the pace likely will not slow down until it begins to cost more for institutions to merge their operations than it saves them on efficiencies and economies of scale, which is not anytime soon, Giffin adds.
"There's still a huge amount of excess capacity in health care and a huge amount of costs that can be taken out," Giffin adds.
Clearly, health providers will continue to consolidate and seek partners through mergers and acquisitions in coming years.
So how can they make these transitions as smooth and trouble-free as possible? Managed Care Strategies asked eight health system executives and consultants to discuss why a hospital or IDS might consider merging with its competitor or a regional neighbor. They say these are the reasons it is an attractive prospect:
· Lower costs: "The biggest driving force is to ratchet down health care costs, improve quality, and eliminate duplications," says Rick Annis, FHFMA, senior vice president and chief financial officer of the North Shore-Long Island Jewish Health System in New Hyde Park, NY.
The North Shore Health System and the Long Island Jewish Health System were two large, nonprofit, competing health systems. "We decided that instead of fighting we could combine forces and benefit the community a great deal," Annis says.
Finding economies of scale
Together they have 27,000 employees, seven hospitals, a skilled nursing facility, and a $2.5 billion operation, Annis says.
Their merger route was more troublesome than most systems experience. The U.S. Justice Department sued them, preventing the health systems from completing the consolidation until the merger finally was approved last fall, Annis says.
Now, the huge new health system is working to become more efficient and to cut unnecessary costs. For example, the system has combined computer work to solve the Year 2000 problem, and the hospitals have centralized finance management, Annis says.
Most health system managers assume a merger will give them economies of scale, which in turn will reduce costs. But details about how these consolidations will occur need to be worked out long before the merger takes place, says Marshall S. Yablon, chairman of Diversified Health Resources in Chicago.
"Those economies of scale need to be understood and articulated by all parties before a deal is done, and that includes such difficult issues as consolidation of facilities, reduction in work force, and decisions about who will provide what services," Yablon says.
Other cost-saving examples include closing duplicate departments, merging support staff areas, reducing the work force, and even closing hospitals in areas that have excess acute care beds, the experts say.
· Reduced competition: Large health systems might be in a better position to negotiate for managed care contracts. Their network size and geographic coverage may make them more attractive, or perhaps even the only game in town.
"What providers all are after is being essential," says Michael J. Eberhard, president and chief executive officer of Medical Pathways Management Corp. in Torrance, CA.
"You want to be in a situation where the health plan cannot effectively market to that community without you," Eberhard says. "So if there are two of you in the community, you prefer there was only one of you."
Merging across geographical areas, however, can be a double-edged sword. The health system might have more competitors now that it has stretched into regions that are outside its traditional health care service area.
"They may have been a sole provider and now they're one organization serving a large region, and they have 12 to 15 competitors," says Ed Pershing, CPA, president of Pershing Yoakley & Associates in Knoxville, TN. Pershing Yoakley & Associates is a health care consulting firm that specializes in finance, strategic planning, managed care, reimbursement, income tax, real estate advisory, and other services.
· Expand services: While merged health systems might consolidate some of their hospitals and ancillary services, they'll also be able to expand their array of health services.
A large health system, for example, might have greater resources available to create a strong information system, says Richard Tompkins, EdD, president of First Chesapeake Group in Annapolis, MD.
The Philadelphia-based Jefferson Health System was greatly motivated to merge with other area hospitals so that the system could offer the community a wider variety of resources, says Stanton N. Smullens, MD, president and medical director of the Jefferson Health Network and the chief executive officer of JeffCare. JeffCare is a PHO that is part of the Jefferson Health Network. The Jefferson Health System is the parent organization of the not-for-profit network.
Jefferson Health System has more than 10 hospitals, including a university hospital, serving Philadelphia and its suburbs.
Since its mergers, the health system has begun to offer more women's health services, a rehabilitation program for spinal cord injuries, a neuroscience program, and stroke centers, Smullens says.
"Also, we have arranged to use clinical trials and have established a cancer network so patients in the community have more access to clinical trials and newer treatment regimens," Smullens adds.
· Build stronger financial clout: The North Shore-Long Island Jewish Health System has been courted by insurance companies and other potential financial backers since its merger, Annis says.
"We were able to acquire commercial financing through one of the larger leasing companies based on our strength," Annis says. "We were able to get bond insurance because of our financial strength, which lowers our cost of capital."
The health system also is working on different types of ventures with real estate developers. The developers will build projects, such as retirement communities, and the health system will manage them, Annis says.
"The size of the organization gives you a lot of market presence on the health care side and on the financial side," Annis says. "People want to do business with us because they know we're going to be a survivor.
Of course, none of this would be true if the two health systems were not already strong before the merger, Annis says.
Two weak systems will only equal one big weak system that possibly could lose even more money than the two did individually, he adds.
"I've seen that happen where, for example, two hospitals are losing $6 million together, and then they merge and a year or two after the merger they are losing $9 million," Annis says.
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