Consolidation in the Hospital Industry

Cardiology Review® OnlineFebruary 2014
Volume 30
Issue 1

A look at the complex future of the hospital industry.

Diana Fancher, DNP, MBA, RN


N Engl J Med.

Dafny L. Hospital industry consolidation—still more to come? 2014;370:198-199.


The New England Journal of Medicine

The New York Times

he surge in hospital mergers has accelerated since the passage of the Patient Protection and Affordable Care Act (ACA) in March 2010. In the January 24, 2014, issue of ’s “Perspective” section, Leemore Dafny, PhD, Professor of Management and Strategy and Herman Smith Research Professor in Hospital and Health Services at the Kellogg School of Management at Northwestern University, writes that hospitals are working toward ensuring market position, improving operational efficiency, and assembling organizations with the ability to manage population health. In August 2013, reported that 105 merger deals were reported in 2012—an increase from the 50 to 60 annually before the ACA. Dr Dafny states that unless consolidations are discouraged and anti-trust laws are supported through public and private initiatives, hospital mergers will continue unchallenged, which could lead to increased health care costs and lasting repercussions for consumers.

Agencies responsible for enforcing anti-trust law (enforcers) have recently challenged “horizontal” hospital mergers, in which providers supplying similar services in the same geographic area merge systems. Enforcers have also shown a lack of acceptance toward hospitals building market power in physician services by purchasing competing practices in the same specialty and geographic area. The Federal Trade Commission (FTC) recently challenged one such purchase in Idaho that would have resulted in 1 organization having 78% of the adult primary care market share. Behind this challenge was the belief that it would result in reduced competition in the market and increased leverage for the acquiring agency, which would result in increased health care costs.

The scrutinization of individual mergers requires substantial time and resources to evaluate individual transactions. Dr Dafny states that the vast amounts of claims data must be evaluated using complex statistical methods in order to understand the extent to which merging organizations compete and to predict the impact of the resulting price increases. Conversely, the enforcers must ponder the potential benefits that can occur from the merger. She states that these benefits may include cost reductions and improved quality or access to care. Quantifying the benefits may prove difficult because of the lack of empirical research and a lack of consensus about what should be measured and what value should be assigned to it. This complexity brings to the surface the reality that as enforcers struggle to demonstrate why consolidations should be blocked, there is additional hesitancy to block mergers when the potential effects are unclear.

Many of the merger deals in process are non-horizontal, involving providers from separate geographic service areas, which do not generally raise anti-trust concerns. She discusses the need for more research relating to mergers and the relationship to increased prices resulting from decreased competition. Dr Dafny believes it could take years to make this research courtroom-ready. This, combined with the complexity in health care economic models, creates hurdles to investigating the latest trend of non-horizontal mergers in health care. Enforcers need more tools for doing their jobs or slowing the consolidation process in order to provide time to assess what organizational structures will result in the best return for health care dollars.

Dr Dafny has 3 suggestions for possible initiatives:

  1. The involvement of angel investors and venture capitalists in the development of innovative health care partnerships, with the goal of delivering clinically integrated, evidence-based, cost-efficient healthcare, bringing new ideas and strategies to the table.
  2. Medicare could experiment with reimbursement that gives incentives to newly formed accountable care organizations that do not involve joint ownership of all assets.
  3. Pursue transparency in private and public claims data in order to assess how hospital industry consolidation affects cost and quality.

CommentaryDepression Affects Many Aspects of CVD


ealth care providers are aligning in record numbers as the impact of the ACA and regulatory expectations unfold and make the case that consolidation and mergers are a more viable and necessary reality. The ACA’s goals include improving quality of care and improving outcomes while decreasing the cost of health care, improving coordination of care, as well as increasing access to health care.1 It is becoming more difficult for hospitals and physicians to survive unless partnerships and collaboration are embraced and maximized, resulting in relationships that drive efficiency and coordination of care.

According to Whit Ryan,2 5 forces are driving hospital consolidation as well as the recent acceleration in mergers and acquisitions throughout the health care industry. The forces include reform and the incentives that are driven by new payment structures, quality, patient satisfaction, and efficiency; economies of scale in an industry with historical low margins; access to capital as independent hospitals struggle to raise capital; bargaining power and leverage with insurance company negotiations and physician recruitment; and patient care coordination, which is deemed as necessary in an industry that has shifted from fee for service to value-based purchasing.1

The bargaining power of horizontally structured systems is one of the key concerns for enforcement stakeholders. Increased reimbursement can be negotiated with systems containing a large network of hospitals and providers in close geographic proximity because they offer variety and depth in providers and services, especially if there are minimal alternative options for health care. When insurers are bargaining with a variety of hospitals in a localized market, the reality of not reaching an agreement with a few of the organizations due to higher prices is not as daunting, compared with failed negotiations with a powerful monopoly.

FTC Commissioner Maureen Ohlhausen emphasized the importance of preventing negative effects resulting from increased provider market power at the 2013 National Policy Forum of America’s Health Insurance Plans.3 She also discussed the possible positive effects of mergers, however, noting the benefits that can result when providers work together. Ms. Ohlhausen stated that the FTC is approaching the health care market with caution in light of the ongoing implementation of the ACA, as increased clinical integration is mandated. However, the FTC will continue to keep a close watch on hospital mergers. In a recent merger between 2 large health systems based in Dallas and Nashville, the FTC granted early termination of the mandated waiting period under the Hart-Scott-Rodino Act, which outlines the federal pre-merger notification program for mergers and acquisitions.1

The growing pressures related to regulatory compliance have placed a large financial burden on hospitals and health care providers. An example of this would be the implementation of the electronic medical record (EMR) mandate, which has proved to be highly demanding with respect to cost, resource allocation, patient portal development, and the ability to assimilate, obtain, and transmit quality data—to name a few of the demands and requirements. To receive Meaningful Use payments from the Centers for Medicare & Medicaid Services, organizations and healthcare providers must meet myriad complex requirements, rules, EMR system builds, and quality initiatives. These objectives are reached at a premium cost for providers large and small, whether they are part of a system or are a stand-alone practice, because the rules do not differentiate based on a provider’s affiliation or ownership. A lone hospital, facing the current and looming challenges, will not fare as well as an organization benefiting from the efficiency produced by combining strategic efforts, lessons learned, and discounted pricing realized from the collaborations of a system of hospitals and health care providers.

As the ACA unfolds, the need for collaboration and innovation will intensify as goals and targets become more difficult to achieve. As providers move to a new dimension in health care, the benchmarks will continue to accelerate and move to unprecedented heights as organizations implement measures to achieve increased efficiency and improved quality. Consolidation may prove to be a vital part of the future of health care for any entity providing health services to the well, sick, acute-care, and chronic patient populations. The ACA has changed the delivery of health care currently and far into the future.


1. The 2010 Patient Protection and Affordable Care Act [HR3590]. Accessed January 28, 2014.

2. Ryan W. 5 forces driving hospital consolidation. Accessed January 10, 2014.

3. Adamopoulos H. Market matters: how major hospital mergers have avoided antitrust issues. Accessed January 10, 2014.

About the Author






is Chief Nursing Officer at the University Medical Center of El Paso in El Paso, TX, where she administers, directs, and coordinates patient care services and operations in this 394-bed acute care facility/Level 1 Trauma Center/academic teaching hospital. Dr Fancher has over 20 years of experience in health care and is a member of the hospital’s senior executive team in planning, policy formation, strategic decisions, and implementation, and is directly responsible for an $85 million operational budget and $2 million capital budget.

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