Oligopoly (noun): a state of limited competition, in which a market is
shared by a small number of producers or sellers.
Research by Booz & Company shows that the
hospital business in the United States is changing at a rate that has not been
seen for years. In 2012 alone, there were 105 merger and acquisition
deals in the hospital and health systems sector, double the number seen in
2009. Here is a graphic showing a history of the number of announced U.S.
hospital transactions between 1994 and 2011 and the key government actions that
accompanied the activity:
The authors suggest that the forces
behind this trend are related to:
1.) Federal healthcare reform (i.e.
the Affordable Care Act and changes to Medicare and Medicaid reimbursement).
2.) Deep budget cuts at the state
level.
3.) Insurance companies are holding
the line on costs.
4.) Difficulty in using credit to
raise the capital necessary to fund new infrastructure.
5.) Declining admission rates.
All of these factors are creating an
environment where hospitals and health systems have to think outside the box to
survive and remain profitable. The most vulnerable targets are
stand-alone hospitals which on average, in 2011, saw their operating margins in
negative territory as shown here:
While these deals will be publicly touted as
creating economies of scale that result in greater efficiencies and reduced costs to hospitals, the Booz study
shows that this is not the case. Out of a sampling of 201 hospital and
health care system deals between 1998 and 2008, only 41 percent of acquired
hospitals outperformed their peer group. In addition, 18 percent of
acquired hospitals went from having positive margins before being acquired to
having negative margins after acquisition. One would think that having
more beds would result in greater efficiencies, unfortunately, of the deals
that ended up with more beds, only 39 percent outperformed the broader market
and of the deals that resulted in the same number or fewer beds, 42 percent
outperformed the broader market. Basically, the idea that a merger or acquisition
in the hospital or health sector would improve the bottom line is worse than a
coin toss.
Let's go back to my opening
definition of oligopoly. Booz & Company predicts that out of the 5000
hospitals in America, roughly 1000 will seek a merger or acquisition
opportunity in the next five to seven years. While on a nationwide basis
there is still plenty of competition, the same cannot be said for specific
geographic areas. The 2012 attempted merger of OSF Healthcare and
Rockford Health, both located in Illinois, is a case in point. This
merger was cancelled after the Federal Trade Commission determined that the
number of acute health care hospitals in Rockford, Illinois would be reduced
from three to two and that the combined hospitals would control nearly
two-thirds of acute-care inpatient services. That is pretty much the dictionary definition of an oligopoly.
While many independent hospitals are
clinging to their independence by their figurative fingernails, the writing may
well be on the wall. It will be increasingly difficult for them to retain
their independence in the face of competition from their larger peers. On
top of that, once their competition is eliminated, it will be increasingly
tempting for the new mega-health and hospital systems to raise health care
costs for Americans, especially since the Booz study shows that most mergers do not result in higher margins. Ultimately, the margins will have to rise to positive territory. Another factor that must be considered is the case where health and
hospital systems load themselves with debt in order to make themselves bigger
and bigger. Eventually, the debt has to be paid and we all know who will
pay in the end.
No comments:
Post a Comment