Why some health system merger plans work out but others are nixed — and why you should care

Discussions with experts highlight how factors like culture and regulatory approval can impact merger deals, as well as how hospital mergers impact prices and quality.

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Consolidation in the healthcare market is expected to continue, though a report from consulting firm Kaufman Hall found that in 2018, there were 90 total hospital and health system deals announced, down from 115 in 2017. Nonetheless, the average size in revenue of sellers (the smaller of the two entities in a deal) reached a high of $409 million in 2018. 

A recent merger that made headlines is the agreement between San Francisco-based Dignity Health and Englewood, Colorado-based Catholic Health Initiatives, which banded together to form a new $29 billion health system called CommonSpirit Health. But for other organizations, M&A deals announced with fanfare never get consummated.

In October, two Texas healthcare giants — Baylor Scott & White Health in Dallas and Memorial Hermann Health System in Houston — signed a letter of intent to form a new health system. Just four months later in February, they scrapped their merger plans.

Why do some of these deals work out while others are canceled? And more importantly, what’s the effect on price and quality of care?

Pat Cormier, a managing director at consulting firm Kotter who works with organizations that are going through significant change, believes financials are one factor at play.

Let’s say, for instance, one health system is having fiscal issues. A second system might hope that by merging, it could help fix the first one’s problems. But if in looking at the financials, they determine a merger wouldn’t do much good, the deal might get called off, though this begs the question why the merger announcement would be made before due diligence was completed.

There’s also federal and state regulatory approval to consider. As a 2016 NEJM Catalyst article points out, when reviewing hospital mergers, the FTC looks for how the deal may impact competition, prices and quality. The FTC has gotten involved before, as was the case in the proposed 2012 deal between OSF HealthCare and Rockford Health System. But that doesn’t happen in every instance. “In 2014, for example, 27 proposed hospital mergers were large enough to be reportable to the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Act,” the article notes. “Of these 27, only one (about 4 [percent]) went beyond a preliminary investigation.”

Cormier also pointed to culture as a critical issue. “Cultures get driven by leadership styles,” she said in a phone interview. If two hospitals are piloted by completely different types of leaders, they may decide to walk away from the table.

In a similar vein, governance can impact whether the merger goes through. Agreement on whether to consolidate boards and who holds decision rights is crucial.

“I have worked with systems where the inner politics and power struggles have resulted in an inability to make the necessary changes to fully gain the savings of integration,” Cormier said via email.

The ins and outs of a merger succeeding or failing are unique to each specific situation.

For Dignity and CHI, things eventually worked out after facing some setbacks in their pursuit of a merger, including a delay in the close of their deal. Additionally, the California Department of Justice granted conditional approval to the deal, requiring that CommonSpirit Health preserve emergency care and care for women for 10 years and create a program for homeless patients. A Dignity spokeswoman initially said the co-CEOs of CommonSpirit would be able to answer questions about the merger via email, but even after several weeks wasn’t able to provide them.

Meanwhile, the reasons for the Baylor Scott & White-Memorial Hermann failed merger is blurry. In revealing their canceled plans, a statement posted on both organizations’ websites notes that management “concluded that as strong, successful organizations, we are capable of achieving our visions for the future without merging at this time.” A Memorial Hermann spokeswoman said the post is the system’s only statement regarding its decision to halt merger discussions with Baylor Scott & White.

A Baylor Scott & White Health spokeswoman similarly declined further comment.

A healthcare expert did not have inside knowledge about either the Dignity-CHI merger of the Baylor-Memorial failure but said more generally that mergers have an effect on prices.

“The evidence around the impact of mergers on prices is about a mile high and very consistent. It shows that when there are mergers or acquisitions among healthcare providers, prices typically go up,” said Suzanne Delbanco, the executive director of Catalyst for Payment Reform, in a phone interview. The nonprofit seeks to help employers and healthcare purchasers get better value for their money.

In an analysis conducted for The New York Times, researchers from the Nicholas C. Petris Center at the University of California, Berkley looked at 25 metropolitan areas with the highest rate of hospital consolidation from 2010 through 2013. They found the price of an average hospital stay went up between 11 and 54 percent in the years after the merger. Likewise, a 2012 Robert Wood Johnson Foundation report concluded that across various markets and data sources, hospital consolidation typically results in higher prices. If hospitals merge in markets that are already concentrated, the price increase can exceed 20 percent.

While prices tend to go up, it’s not clear about how quality is affected by mergers. There hasn’t been as much research around how health system mergers impact quality, Delbanco said. That same RWJ Foundation report noted that hospital competition — something that might be lost because of consolidation — improves quality of care. And a recent New York Times article by Austin Frakt, an adjunct associate professor at the Harvard T.H. Chan School of Public Health, cited several studies and concluded the same. “Studies show that rates of mortality and of major health setbacks grow when competition falls,” the article reads.

Another expert, Chris Skisak, executive director of the nonprofit Houston Business Coalition on Health, echoed Delbanco.

“They haven’t saved money. They haven’t gained efficiencies. They sure haven’t reduced costs or [ended in] better outcomes to patients,” Skisak said in a phone interview. In fact, he said “it’s a good thing for the end purchaser” that the Baylor Scott & White-Memorial Hermann deal fell through.

Not surprisingly, however, the American Hospital Association has promoted the benefits of hospital mergers. A report by Charles River Associates prepared for the AHA found that when the acquired hospital and the nearest hospital in the acquiring system were less than 30 miles apart, annual operating expenses fell by 2.8 percent.

Photo: mikdem, Getty Images