In late November 2016 the federal government announced that annual health care spending increased by 5.8 percent to $3.2 trillion.1 Already at 17 percent of gross domestic product (GDP), US health care costs are nearly double those of most developed countries on a per capita basis.2 States and the federal government have been unable to bend the cost curve in a material way, but we can see through the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) and the continued shift to value-based payment models that bigger changes are coming. The health care system's financial growth rate is likely unsustainable, payers and providers are responding with wholesale changes to reimbursement models, and providers are taking a hard look at how they will operate in an industry where the benefits of scale have become more critical than in the last 15-20 years.
Enter: consolidation. Hospitals and health systems are pursuing consolidation as one answer to new marketplace realities. The pace of provider consolidation has increased on average 14 percent each of the last seven years3, and is impacting all delivery system types. Providers are seeking the benefits of scale to offset economic pressures including declining reimbursement, rising IT and regulatory compliance costs, and increasing drug/supply expenses. The cumulative impact of these cost pressures has pushed both community hospitals and large, national delivery systems to seriously consider working with one or more partners to preserve margins. In addition, consolidation is an attractive solution to health care providers looking for ways to reach new geographies or markets, diversify revenue sources, manage populations, provide new services, and invest in technologies/facilities while more efficiently deploying limited capital.
In a collaborative, a group of independent yet aligned hospitals or health systems form a legal partnership to pursue common goals and initiatives. (Some collaboratives may include a health plan or physician groups as members.)4 These arrangements are attractive to providers that want to remain independent yet achieve the benefits of scale (note that collaboratives do not include financial integration). Collaboratives can deliver value via cost savings, improved quality, value-based care, network development and population health support, and “soft measures” like strengthened relationships. However, the road to savings can take time; for providers facing imminent financial or competitive pressures, a joint venture (JV) or full asset merger might be preferred options.5
Health care partnerships are taking form in ways we couldn't have fully imagined a decade ago. Providers are pursuing JVs and other affiliations with peers, health plans, and new market entrants to manage clinical and financial risk, access new technologies, and strengthen their capabilities in value-based care (VBC), data analytics, population health, primary care, and network participation. Stakeholders in the provider space should actively pursue arrangements, perhaps even unorthodox ones that advance their interests. However, the transactional nature of partnerships may spawn control issues and culture clashes so participants should clearly define in advance their expectations, roles, and responsibilities.
Full asset mergers
Full asset mergers could provide the most immediate capability and cost-saving benefits, and they may mitigate control and culture pitfalls often seen in collaboratives and partnerships. Acquirers can survey the landscape to identify organizations that may be a good financial, operational, and market “match” and control the terms of engagement. Still, a merger may present post-deal integration challenges that can dilute or delay deal value realization.
Provider consolidation is likely to continue as market economics exert downward pressure and health care providers remain highly fragmented relative to other industries. Collaboratives, partnerships, and full asset mergers can give providers new ways to compete in an uncertain market with new rules, new challenges, and new opportunities.
- Deloitte Center for Health Solutions, 2013 Survey of US Health Care Consumers, 2014 Survey of US Physicians, 2013 Survey of US Employers; Bureau of Labor Statistics: http://data.bls.gov/pdq/SurveyOutputServlet *Data are rounded.
- Irving Levin Associates, Inc., The Hospital Acquisition Report 2016.
- Provider collaboratives: Working together to navigate the changing health care delivery system, Deloitte Center for Health Solutions, 2017