Most hospitals that joined a larger system generated more revenue but didn't become more efficient, Modern Healthcare's analysis of Medicare cost reports from 2013 to 2019 shows.
Hoag Memorial Hospital, for instance, saw its estimated operating revenue per day increase 29.2% from 2015—two years after it merged with Providence—to 2019. But its average operating expenses per day rose 34.1% over that span, dropping its average operating income per day 19.3%. Meanwhile, its full-time equivalent employees per average occupied bed rose from 5.99 to 6.75 from 2015 to 2019.
Although Medicare cost reports do not capture all of a hospital's data, they can provide general estimates of financial health. Cost reports are audited by the hospitals, and not a third party like annual earnings reports. They exclude physician practice metrics and system-wide measures, among other data. Modern Healthcare used 2013 as a baseline because the Medicare cost reports' format changed that year.
Modern Healthcare's analysis supports other research that found mergers yield minimal cost savings. Supply chain spending, for instance, only dropped about 1.5% after hospitals merged, which represents only about 10% of what is typically claimed for a merger justification, according to a University of Pennsylvania Wharton School working paper that analyzed hospital supply purchase orders from 1,200 hospitals from 2009 to 2015.
"People are beginning to understand that mergers don't bring about cost reduction," said Lawton Robert Burns, professor of healthcare management at the Wharton School, who wasn't affiliated with the study, noting the recent decline in M&A transactions as executives are being more careful.
Acquired hospitals typically pay what's essentially a tax to support the system's central office, said Dan Higgins, a partner at Dentons who is legal counsel for Hoag. Ideally, those centralized support offices produce more efficiencies than their cost to maintain them, he said.
"We have been paying an enormous amount, and what are we relying on them for?" Higgins asked. "The answer is fundamentally nothing."
Providence frames it differently. Providence helped Hoag build up its medical group, diagnostics, ambulatory surgery centers, orthopedic services and mental health offerings, said Erik Wexler, president of operations and strategy for the 51-hosptial system's southern footprint. The system also deployed the Epic electronic health record platform across Hoag's network, he said.
"If someone says nothing in population health improved, that wasn't the case," Wexler said. "Their improvements in quality and patient satisfaction have exceeded their own care standards, which illustrates the benefits of being together."
The court proceedings won't change day-to-day operations with Hoag, Wexler said, lauding the hospital and its medical staff. But it may slow long-term initiatives, he said.
"It may slow down other innovative opportunities because the parties are waiting to learn about what the court feels," Wexler said. A trial date is set for April 2022.
Higgins said the cultures didn't align either.
Hoag requested to change bedside monitors so that it would alert the nurses station when vital signs were off, rather than wake the patient. Higgins said Hoag allegedly couldn't get Providence's approval because it "wasn't part of Providence's program," he said.
"It was one of a thousand pin pricks where the corporatized parent wouldn't allow a financially well-endowed, fast-moving hospital to do what it needed at the physician level," Higgins said.
"Decision-making was so far removed from the community, it was a hindrance to community care," Braithwaite said. "There's an undermining of the commitment to the level of service and quality for the purpose of strengthening the financials at Providence. It felt counter-directional and certainly counter-cultural."
Wexler rebutted the claims that Providence stripped Hoag of its authority, saying that "nothing could be further in the truth." There are corporate offices in Irvine, he noted, adding that it is "really unfortunate Hoag is trying to pull apart a system of care that's all within a 20-mile radius."
Providence acquired St. Joseph Health in 2016. At that point, all of Providence's focus was on improving St. Joseph's financials and it tabled its population health initiative with Hoag, Braithwaite said.
Providence's operating income declined $536 million from 2015 to 2016, posting 1.4% and -1.2% operating margins, respectively. The group of Orange County, Calif., hospitals, including Hoag, helped mitigate losses incurred at Seattle's Swedish Health—which Providence acquired in 2012—and Providence's Los Angeles operations. Hoag's operating margin exceeded 5% from 2015 to 2019, according to the Office of Statewide Health Planning and Development data.
Southern California represents more than 30% of Providence's operating revenue. That share increased from 29% in 2018 to 32% in 2020.
Hoag accounts for less than 6% of Providence's operating revenue, Providence said in its 2020 earnings report. But that's an oversimplification, said Nathan Kaufman, founder and managing director of the healthcare consultancy Kaufman Strategic Advisors.
"Hoag is such a significant part of Providence's financial performance, but they don't have a say commensurate with that," he said.