For health systems, how big is too big?

Intermountain Healthcare and SCL Health completed their merger in April. In doing so, they formed a $14 billion system, with 33 hospitals spanning seven states.

Contrary to the publicized rationale for most health system mergers, the focus of the transaction wasn’t on limiting expenses. Intermountain and SCL combined to build “economies of capability”—adding a health plan to SCL’s operations, helping improve its risk-based arrangements and boosting population health management, said Dan Liljenquist, Intermountain’s senior vice president and chief strategy officer.

“If you are not bringing new capabilities, a merger will create value on the margins, but that value comes at a competing cost in managing a whole bunch more complexity,” he said. “I am not sure what the right answer is—maybe we have one or two other deals in us, but I don’t think there are 10 deals. I don’t think consolidation at that level provides economies of scale.”

Health system board members and executives across the country are having similar conversations as they map out regional and national expansions, but their path is muddied by mixed data on post-merger savings. Leaders must convince regulators the best way to reduce their costs is through addition. And regulatory agencies are increasingly skeptical.

The Federal Trade Commission challenged three proposed hospital mergers this year after finding the potential for the transactions to increase prices, reduce quality and stifle wages outweighed their possible benefits. The health systems involved withdrew their proposals.

Even if there are savings, they are often overshadowed in the eyes of regulators by the cost of coordinating a merger and price increases for consumers, experts said.

Lifespan and Care New England, two Rhode Island not-for-profit systems, scrapped their merger plans in February amid regulatory opposition.

The organizations’ proposed savings related to bundled supply purchases, but there wasn’t a lot of common supplies used between the two systems, said Lawton Burns, a professor of healthcare management at the University of Pennsylvania who assisted the FTC’s review.

“Even the savings projections in areas where they were potentially compatible weren’t that big,” he said. “We concluded that if that is all they were going to get out of it, it wasn’t going to cover the merger’s bill.”

Health systems seek to lower their expenses—and those of the hospitals they are acquiring—through mergers by consolidating their revenue cycle, technology, human resources and other administrative departments. Overhead associated with a hospital’s real estate footprint, electronic health record and equipment decreases as those expenses are spread over a bigger organization. It takes at least two years after a deal is completed for integration efforts to come to fruition, hospital executives said.

But such savings may never meaningfully materialize if an organization gets bogged down by bureaucracy or if systems span vast geographies, industry observers and health system leaders said. Executives have to travel farther to different sites, roles across hospitals overlap and disparate IT systems complicate workflows.

“There is a point where the level of complexity creates diseconomies of scale where per-unit costs go up,” Liljenquist said.

The difficulty in pinpointing specific reasons for any cost changes further confuses the situation.

Researchers typically use operating expenses per adjusted discharge, which accounts for the differences in resource intensity between inpatient and outpatient care. But they also caution it’s challenging to draw a direct link between a merger and a change in operating expenses, which can fluctuate based on many other factors like shifts in patient acuity, insurance coverage, supply and labor shortages and regulations.

Modern Healthcare compiled information from 10 mergers with complete full-year Medicare cost report data between 2011 to 2019. According to the analysis of National Academy for State Health Policy data, operating cost per adjusted discharge at acquired hospitals tended to increase for a few years after the merger, then plateau or decline, and then return to or exceed pre-merger levels shortly thereafter.

Renton, Washington-based not-for-profit system Providence acquired Swedish Health Services’ five hospitals in 2012. Median operating cost per adjusted discharge at the 227-bed Swedish Medical Center Cherry Hill increased an average of 7% a year from 2011 to 2019, although operating cost growth stagnated from 2015 to 2017. Medical inflation accounted for about 34% of the increase in median operating cost per adjusted discharge.

Operating costs at the other four acquired hospitals stayed relatively consistent.

The Medicare cost data didn’t account for case-mix-adjusted admissions, a Providence spokesperson said in a statement. The year-over-year increase in expenses at Swedish Medical Center Cherry Hill, which is a referral center for cardiovascular and neurological care, was closer to 4% when adjusting for higher-acuity patients, the spokesperson said.

“Our communities face a host of complex challenges, including a severe national staffing shortage, inflation and global supply chain disruptions. These external forces are driving up the cost of care. Yet reimbursement from insurers and revenue have not kept pace,” the statement said.

Providence representatives said the merger enabled integration of administrative services and cost-effective IT implementations.

A 4% annual cost growth at Providence still outpaces medical inflation, according to Modern Healthcare’s analysis. Medical inflation would account for about 90% of the expense increase from 2011 to 2019 under that estimate, a figure Providence confirmed.

In July, the health system announced it would restructure to try to mitigate worker shortages, inflation, supply chain disruptions and reimbursement declines, consolidating its seven regional offices to three.

Existing research illustrates post-merger cost savings are not a sure thing, experts said.

“Do mergers achieve the full set of aspirations of health system boards and their CEOs and CFOs? The answer to that may well be no,” said Cory Capps, a partner at the economic consulting firm Bates White.

“There may well be no savings. Certainly, there is no guarantee that there will be savings or that they are consistently large,” he said, noting exceptions can exist.

Banner Health, a 30-hospital academic medical center based in Phoenix, acquired three University of Arizona Health Network hospitals in 2015.

The median operating cost per adjusted discharge at the 649-bed Banner University Medical Center Tucson rose an average of 10% from 2013 to 2018. Costs then decreased 6% from 2018 to 2019. Medical inflation accounted for about 30% of the increase in median operating cost per adjusted discharge from 2013 to 2018. The 766-bed Banner University Medical Center Phoenix mirrored that trajectory.

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At 245-bed Banner University Medical Center South, median operating cost per adjusted discharge decreased an average of 2% a year from 2013 to 2017. But costs rose an average of 6% a year from 2017 to 2019. Medical inflation accounted for about 40% of the increase in cost per adjusted discharge from 2017 to 2019.

Banner tried to advance academic medicine and training programs when it acquired University of Arizona Health Network, not extract cost efficiencies, a Banner spokesperson said in a statement.

“We would expect to see some increases in cost per discharge within our academic medical centers over time as the levels of care at those facilities increase,” the spokesperson said.

Banner has invested more than $1 billion in the academic health system since 2015, including adding and expanding artificial heart and heart transplantation services, the statement said.

The Providence-Swedish and Banner-University of Arizona Health Network transactions show how post-merger results can vary. Such variation is reinforced by multiple studies.

Hospital mergers only saved acquired hospitals $176,000 annually on supply purchases, according to a working paper from University of Pennsylvania researchers who analyzed about 80 mergers completed between 2009 and 2015. The savings, which fell well below hospital projections, predominantly came from hospitals close to each other, the paper found.

But a peer-reviewed 2017 analysis of 459 hospital mergers completed between 2000 and 2010 found hospitals purchased by out-of-market buyers consistently resulted in post-merger savings, unlike in-market acquisitions. All acquired hospitals, on average, reduced costs by 4% to 7% in the years following a transaction, the study published in the Journal of Health Economics found.

Another study came to similar conclusions. Hospitals’ annual operating expenses per admissions drop 3.3% after they have been acquired by a larger system, according to an American Hospital Association-commissioned analysis of 2019 cost report data.

As for the acquirer hospitals, the Journal of Health Economics study and Modern Healthcare’s analysis found no evidence of statistically significant savings after the transaction.

“There are some supply cost savings, but the real opportunities of scale are on the revenue side,” industry consultant Nathan Kaufman said.

Hospitals that integrate well can reduce their expenses, but execution is inconsistent, said David Jarrard, CEO and founder of the healthcare consultancy Jarrard Phillips Cate & Hancock. Long-term strategies related to standardizing equipment purchasing and reducing clinical variation are rarely achieved, he said.

“There is an opportunity for smart systems to redesign payment systems and their cost structure,” Jarrard said. “But they have to adopt a mindset of systemic transformation rather than addition.”

System-owned hospitals aren’t necessarily better at cutting costs than independent hospitals.

Independent hospitals with between 100 and 249 beds had lower median operating costs per adjusted discharge than system-owned hospitals of the same size for eight out of the nine years spanning 2011 to 2019, according to a Modern Healthcare analysis of National Academy for State Health Policy data for more than 2,000 hospitals.

System-owned hospitals tended to have lower operating costs than their independent counterparts for facilities with fewer than 25 beds and those with more than 250 beds. There wasn’t a significant difference in median operating cost per adjusted discharge for hospitals with between 26 and 99 beds.

Other research has shown system-owned hospitals did not exhibit lower costs than independent ones. A peer-reviewed 2015 analysis of 1998 to 2010 data from 4,000 hospitals found no evidence system-owned hospitals had lower costs.

Executives point to the potential advantages of scale when advocating for mergers: Market power can increase negotiating leverage with payers, accelerate technology investments and enable population health initiatives.

Large systems also typically weathered the COVID-19 pandemic better. They had more cash on hand and more resources to shift across hospitals amid the intermittent surges.

Providence and Swedish, for instance, were able to develop COVID-19 treatments quickly and share resources during the pandemic, a spokesperson said.

But as health systems propose mergers, they will have to show regulators their past transactions have reduced costs and not led to higher prices. FTC Chair Lina Khan said during an April 14 forum on healthcare mergers that the agency will be “very skeptical” of claims that consolidation will increase efficiency.

The best-run health systems have been able to standardize clinical practices and the supplies they use, cut extra layers of management and use technology to streamline day-to-day operations after mergers, industry observers said.

Dallas-based Baylor, Scott & White Health said in 2019—six years after Baylor Health Care System and Scott & White Healthcare merged—that the transaction led to more than $700 million in savings, mostly stemming from supply chain and managed-care economies of scale.

Charlotte, North Carolina-based Atrium Health, which acquired Navicent Health in Macon, Georgia, in 2018, saved $83 million over a three-year period, executives said. Following its 2020 acquisition of Wake Forest Baptist Health, Atrium said it cut $147 million in costs in about a year.

“If parties want to persuade state or federal agencies, they will need to show them they have a (cost-saving) plan and that past mergers didn’t result in an increase in prices above a certain market value rate,” Capps said.

Researchers said, however, that health systems don’t need to merge to become more efficient.

And any savings, if they occur, aren’t necessarily passed on to patients, said Leemore Dafny, a business administration professor at Harvard University and former deputy director of healthcare and antitrust at the FTC.

In June, the for-profit chain HCA Healthcare called off its proposed acquisition of five Steward Health Care System hospitals in Utah after the FTC sued on the grounds that the deal would increase prices, which would’ve been passed onto consumers.

Also in June, RWJBarnabas Health nixed its proposal to acquire St. Peter’s Healthcare System in New Brunswick, New Jersey. The West Orange, New Jersey-based not-for-profit health system said it and St. Peter’s mutually agreed to end the transaction, which the FTC said would’ve given the combined entity about 50% of market share for general acute-care services in Middlesex County.

Scale has its limits, Liljenquist said. If health systems reach across 30-plus states, it becomes more of a play for negotiating leverage than cost savings, he said.

“Most often, that is actually bad for patients because it entrenches the current model and allows you to get paid more and keep competition away,” Liljenquist said.