Independent hospitals hold their own on revenue growth

Revenue at independent hospitals grew at a faster pace than health system-owned hospitals, suggesting that returns may be diminishing on mergers and acquisitions, new data show.

Net patient revenue at independent hospitals rose at an average rate of 4.8% from 2014 to 2018, compared with 4% at their system-owned peers, according to Definitive Healthcare's analysis of around 5,500 U.S. hospitals. That is likely in part due to the larger asset base of health systems, but also revenue gains from consolidation may be plateauing, said Kate Shamsuddin, senior vice president of strategy at Definitive.

"There are huge benefits in that strategy playing out related to managing costs better, among others, but we may be starting to reach the edge of a curve where mergers and acquisitions are having diminishing returns," she said. "We have seen such massive mergers over the past three to four years, and my sense is those are still effective moves, but the actual gain associated from it may be stabilizing more than anticipated."

System-owned hospitals were able to rein in expenses at a faster clip than independent hospitals, as expense growth stabilized to an average rate of 3.9% compared with 4.6% at their unaffiliated peers over that span. This buoys health system executives' claims that scale helps them reduce overhead thanks to bulk purchasing power and other factors.

Consolidation allows health systems to spread their costs over a wider asset base and gives them a leg up in recruiting and retaining talent, said Michael Buchanio, a principal in West Monroe Partners' healthcare practice.

"Scale brings you many benefits that can drive more efficient operations, but you also lose the ability to be agile and it is harder to adjust," he said.

There have been more acquisitions of smaller, sometimes struggling hospitals than mega-mergers as of late, which lend themselves more to expense reduction than opportunities for organic growth, said Buchanio, adding that integration is a long road.

Healthcare executives argue that consolidation is a necessary means to boost access, make vital technology and capital improvements, keep expenses in check and standardize clinical best practices.

In response, many studies have pointed to scale not yielding its expected results. Purported efficiencies of scale are diluted by complex integration efforts, or a lack thereof, that often leave providers with redundant operations, economists argue. Squeezing insurers for higher reimbursement rates will only get health systems so far, they contend.

Earlier this week, Navigant issued a report that found a significant negative correlation between health system expansion and profitability.

Still, the push to grow through mergers and acquisitions remains strong and executives could be bolstered by somewhat stronger financial footing, experts said.

Across all types of hospitals, average net patient revenue increased from $282.7 million in 2014 to $334.5 million in 2018, according to Definitive data. Average operating expense increased from $264.2 million to $313.9 million over that period. But revenue growth has been on a downward trend.

Looking ahead, hospital system executives may be tweaking their sights, looking to partner or merge with insurers, ambulatory care and telemedicine providers and other stakeholders, Shamsuddin said.

"Hospital systems will likely be much more willing to open up to more creative relationships," she said. "Hospitals may not be always looking to acquire other hospitals, and may find better partnerships with other strategic players."