Hospital Mergers Save More When Facilities Are Close Together

December 31, 2018 - Hospital mergers produce even greater efficiencies and savings when the acquired facilities are in close proximity to each other, a new report shows.

The Charles River Associates report prepared for the American Hospital Association (AHA) revealed that the merger of nearby hospitals reduced expenses per adjusted admission by 2.8 percent compared to non-merging hospitals.

For hospital mergers involving more distant hospitals, the decline in expenses per adjustment admission was 1.5 percent. But the expense reduction was not statistically significant, researchers pointed out.

The new report builds on a previous study by Charles River Associates that showed hospital mergers reduced costs and improved care quality.

In the 2017 study, researchers interviewed 20 different hospital system leaders and asked them to describe the cost reductions and quality improvements that may be achieved through hospital mergers. Researchers also asked about the primary motivation for hospital mergers.

READ MORE: How Hospital Merger and Acquisition Activity is Changing Healthcare

Hospital system leaders consistently reported that full financial integration of hospitals produced the greatest financial savings and care quality benefits. Looser affiliations did not have the accountability, commitment, or alignment of incentives to achieve similar outcomes, the leaders indicated.

The 2017 study also included an econometric analysis to compare cost per admission, revenue per admission, and inpatient quality measures for hospitals that went through a merger or acquisition and similar hospitals that did not engage in a transaction.

The analysis revealed that hospital mergers reduced operating expense per admission at the acquired hospitals by 2.5 percent. As a result, the average merger-related annual savings would be $5.8 million assuming the average annual operating expense of the merging hospital was approximately $235 million.

Researchers also found that net patient revenue per admission fell at acquired hospitals and care quality did not change after a hospital merger.

To expand on the 2017 study, Charles River Associates along with the AHA examined the effect of proximity on savings and care quality improvements post-merger. And they uncovered that mergers between hospitals within 30 miles apart produced greater savings.

READ MORE: FTC’s Approach to Assessing Hospital Mergers Flawed, AHA Says

In addition to expenses per admission reductions, nearby hospital mergers resulted in a reduction in revenue per admission. When merging hospitals were less than 30 miles apart, revenue per admission dropped 3.5 percent.

However, researchers also observed a 5.9 percent decline in revenue per admission when the merging hospitals were further apart. But the magnitudes of the declines were not statistically different, they noted.

In terms of care quality improvements, the new analysis showed the effect of hospital mergers on inpatient quality measures was “less conclusive.”

Researchers linked hospital mergers to small quality improvements for some measures. The only measure producing statistically significant results was readmission rates. Mergers between hospitals in close proximity improved hospital readmission rates, while mergers of more distant hospitals saw no significant change in their rates.

Researchers stressed that their results add to a growing repository of research showing that hospital mergers generate cost savings.

READ MORE: Hospital Mergers Produce Modest Healthcare Supply Chain Savings

One such research project came from Deloitte and the Healthcare Financial Management Association (HFMA) in 2017. Using similar data as Charles River Associates, the two organizations found that hospital financial executives agreed that access to capital, cost efficiencies, and patient care improved post-merger.

Their supplemental empirical analysis also showed that both operating expenses and revenue per adjustment admission declined for hospitals engaging in merger deals between 2008 and 2014. They also found that revenue fell faster than operating costs, resulting in an overall decline in operating margins at merging hospitals.

Another 2017 study from the University of California at Los Angeles also revealed cost reductions post-merger, with merger-related cost savings ranging between four and seven percent compared to non-merging comparison hospitals.

The cost and quality benefits of hospital mergers has been under the microscope of late. Mergers are occurring at a rapid rate, with 2017 seeing historic levels of hospital merger and acquisition activity.

Hospitals are saying that their merger and acquisition deals will bring care quality improvements and savings to both the healthcare system and patients by increasing scale. Many organizations also cite value-based care and care integration as top motivators of hospital mergers.

However, state and federal government leaders are questioning the actual benefits of the mergers.

The Federal Trade Commission (FTC) reported in 2016 that hospital prices increased as the number of competitors in a market decreased. And the Medicare Payment Advisory Commission (MedPAC) found that prices may be higher after a merger or acquisition because hospitals are under less pressure to reduce their costs.

As the debate continues with research coming out supporting both sides, state and federal agencies are increasing their scrutiny of hospital merger and acquisition deals. Organizations looking to partner with a close or distant hospital should expect to clear higher regulatory hurdles to complete a deal.