Rapid Pace of Health System Consolidation to Continue, Experts Say

December 15, 2020 - The top ten largest health systems now control nearly a quarter market share because of rapid health system consolidation and this trend is likely to continue as care delivery evolves, reveals a new report from Deloitte.

The largest health systems grew significantly in market share and revenue, with the latter increasing nearly twice as much over the past five years compared to the rest of the health systems and independent hospitals in the market (82 percent versus 45 percent).

A large component of the growth is the fact that large health systems got larger during the period. Health systems with 30 or more hospitals saw the average number of hospitals in the system increase to 68.4 by 2018 from 64.6 in 2013.

Meanwhile, the total average number of hospitals per all health systems increased slightly to 6.5 by 2018 from just 6.4 in 2013.

Healthcare merger and acquisition activity has shifted to more large-scale deals in which both organizations each have at least $1 billion in annual revenues. Just recently, the third quarter of 2020 saw four such deals announced, according to consulting firm Kaufman Hall.

Healthcare organizations have been looking to add more types of services beyond the hospital, Deloitte explains.

“Advances in clinical technology continued to allow more types of care to be safely provided outside of a hospital. Outpatient and other alternative care settings became even more popular in the past five years with consumers and payers due to their convenience, lower cost, and better value. Outpatient care now makes up a larger portion of hospitals’ revenue,” the report states.

Outpatient care increased from 28 percent to 48 percent of overall hospital revenue between 1994 and 2018, a separate report from Deloitte shows.

And more recently, hospital outpatient revenue grew at a higher compounded annual rate (9 percent) compared to inpatient revenue (6 percent), the report found for the period between 2011 and 2018.

Despite the unprecedented public health crisis created by COVID-19, experts at Deloitte project healthcare industry consolidation to continue at a rapid pace.

Care delivery is shifting to be more virtual, focused on prevention and wellness, consumer-centric, and equitable, especially coming out of the COVID-19 pandemic, the authors of the report state. As a result, the industry will need fewer hospitals.

By 2030, inpatient hospital revenue will be 35 percent lower compared to today, and demand for hospital beds will be 44 percent lower, the authors predict. This means hospitals are likely to be smaller and there will be fewer facilities, which will lead to significant industry consolidation, they add.

“Health systems will likely be confronted with significantly lower revenue and decisions about where care can and should be delivered,” they explain. “Care in hospitals will likely become much more specialized. Those looking to innovate will seek consolidation to gain more capabilities, resources, and relationships.”

Healthcare mergers and acquisitions (M&A) will be the key to competing in the evolving industry, and M&A tools (i.e., mergers, acquisitions, integration, and divestitures) will help organizations innovate, the authors say.

“Some organizations will seek M&A to develop a broader portfolio of care delivery options and non-health care businesses. Others may end up seeking consolidation to survive. Either way, M&A is a leading strategy to create opportunities for relationships, capabilities, and services,” they write.

But healthcare industry consolidation will vary by market.

Deloitte experts project 61 of the 390 metropolitan statistical areas (MSAs) across the US to see significant consolidation based on a projected 66 percent lower demand for hospital beds in the areas.

The remaining 329 MSAs will also experience healthcare industry consolidation, but to a lesser degree.

Overall, the experts expect consolidation will likely be more pronounced in markets with falling or flat population growth and hospitals with poor financial performance, according to the report.

“Care delivery is changing. Hospital business models are changing. The concept of scale is changing. To survive and thrive, especially post-pandemic, health care executives should look at their options and carefully consider M&A a key part of their strategy going forward,” Ion Skillrud, author of the report and principal at Deloitte Consulting LLP, said in a press release.