Hospital Consolidation Rising

The highest level of healthcare consolidation since the turn of the millennium occurred during 2012 and it is expected to continue - if not accelerate - going forward, a new report from Chicago-based Fitch Ratings contends.

The main spark for the new wave of consolidation is healthcare reform, report author Adam Kates told Healthcare Finance News. Eyeing reimbursement reductions and a changing business model that places more risk on the provider sector, healthcare organizations are looking to gain leverage from combining assets, staff and resources, he said.

"Hospital executives are seeing the fabric of operations changing from a fee-for-service format that rewards patient volume to a managed system that rewards patient outcomes," said Kates, director of Fitch's public finance group. "It is a very significant change in their operations and there is going to be a difficult period when they will have to operate in both worlds."

Fitch's study focused on not-for-profit hospitals, but Kates said consolidation has been active in the for-profit hospital and physician sectors as well. In spending more than a year conducting his market study, Kates said he has identified a definite trend of hospitals taking steps to build economies of scale to better withstand the revenue pressures they expect with the advent of the Affordable Care Act.

Ben Rooks, founder of San Francisco-based ST Advisors, said the wave of hospital mergers is a logical response to the value-based purchasing business model touted by the ACA.

"It's a numbers game," he said. "To effectively take on the financial risk providers are being told to assume, they need a certain amount of critical mass. The bigger you are, the more the numbers work to your advantage."

When two hospitals that previously competed in one region suddenly join forces, they not only gain economies of scale and double their market share, experts agree they also gain valuable leverage in negotiating for insurance contracts, product pricing and talent recruiting as well as assuming more control over emerging accountable care organizations.

-from Healthcare Finance News