Acquisitions deliver one-time gains in hospital margin efficiency: study

Brief description of the dive:

• The takeover of independent hospitals by multi-hospital health care systems increases their profitability and efficiency, according to a new study published this week in the Journal of Political Economy Microeconomics.
• The acquired hospitals saw their profitability increase by approximately $14 million annually as a result of higher consumer prices and cuts in non-clinical staff.
• However, the study found that when corporately owned hospitals are acquired by other health systems, there are no similar efficiency gains, suggesting that there is likely a limit to the extent to which consolidation can benefit hospital performance.

Diving Insights:

The study shows that healthcare consolidation is increasing in the US. As of 2020, multihospital systems controlled 81% of U.S. hospital beds — up from 58% in 2000, according to the study.

Health economists from the Institute of Health Economics Leonard Davis in Philadelphia at the University of Pennsylvania tried to understand the conditions under which hospitals could benefit from consolidation.

The study tracked post-acquisition hospital performance from 2013 to 2017 for independent and corporate-owned hospitals.

After the takeover, average hospital treatment prices increased by as much as 11%.

Independent hospitals acquired by health systems cut an average of $11.2 million in annual expenses through cuts non-clinical staff in administration, maintenance and supply, medical records and pharmacies.

They also observed an increase in 90-day readmission rates, which likely indicates deterioration in quality. The study concluded that rising readmission rates may be related to fewer support staff.

On the other hand, system-owned hospitals acquired by other health systems did not reduce operating costs or experience efficiency gains after the acquisition.

The finding is significant given that provider groups often tout mergers as a way for hospitals to optimize operations. Hospital groups argue that adapting to larger health care systems will enable struggling hospitals to centralize resources and increase their bargaining power with payers.

“This suggests that when an independent hospital first becomes a system owner, the system does a fairly good job of optimizing human resources, and future transactions are unable to improve it.” he said Atul Gupta, an assistant professor of health care management at the Wharton School at the University of Pennsylvania, who authored the study.

The study adds to a growing body of literature suggesting that some health system mergers may be possible lower the quality care and pick it up consumer prices.

The study should give antitrust regulators “food for thought,” Gupta said.

“For example, a clear implication is that when a hospital is already owned by a system and is acquired by another system, there is unlikely to be a benefit to consumers because we have shown that these transactions do not result in reduced operating costs,” he stated.

Gupta said it’s an “open question” whether patients will benefit from the efficiencies gained from first-time acquisitions.