Acquisitions Work As A One-Time Efficiency Boost For Hospital Margins: Study

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Dive Brief:

• When independent hospitals are acquired by multi-hospital health systems, they experience boosts to profitability and efficiency, according to a new study published in the Journal of Political Economy Microeconomics this week. 
• Acquired hospitals saw profitability increase by about $14 million per year, on increased consumer prices and cuts to nonclinical staff. 
• However, when corporate-owned hospitals are acquired by other health systems, they do not experience similar efficiency gains, the study found, suggesting there is likely a limit to how much consolidation can benefit hospital performance.

Dive Insight:

Healthcare consolidation is growing in the U.S. As of 2020, multi-hospital systems controlled 81% of U.S. hospital beds — up from 58% in 2000, according to the study.

Health economists at the University of Pennsylvania’s Leonard Davis Institute of Health Economics in Philadelphia sought to tease out the conditions under which hospitals might benefit from consolidation.

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

Average hospital inpatient prices rose by up to 11% following an acquisition.

Independent hospitals acquired by health systems cut an average of $11.2 million in annual expenditures through cutting nonclinical staff in administrative, maintenance and supply, medical records and pharmacy departments. 

They also saw their 90-day readmission rates rise, possibly indicating a degradation of quality. The rising readmission rates could be associated with having fewer support staff on hand, according to the study.

System-owned hospitals acquired by other health systems, on the other hand, did not cut operating costs or experience efficiency boosts following acquisition.

The finding is significant, given mergers are often touted by provider groups as a way for hospitals to optimize operations. Hospital groups argue aligning with larger health systems allow struggling hospitals to centralize resources and increase their bargaining power with payers.

“This suggests that the first time an independent hospital transitions to system ownership, the system does a pretty good job of optimizing human resources, and future transactions are not really able to improve on them,” said Atul Gupta, assistant professor of healthcare management at the Wharton School of the University of Pennsylvania, who authored the study. 

The study adds to a growing body of literature suggesting some health system mergers can decrease quality of care and raise consumer prices. 

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

“For example, one clear implication is that when a hospital is already system-owned and it gets acquired by another system, there are unlikely to be any efficiencies for consumers, because we have shown that these deals do not result in a reduction in operating costs,” he said.

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