The creation of economic efficiencies in hospital mergers

Acquisitions of safety-net hospitals from 2016-2021: a case series

Safety-net hospitals have recently become targets of acquisition by health systems with the stated purpose of improving their financial solvency and preserving access to safety-net services. Whether acquisition achieves these goals is unknown. In this descriptive case series, we sought to determine the factors that contribute to safety-net hospital acquisition, and identify whether safety-net services are preserved after acquisition. We examined 22 acquisitions of safety-net hospitals from 2016 to 2021 and described characteristics of the acquired safety-net hospitals, their acquiring systems, and the operational fate of acquired hospitals. Relative to other hospitals in the same Hospital Referral Region in the year prior to acquisition, acquired safety-net hospitals tended to be smaller and have lower occupancy rates. Acquiring systems were geographically concentrated, with only 6 of 20 systems operating in more than 1 state. Safety-net hospitals frequently offered typical safety-net services prior to acquisition. However, after acquisition, 2 of the 22 acquired safety-net hospitals lost safety-net services, 3 hospitals ceased inpatient services, and 1 hospital closed entirely. These findings suggest that acquisition of safety-net hospitals may be associated with trade-offs related to the provision of safety-net services for the communities that stand to benefit from them most.

Quality competition and hospital mergers-An experiment

On the basis of a Salop model with regulated prices, we investigate quality provision behaviour of competing hospitals before and after a merger. For this, we use a controlled laboratory experiment where subjects decided on the level of treatment quality as head of a hospital. We find that the post-merger average quality is significantly lower than the average pre-merger quality. However, for merger insiders and outsiders, average quality choices are significantly higher than predicted for pure profit-maximising hospitals. This upward deviation is potentially driven by altruistic behaviour towards patients. Furthermore, we find that in the case where sufficient cost synergies are realised by the merged hospitals, there is a significant increase in average quality choices compared to the scenario without synergies. Finally, we find that our results do not change when comparing individual decisions to team decisions.

Healthcare managers’ perception of economies of scale

Purpose

The purpose of this paper is to explore how healthcare managers perceive economies of scale and the underlying mechanisms for how scale/size affects performance.

Design/methodology/approach

Data were collected in 20 in-depth interviews with healthcare professionals from 13 healthcare delivery organizations and from a public authority that finances and contracts healthcare services. Data were coded and analysed using content analysis.

Findings

The study concludes that the impact of scale on performance is perceived by healthcare professionals to be different for different types of healthcare services: For surgery, significant scale effects related to spreading of fixed cost, the experience curve, and potential for process improvement. For inpatient care, moderate scale effects related to spreading of fixed costs and costs of doctors on on-call duty. For outpatient care, small or no scale effects.

Research limitations/implications

The small sample of interviewees from a single geographical region and healthcare system limits the applicability of the findings.

Originality/value

The paper provides insights into how healthcare managers experience scale effects and how they consider economies of scale when planning hospital configuration. Also, past studies of economies of scale in hospitals proffer mixed results and the findings in this paper indicate a possible explanation for this inconclusiveness, i.e. differences in service mix between different hospitals.

Two Decades of Organizational Change in Health Care: What Have we Learned?

The 1980s and 1990s witnessed a substantial wave of organizational restructuring among hospitals and physicians, as health providers rethought their organizational roles given perceived market imperatives. Mergers, acquisitions, internal restructuring, and new interorganizational relationships occurred at a record pace. Matching this was a large wave of study and discourse among health services researchers, industry experts, and consultants to understand the causes and consequences of organizational change. In many cases, this literature provides mixed signals about what was accomplished through these organizational efforts. The purpose of this review is to synthesize this diverse literature. This review examines studies of horizontal consolidation and integration of hospitals, horizontal consolidation and integration of physician organizations, and integration and relationship development between physicians and hospitals. In all, around 100 studies were examined to assess what was learned through two decades of research on organizational change in health care.

Flexible bed allocations for hospital wards

Flexibility in the usage of clinical beds is considered to be a key element to efficiently organize critical capacity. However, full flexibility can have some major drawbacks as large systems are more difficult to manage, lack effective care delivery due to absence of focus and require multi-skilled medical teams. In this paper, we identify practical guidelines on how beds should be allocated to provide both flexibility and utilize specialization. Specifically, small scale systems can often benefit from full flexibility. Threshold type of control is then effective to prioritize patient types and to cope with patients having diverse lengths of stay. For large scale systems, we assert that a little flexibility is generally sufficient to take advantage of most of the economies of scale. Bed reservation (earmarking) or, equivalently, organizing a shared ward of overflow, then performs well. The theoretical models and guidelines are illustrated with numerical examples. Moreover, we address a key question stemming from practice: how to distribute a fixed number of hospital beds over the different units?

Demand uncertainty and hospital costs: an application to Portuguese public hospitals

In this paper, we evaluate the effect of demand uncertainty on hospital costs. Since hospital managers want to minimize the probability of not having enough capacity to satisfy demand, and since demand is uncertain, hospitals have to build excess capacity and incur the associated costs. Using panel data comprising information for 43 Portuguese public hospitals for the period 2007-2009, we estimate a translog cost function that relates total variable costs to the usual variables (outputs, the price of inputs, some of the hospitals' organizational characteristics) and an additional term measuring the excess capacity related to the uncertainty of demand. Demand uncertainty is measured as the difference between actual and projected demand for emergency services. Our results indicate that the cost function term associated with the uncertainty of demand is significant, which means that cost functions that do not include this type of term may be misspecified. For most of our sample, hospitals that face higher demand uncertainty have higher excess capacity and higher costs. Furthermore, we identify economies of scale in hospital costs, at least for smaller hospitals, suggesting that a policy of merging smaller hospitals would contribute to reducing hospital costs.

Measuring unexpected hospital demand: the application of a univariate model to public hospitals in Greece

The accurate forecasting of hospital demand is an important issue in many countries. The author applied a univariate model using hospital daily emergency admissions of 10 public hospitals in Athens, Greece, during the period 2001-2005. Unexpected demand varied considerably among hospital units in Greece, and its volatility over time was low. Managerial and organizational characteristics of the hospital, the easy accessibility by the patients, its reputation, and the size of the hospital were possible explanations for these variations. The Ministry of Health should undertake policies in order to smooth out the variations in unexpected demand among the Greek public hospitals.

How do system-affiliated hospitals fare in providing community benefit?

The shift from local, community-based organizations to more complex delivery systems raises questions about the community orientation and accountability of health systems and their affiliates. This study examines whether hospitals affiliated with health care systems are more or less likely to engage in practices that reflect responsibility to their local communities by providing benefits in the form of uncompensated care, community engagement, Medicaid caseload, and accessible pricing policies. Using audited state data and other sources, we performed a longitudinal analysis on a pooled cross-sectional data file for the years 1989-2003 for all hospitals in Texas, California, and Florida. Results indicate that when compared to independent hospitals, system affiliation is associated with less community benefit. However, the level of community benefit varies depending on the type of community benefit examined and the structural characteristics of the system with which a hospital is affiliated. Results further suggest that the level and type of community benefit is conditioned by the market under which system-affiliated hospitals operate.

Consolidations and closures: an empirical analysis of exits from the hospital industry

This paper investigates the pre-exit characteristics of hospital mergers, acquisitions, and closures. We estimate competing risk hazard models using an 18-year national data set that spans the wave of closures in the 1980s and of mergers in the 1990s. Evidence shows that weak productivity of the hospital is a strong determinant for closures while competitive pressures are more influential in the decision to consolidate. Thus, increased market power, relative to cost reductions, appears to play a larger role in the merger decision. Our results also provide insight into possible correlations between mergers and closures.

Scale and scope efficiencies through hospital consolidations

The hospital sector in the Province of Ontario has recently completed a large scale restructuring marked by wide ranging hospital closures, mergers and program transfers. Given a generally inconclusive economics literature, regulators used an accounting, as opposed to an economic, approach when predicting gains to consolidations. This paper uses an economic cost function to examine economies of scale and scope in the years preceding restructuring, where there was little doubt that economies were possible. Issues relating to output aggregation, functional form, and scale and scope testing are addressed and an equilibrium cost function is derived from an estimated short run function to measure the cost concepts of interest. Using index and direct approaches, we examine a variety of potential reconfigurations and conclude that there were indeed large scale unexploited gains to strategic consolidation in the hospital sector. Furthermore, these gains may not have been detected using standard approaches in the literature.

Hospital integration and vertical consolidation: an analysis of acquisitions in New York State

While prior studies tend to view hospital integration through the lens of horizontal consolidation, I provide an analysis of its vertical aspects. I examine the effect of hospital acquisitions in New York State on the distribution of market share for major cardiac procedures across providers in target markets. I find evidence of benefits to acquirers via business stealing, with the resulting redistribution of volume across providers having small effects, if any, on total welfare with respect to cardiac care. The results of this analysis -- along with similar assessments for other services -- can be incorporated into future studies of hospital consolidation.

Changing organisations: a study of the context and processes of mergers of health care providers in England

This paper presents findings from a study of the context and processes of provider mergers in the NHS in England. Mergers are an example of organisational restructuring, a key lever for change in the UK health care sector and elsewhere, although it is only one strategy for organisational change. The framework for the study is key themes from the organisational change literature: the complexity of the effects of change; the importance of context; and the role of organisational culture. The drivers for health care mergers and the evidence for these are analysed. Using documentary analysis and in-depth qualitative interviews with internal and external stakeholders, the first part of the paper reports on stated and unstated drivers in nine mergers. This provides the context for four in-depth case studies of the process of merger in the second and third years post-merger. Our study shows that the contexts of mergers, including drivers of change, are important. Merger is a process without clear boundaries, and this study shows problems persisting into the third year post-merger. Loss of management control and focus led to delays in service developments. Difficulties in the merger process included perceived differences in organisational culture and perceptions of 'takeover' which limited sharing of 'good practice' across newly merged organisations. Merger policy was based on simplistic assumptions about processes of organisational change that do not take into account the dynamic relationship between the organisation and its context and between the organisation and individuals within it. Understanding the process of merger better should lead to a more cautious approach to the likely gains, provide understanding of the problems that are likely in the period of change, and anticipate and avoid harmful consequences.

Determining location and size of medical departments in a hospital network: a multiobjective decision support approach

Decisions on the location and size of medical departments in a given hospital network are prime examples of priority setting in health care, which is an issue of growing political importance. As such decisions are regularly characterized by multiple and often conflicting objectives in real-life, this paper integrates the fields of hospital planning and multiobjective decision support. The proposed two-phase solution procedure for our corresponding mathematical programming model does not require a priori preference information. Instead, it seeks efficient solutions by means of multiobjective tabu search in the first phase, while applying clustering in the second phase to allow the decision makers to interactively explore the solution space until the "best" configuration is determined. The real-world applicability of our approach is illustrated through a numerical example based on hospital data from Germany.

Within-year variation in hospital utilization and its implications for hospital costs

Variability in demand for hospital services may have important effects on hospital costs, but this has been difficult to examine because data on within-year variations in hospital use have not been available for large samples of hospitals. We measure daily occupancy in California hospitals and examine variation in hospital utilization at the daily level. We find substantial day-to-day variation in hospital utilization, and noticeable differences between hospitals in the amount of day-to-day variation in utilization. We examine the impact of variation on hospital costs, showing that increases in variance are associated with increases in hospital expenditures, but that the effects are qualitatively modest.

The determinants of hospital and HMO vertically integrated delivery systems in a competitive health care sector

As a response to increased competition in the U.S. health care system, there have been a number of structural changes such as substantial increases in the number of hospital closings, horizontal mergers, and vertical combinations. This paper uses logistic regression and ordinary least squares models to attempt to understand why short-term, non-federal hospitals have created vertically integrated systems with HMOs in urban and rural markets during the 1993-1997 period. During this period, 1,917 integrated systems were formed while 1,466 dissolved. The empirical results indicate that the relative buying power of hospitals is a significant determinant of why hospitals would create vertically integrated systems with HMOs. Other variables also have significant effects upon the creation of vertical affiliations both at the individual hospital level and at the market level.

Integrated delivery networks: a detour on the road to integrated health care?

This paper reviews the rationales and evidence for horizontal and vertical integration involving hospitals. We find a disjunction between the integration rationales espoused by providers and those cited in the academic literature. We also generally find that integration fails to improve hospitals' economic performance. We offer seven lessons from hospitals' efforts to integrate and then suggest four alternative models for achieving integrated delivery of health care services.

Is managed care leading to consolidation in health-care markets?

OBJECTIVE

To determine the extent to which managed care has led to consolidation among hospitals and physicians.

DATA SOURCES

We use data from the American Hospital Association, American Medical Association, and government censuses.

STUDY DESIGN

Two stage least squares regression analysis examines how cross-section variation in managed care penetration affects provider consolidation, while controlling for the endogeneity of managed-care penetration. Specifically, we examine inpatient hospital markets and physician practice size in large metropolitan areas.

DATA COLLECTION METHODS

All data are from secondary sources, merged at the level of the Primary Metropolitan Statistical Area.

PRINCIPAL FINDINGS

We find that higher levels of local managed-care penetration are associated with substantial increases in consolidation in hospital and physician markets. In the average market (managed-care penetration equaled 34 percent in 1994), managed care was associated with an increase in the Herfindahl of .054 between 1981 and 1994, moving from .096 in 1981 to .154. This is equivalent to moving from 10.4 equal-size hospitals to 6.5 equal-sized hospitals. In the physician market place, we estimate that at the mean, managed care resulted in a 14 percentage point decrease of physicians in solo practice between 1986 and 1995. This implies a decrease in the percentage of doctors in solo practice from 38 percent in 1986 to 24 percent by 1995.

Management of integrated delivery systems in the next decade

In an attempt to find some remedies within what is already a highly competitive and politically charged environment, this article's purpose is to specify some major steps that the management of integrated delivery systems might heed in the next decade to curtail their expenditures and better position themselves for the future.

Horizontal mergers in the United States health field: some practical realities

During the past decade, 'merger mania' has been a striking trend in the US health field as a strategy to improve the integration of services, to reduce expenses, and to increase the ability of providers to manage risk-based payment. However, during the past quarter of a century limited operational and fiscal evidence has been published in both the health and general management literature that strongly supports the efficacy of horizontal mergers. This article further argues that a likely scenario over the next decade, in spite of disappointments among these mergers in effecting significant cost reductions, is for the US health networks to continue acquiring additional providers and insurers. After these alliances gain significant market penetration, they are expected to behave as oligopolists. For these mergers to eventually achieve their earlier projected savings, the health field's leadership will be forced to implement cost-cutting measures such as: more vigorously coordinating the network's key clinical services to reduce competition for revenues among the partners within an alliance, closing superfluous hospitals and centralizing expensive tertiary services, encouraging surplus physicians to relocate to under-served areas, and providing direction to carefully integrate the best elements of what the competitive and regulatory strategies are able to offer to improve access, social equity, quality of care, and to reduce total health expenditures.

How to enhance the efficacy of health network growth

In almost every American metropolitan area, health executives are busily enhancing the efficacy of their health networks by corporately restructuring so that their organization can become a fiscally and politically powerful oligopoly or a regulated monopoly. When the formation of these alliances are initially announced by the local media, they are reported to be vehicles to enhance access, social equity and quality of care, and to reduce costs. Since an increasing number of these health networks are currently experiencing fiscal, cultural and other difficulties, it is critical to study: (a) what factors should be considered when developing an effective and efficient health network?; (b) what are the practical issues in their strategic formation and management so they eventually achieve their full potential?; and (c) why will some divestitures among these health networks occur and how will these corporate 'spin offs' impact on consumers, providers, insurers and governmental agencies? Within the next decade the United States will face some inevitable economic difficulties. At that time, enhancing access and reducing costs will become more critical issues for health networks. These alliances may then need to become more responsive to consumer pressures as the Americans shift their political proclivities from the current quasi-competitive to a more quasi-regulatory position. In this context, the use of global budgetary targets is discussed as a possible option in the United States to constrain costs, an approach used in almost all other western industrialized nations.

Consequences of organizational change in U.S. hospitals

Organizational change has become commonplace among U.S. hospitals. Empirical investigations of the consequences of organizational change, however, are relatively scarce, and findings of existing studies are inconsistent. In this article, the authors review the rationale and performance implications of hospital organizational change in three areas: (1) the development of new multi-institutional arrangements, (2) change in traditional ownership and management configurations, and (3) diversification in organizational products/services and consolidation of organizational scale. Empirical research on hospital change published between 1980 and 1999 in the health services research, social science, and business literatures is reviewed to highlight the potential pitfalls that hospitals may encounter in their effort to remain viable. The article also summarizes the strengths and weaknesses of current hospital change research and provides specific suggestions for future research in this area.

Hospital mergers and closures: survival of rural hospitals

There are two major models to save financially failing rural hospitals: (1) expanding through an affiliation or merger with other hospitals to increase the utilization and diversity of services, or (2) downsizing by employing the limited-service model and providing only emergency and primary care service with limited acute care. This study investigates hospital mergers and closures from 1990 to 1992 using the American Hospital Association's (AHA's) data from the Annual Survey of U.S. Hospitals. The presence of potential scale and scope economies among merging and closing hospitals prior to the merger or closure suggests that rural hospitals are operating at a size level that has great potential for achieving scope and scale efficiencies through mergers.

The changing effects of competition on non-profit and for-profit hospital pricing behavior

Has the nature of hospital competition changed from a medical arms race in which hospitals compete for patients by offering their doctors high quality services to a price war for the patients of payors? This paper uses time-series cross-sectional methods on California hospital discharge data from 1986-1994 to show the association of hospital prices with measures of market concentration changed steadily over this period, with prices now higher in less competitive areas, even for non-profit hospitals. Regression results are used to simulate the price impact of hypothetical hospital mergers.

Organizational diversification in the American hospital

This paper outlines a conceptual framework of organizational diversification and assesses the state of empirical research on hospital organizational change. The literature on economic organization of hospitals, one of the most developed branches of health services research, still has only weak ties to economic theory. Evolving physician-hospital organizations do not fit into existing frameworks based on horizontal integration, vertical integration, or diversification. Empirical research has primarily focused on horizontal integration, and cause-effect relationships are often obscured by models that depart from economic theory and lack controls for self-selection bias. Recent empirical studies indicate that hospital mergers had moderate, rather than dramatic, effects on the rate of change in operating costs, staffing, and scale. Mergers rarely resulted in hospital closure, but were as likely to result in acute care consolidation and restructuring as in conversion to non-acute inpatient uses. While administrative costs were higher in for-profit than non-profit system hospitals, total costs were similar. System hospitals had lower marginal and average costs per stay than independent hospitals. Hospital vertical integration into subacute care was largely an artifact of the governmental uniform pricing system, which encouraged vertical integration. Hospitals that shared governance or financial risks with physicians outperformed those with high levels of physician governance and financial integration (e.g. stock ownership). Formal physician-hospital organizational arrangements often served to coordinate managed care contracting or to forge links with primary care group practices. Hospital diversification into related services improved short-term financial performance over unrelated diversification, although long-term performance was similar.

Economies of scale in non-revenue producing cost centers: implications for hospital mergers

This paper uses semiparametric methods to estimate the magnitude of economies of scale in 14 non-revenue producing cost centers in hospitals. There are substantial economies of scale in small hospitals, but economies are exhausted in hospitals with over 10,000 discharges annually. In recent hospital mergers challenged by federal antitrust agencies, one or both hospitals had over 10,000 discharges, suggesting that efficiency gains in non-revenue producing cost centers will be small, and could easily be offset by nominal price increases.

Which types of hospital mergers save consumers money?

This study analyzes the changes in costs and prices from 1986 to 1994 for more than 3,500 U.S. short-term general hospitals, including 122 horizontal mergers. These mergers were generally financially beneficial to consumers, providing average price reductions of approximately 7 percent. Merger-related price reductions were considerably less in market areas with higher market concentration levels. Merger-related price reductions in areas with higher penetration by health maintenance organizations (HMOs) were approximately twice those in areas with lower HMO penetration. Merger-related price reductions were greater for low-occupancy hospitals, nonteaching hospitals, nonsystem hospitals, similar-size hospitals, and hospitals with greater premerger service duplication.

Physician case-by-case assignment and participation in Medicare

The prospect of budget cuts in Medicare is likely to result in less generous reimbursements from Medicare and thus affects physicians' willingness to accept Medicare patients with the reduced payments. This study examines physicians' decisions about case-by-case assignment and participation in Medicare in relation to Medicare reimbursement generosity. A two-part model is applied to a database from a national survey of physicians. The results indicate that reimbursement generosity from private insurance relative to that from Medicare negatively affects physicians' assignment rates, implying that the elderly's access to health care and/or the financial burden is likely to be jeopardized by further reductions in Medicare reimbursements.