The Great Health Care Consolidation Race ? What Really Matters

Thursday, December 14, 2017 | Larry Sobal

The health care industry is in a constant state of deciding what it wants to be in the future. And part of its reengineering appears to be an upswing in consolidations, most notably some huge announcements in the past two weeks. The real question may be less about who is joining whom, and more about what the real benefits will be.

Let’s start with what has hit the news recently.

• CVS Health inked a definitive merger agreement to acquire all outstanding shares of Aetna for roughly $69 billion in cash and stock. The deal is one of the largest transactions in recent memory. When including the assumption of Aetna's debt, the transaction totals $77 billion.
• Englewood, CO-based Catholic Health Initiatives and San Francisco-based Dignity Health signed a long-awaited definitive agreement to combine into a single Catholic health system comprised of 139 hospitals across 28 states.
• UnitedHealth Group's Optum unit will acquire DaVita Medical Group's clinics in Florida, California, Colorado, Nevada, New Mexico and Washington, as well as 35 urgent care centers and six outpatient surgery centers. The deal totals approximately $4.9 billion in cash.
• Aurora Health Care, the largest health system in Wisconsin, and Advocate Health Care Network, the largest health system in Illinois, announced an agreement last week to combine their operations, a merger that would create the 10^th largest nonprofit health system in the country. The combined system would have annual revenue of $11 billion, employ almost 70,000 people, including more than 3,300 physicians, and operate 27 hospitals.
• Adding to a late-in-the year flurry of huge mergers, Ascension and Providence St. Joseph are in talks that would create the largest hospital operator in the country with 191 hospitals in 27 states and annual revenue of $44.8 billion.

And let’s not forget some of last year’s big deals, such as Abbott purchasing St. Jude Medical for $25 billion to get bigger in the cardiovascular-device world. These follow years of consolidation activity between small, medium and large health care organizations—and physicians as well. In fact, there have been over 1,000 merger and acquisition deals in the U.S. hospital industry in the past 10 years. It’s also noteworthy to mention that some proposed consolidations never happened, such as Aetna’s proposed $37 billion merger with Humana, after it (and others) were blocked in court on antitrust grounds.

There are a number of factors contributing to the continued consolidation of health care, and most seem to point toward a desire to attain a substantial “critical mass” that promises leverage, efficiencies and market share. What isn’t clear, as aptly described by Dr. Atul Gawande in The New Yorker’s "Big Medicine" article, is whether bigger is actually better, and better for whom.

When you sort through the PR material associated with consolidation announcements, what usually emerges is a goal to achieve financial strength, reduce clinical variation, increase scale, form clinically integrated networks for improved care delivery or to vertically integrate to control a larger portion of the health care delivery value stream. Increasingly, you see consolidation rationale around how to more rapidly and successfully transition care from being volume-based to more value-based and driving increased efficiency and efficacy of care delivery, achieving geographic growth, expanding and creating deeper capabilities, or building stronger infrastructure in supporting better care.

To the degree that there have been retrospective studies of consolidation, the most commonly mentioned benefits are decreasing costs, access to capital and bolstering struggling hospitals. Of course, there has been some evidence that not all health care mergers go well.

At face value, the attractions of consolidation are understandable and worthy. But what I hope to see, and sometimes don’t, is a clear and simple focus on the patient. To that end, I can make a strong argument that the Triple Aim should be the primary criteria by which the consolidation was successful. In other words, did it improve the health of a population, reduce the per capita cost of health care and also improve the patient experience? Better yet, did it achieve the Quadruple Aim of also improving the work life of health care providers, including physicians, other clinical caregivers and staff? Published research of this is minimal, but there are some studies highlighting why health care mergers can be good for patients.

Health care reform has placed an increased focus on demonstrating quality outcomes and providing low-cost care. The leaders of organizational consolidations must evaluate the degree to which quality of care can be improved. Unfortunately, quality initiatives can sometimes be among the last to be instituted in mergers and acquisitions.

Unfortunately, quality initiatives can sometimes be among the last to be instituted in mergers and acquisitions.

A good place to start might be including success measures such as increased use and expansion of evidence-based medicine and other care management protocols, management and staff accountability for quality outcomes, and use of information technology to support quality improvement. Effective clinical resource utilization—as measured by readmission rates, emergency department utilization, length of stay and cost per case—is also important to assess. Plus, in an era when margin pressures are increasing due to softening admissions and rising costs, it’s fair to say that one potential outcome of a merger would be to eliminate unnecessary duplication of clinical programs, especially those of low volume that would be better off if centralized.

Leaders should calculate these factors' effectiveness on quality and cost to determine the ultimate success of a consolidation. 

While I get excited when I hear about some of the big deals that are being announced, and am optimistic about the innovation and shared learning that will accelerate improvement, history has shown that they don’t always deliver on their intended purpose. There are many variables and catalysts influencing the consolidation that is underway in the health care industry. I hope that with all the careful planning, thorough due diligence, and strategic integration post-transaction, there remains a clear focus on bringing improvement and innovation to the patient.

llustration: Lee Sauer

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Larry Sobal is Executive Vice President and a Senior Consultant at MedAxiom. He has a 35-year background as a senior executive in medical group leadership, hospital leadership and health insurance. Larry consults, writes and presents on topics relevant to transforming physician practices and health systems. His weekly blog post comes out on Thursdays and can be accessed at www.medaxiom.com.

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