Are Mergers and Acquisitions the Cure for Shrinking Hospital Margins?

A consulting firm offers three factors that could support hospital M&A strategies in 2021 and beyond.

The human toll that COVID-19 takes is painfully obvious, always heartbreaking, and often inspiring. But could the pandemic also put some hospitals on life support as it severely reduces the consolidation strategies within the industry and thus the hospitals’ ability to reduce losses?

That is the view of the consulting firm Ernst & Young (EY), which recently launched its Global Capital Confidence Barometer and noted that the number of healthcare executives considering a merger or acquisition in the next 12 months has dramatically decreased.

According to the EY, 34% of healthcare executives say they will pursue M&A until next year. That number is significantly lower than the 60% who made the same claim a year ago. Whether this is good news or bad news depends on who you ask, but EY says it could have an impact on the long-term prospects of health organizations.

“As hospitals increasingly face significant margin challenges driven by rising nursing costs and relentless pressure to reduce the reimbursement of those nursing bills, M&A is becoming an increasingly important role,” noted EY of the Barometer results. In fact, only the largest hospitals with an average operating margin of 6.6% have margins comparable to the largest US payers (which ranged from 5.0% to 8.1% in 2019). The rest of the hospitals even had negative operating margins in 2019. “

Despite the current decline in M&A interest, EY cites three key factors that could support hospital M&A strategies in 2021 and beyond. They are:

  • The margins in the hospital are shrinking. “The average hospital operating margin fell from 1.8% in 2015 to 0.3% in 2015. To counteract this, increased mergers and acquisitions in the hospital can lower costs and increase margins through economies of scale, record a larger patient volume and improve coordination improve care across the care continuum and develop sustainable reimbursement solutions with managed care and corporate payers, “the company stated.
  • Vertical integration between payers and providers. “In the long run, convergence can be critical in enabling the US to break away from the pay for volume paradigm. In the meantime, health systems and payers can work together to find solutions that work today for a sustainable economy and a bridge to tomorrow, “said EY.
  • The need to scale hospital systems to be competitive. “Consolidating hospital peers or systems can lower costs by increasing scope. Mergers and acquisitions with an academic medical center can allow a healthcare system to grow in size and improve its regional branding as a provider of world-class, innovative care,” the Consulting firm explained.

But not everyone agrees that M&As are the right tourniquet in many hospitals to stop the financial bleeding. In fact, America’s Health Insurance Plans (AHIP), the trade association, says one of the main drivers of rising healthcare costs is increasing consolidation between hospitals and hospital systems. The Federal Trade Commission shares this view.

“Too many hospital mergers lead to high prices and less care for the most needy patients,” the commission stated in a. fixed opinion Last month.

In a separate blog from the AHIP in August, the association found that “arguments in favor of hospital consolidation often herald higher quality of care or other benefits for consumers. A number of recent studies have found this to be incorrect to learn on hospital mergers and acquisitions in 2009-2013: “The takeover of one hospital by another hospital or hospital system was associated with slightly poorer patient experiences and no significant changes in readmission or mortality rates.” “

Desperate times and desperate measures

Even in good times, the healthcare industry is under tremendous pressure to keep costs down while maintaining patient care and satisfaction. COVID-19 made things a lot worse, says Simon Merry, EY’s strategy and transaction leader for health sciences and wellness in the US in the east.

“Everyone is fighting for resources. There is no level playing field and there are many players inside and outside the industry trying to change the way we deliver healthcare,” said Joyeux. “COVID has put the pressure on. So can the industry stay the way it is, or is M&A the recipe that will help these hospitals stay competitive?”

To answer this question, EY consultants developed a six-step process designed to help financially troubled hospitals decide whether consolidation is just what the doctor ordered.

think of Step one as the equivalent of a financial check, explains Joyeux. The check-up begins with three questions the manager should ask to determine the organization’s ability to close a deal and, if so, the size and scope of the right deal. These questions are:

  • What is your equity?
  • How much cash do you have at your disposal?
  • How high is their debt capacity and to what extent can they fall back on it?

Step two examines the competitive dynamics in the market. This includes evaluating the choices patients make about where they are cared for and the way care is provided.

Step three is the reimbursement dynamic. Health organizations need to know if they are in a market where payers are consolidating or if there is a threat of consolidation, and how both could affect pricing power.

Step four examines patient demographics in the local market. Will the population grow, shrink, age or get younger, get sicker or less ill, and how will these factors affect the types of services needed in the future?

Step five evaluates whether there is a trend towards more outpatient versus inpatient services and how your organization can meet this trend.

Step six looks at your competitors and assesses what new opportunities there might be in the local market due to gaps in current services.

There is no one-size-fits-all formula for making the decision to consolidate.

“The criteria will be different for each hospital,” stresses Joyeux. “They’ll be specific to the hospital. Each market will be different. It’s a very local business. So the challenges and opportunities for hospitals in Nebraska will be very different from those of a greater New York City hospital.”

Finally, Joyeux says hospitals need to be clear about what they want to achieve with consolidation. A merger is designed to reduce costs and streamline operations. But it should also improve the quantity and quality of health services that the organization can provide.

David Weldon is a contributing writer for HealthLeaders.

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