Mixed data on savings benefits for health system mergers

The Renton, Washington-based nonprofit Providence system acquired all five hospitals from Swedish Health Services in 2012. The median operating cost per adjusted discharge at the 227-bed Cherry Hill Swedish Medical Center increased by an average of 7 % per year between 2011 and 2019 , although operating cost growth stagnated from 2015 to 2017. Medical inflation accounted for about 34% of the increase in median operating cost per adjusted discharge.

Operating costs at the other four acquired hospitals remained relatively constant.

The Medicare cost data did not take into account case-mix adjusted admissions, a Providence spokesperson said in a statement. The year-over-year increase in spending at Cherry Hill Swedish Medical Center, which is a referral center for cardiovascular and neurological care, was closer to 4% when adjusting for higher-acuity patients, the spokesman said.

“Our communities face a number of complex challenges, including severe national staffing shortages, inflation, and global supply chain disruptions. These outside forces are driving up the cost of care. However, insurers’ reimbursement and revenues have not kept pace,” the statement said.

Providence representatives said the merger enabled the integration of cost-effective IT deployments and management services.

A 4% annual cost growth in Providence continues to outpace medical inflation, according to analysis by Modern Healthcare. By that estimate, medical inflation would account for about 90% of the spending increase from 2011 to 2019, a figure Providence confirmed.

In July, the health system announced it would be restructuring to try to mitigate worker shortages, inflation, supply chain disruptions and declining reimbursements, consolidating its seven regional offices into three.

Existing research illustrates that post-merger cost savings are not a sure thing, experts said.

“Do mergers achieve the full set of aspirations of health system boards and their CEOs and CFOs? The answer to that may well be no,” said Cory Capps, a partner at economics consultancy Bates White.

“There may be no savings. There is certainly no guarantee that there will be savings or that they will be consistently large,” she said, noting that exceptions may exist.

Banner Health, a 30-hospital academic medical center based in Phoenix, acquired three University of Arizona Health Network hospitals in 2015.

The average operating cost per adjusted discharge at the 649-bed Banner University Medical Center Tucson increased an average of 10% from 2013 to 2018. Costs then decreased 6% from 2018 to 2019. Medical inflation accounted for about 30% of the increase in median adjusted operating cost per discharge from 2013 to 2018. The 766-bed Banner University Medical Center Phoenix reflected that trajectory.

Download the Modern Healthcare app to stay informed when industry news breaks.

At the 245-bed Banner University Medical Center South, the median operating cost per adjusted discharge decreased an average of 2% per year from 2013 to 2017. But costs increased an average of 6% per year from 2017 to 2019. Medical inflation accounted for about 40% of the adjusted discharge cost increase from 2017 to 2019.

Banner tried to promote academic medicine and training programs when it acquired the University of Arizona Health Network, not extract cost efficiencies, a Banner spokesman said in a statement.

“We would expect to see some increases in cost per discharge within our academic medical centers over time as levels of care at those facilities increase,” the spokesperson said.

Banner has invested more than $1 billion in the academic health system since 2015, including adding and expanding artificial heart and heart transplant services, according to the release.

The Providence-Swedish and Banner-University of Arizona Health Network transactions show how post-merger results can vary. Such variation is reinforced by multiple studies.

Hospital mergers alone saved acquired hospitals $176,000 annually in supply purchases, according to a working paper from researchers at the University of Pennsylvania who analyzed about 80 mergers completed between 2009 and 2015. The savings, which fell well below the projections of the hospitals, came mainly from hospitals close to each other, the paper found.

But a 2017 peer-reviewed analysis of 459 hospital mergers completed between 2000 and 2010 found that hospitals bought by off-market buyers generated post-merger savings, unlike in-market acquisitions. All acquired hospitals, on average, cut costs 4% to 7% in the years after a transaction, the study published in the Journal of Health Economics found.

Another study reached similar conclusions. Annual operating expenses for hospital admissions drop 3.3% after being acquired by a larger system, according to an analysis commissioned by the American Hospital Association of 2019 cost report data.

As for the acquiring hospitals, the Journal of Health Economics study and Modern Healthcare analysis found no evidence of statistically significant savings after the transaction.

“There are some supply cost savings, but the real opportunities for scale are on the revenue side,” said industry consultant Nathan Kaufman.

Hospitals that integrate well can cut costs, but execution is inconsistent, said David Jarrard, CEO and founder of health consultancy Jarrard Phillips Cate & Hancock. Long-term strategies related to standardizing equipment purchases and reducing clinical variation are rarely achieved, he said.

“There is an opportunity for intelligent systems to redesign payment systems and their cost structure,” Jarrard said. “But they have to adopt a mindset of systemic transformation rather than addition.”

Leave a Reply

Your email address will not be published.