Healthcare Mergers and Acquisitions: A Smart Recipe for Growth?

Posted on April 18, 2012


At the PDC Summit last month, a panelist noted Cleveland Clinic CEO Toby Cosgrove’s perspective that expected mergers and acquisitions (M&A) to be integral to sustaining healthcare revenue.  This is also supported by economic theory.  Big-time growth in this way is likewise espoused by for-profit healthcare.

I believe mergers and acquisitions in healthcare can greatly consolidate what is currently a fractured market. If M&A can do for healthcare what it did for banking, then it will be generally beneficial. I think having a handful of national brands in healthcare, recognized coast to coast, is smart. I have accounts with Bank of America, primarily because I have easy, cost-free access to my money almost anywhere I travel. Imagine having that peace-of-mind for healthcare, without wondering if you are in network when you get sick or injured when out of town.

I question mergers and acquisitions as a major strategy for one main reason. For some hospitals and systems, healthcare is not (yet) about the acquisition of more patients.

Cosgrove believes healthcare growth relies on mergers, which will deliver patient volume. As an analogy, Cosgrove feels the pie is finite and hospitals need to grab as much of it as possible before everyone gets claimed.

It would be great to feed the hopper of the healthcare machine if there wasn’t so much dropping out, spilling over and getting rejected on its way through. There is still so much tinkering and fine-tuning to the healthcare delivery process needed, which will deliver significant value (including elimination of waste), that more input is not a responsible solution until the machine is operating at peak efficiency. What’s the point of injecting more fuel into an engine to amp up horsepower if the fuel injection is gummed up, the pistons are misfiring and the master cylinder is leaking oil?

Volume is a great focus when everything else is in your system is working well.  And volume is attractive for leadership because it can hide a lot of inefficiencies. When a franchise grows by opening more stores and acquiring more customers investors are happy, but analysts quickly look at telling metrics like the cost of acquiring new customers, customer spending per visit, sales per location—which report on how well the internal operations of the business is working.  A hospital system that is gobbling up other hospitals may be weak in those equivalent healthcare metrics, and volume is not a solution.

In the same PDC panel, efficiency was a big discussion item. Hospital executives noted efficiency of flows, logistics and asset management are not optimized at most hospitals. 70-80% bed utilization of the past will need to make way for 85-90% full. And internally, hospitals must structure their business model to make money on all populations of patients, including Medicaid. This will require a cost reduction of 10-30%, and few hospitals are capable of such lean operations at this time.

I contend there will be a proper time for healthcare mergers, but until each hospital gets its operations house in order it is premature.  M&A will not only deliver mere marginal benefit but could also exacerbate existing organizational issues at the acquiring company. Admittedly, no one ever acquires a company thinking ‘let’s save a bunch of money on elimination of duplicated services’. Overhead reduction is a fringe benefit.

M&A confirms the ugly arms race mentality in the healthcare market.  It also suggests internally everything is perfectly maximized and new revenue growth must come externally, when there is plenty of revenue to be wrung out of the existing inefficiencies in billing, scheduling, departmental throughput, and manpower needed to handle existing patient loads.

The courts are already wary of systems with a significant market share, and are looking skeptically on proposed mergers with anti-trust concerns in mind. Possibly lost or perhaps crushed under foot are the critical access hospitals (CAHs), which play a significant role in care delivery to a large portion of the U.S. but are often marginalized because of their size, and frequently become acquisition targets due to their precarious financial situations.  I contend they cannot be ignored.

An unexplored drawback is the ‘too big to fail’ argument that led to the banking bail out and soft takeovers of companies like General Motors. Would the government do the same for healthcare? If they did and took control of the enterprise (as opposed to providing a cash infusion), would they let go?