Ascension-Providence St. Joseph Merger: Consolidation No Panacea
(Bloomberg Gadfly) -- You get big? I'll get bigger.
In the face of increasing consolidation among insurers, hospitals are themselves linking up at ever-greater rates. The Wall Street Journal reported Monday that we may see one of the biggest hospital deals yet: a possible merger of non-profit giants Ascension and Providence St. Joseph Health, which would create the largest hospital group in the U.S.
But while consolidation seems like a rational response to the issues facing hospitals, it isn't a surefire solution.
The results of the strategy have been mixed. For-profit hospital groups have loaded up on debt and acquisitions, only to see share prices plunge due to disappointing results. And even HCA Healthcare Inc. -- the largest hospital chain, which has avoided large acquisitions recently -- has seen its share price stagnate in a tough environment.
Hospitals are expensive for patients, and insurers have been pushing people to lower-cost alternatives. They're doing this with plan design and high deductibles -- and increasingly they're becoming providers themselves. Cost savings would be a priority if this merger happens, but no tie-up is going to make hospitals anything but the priciest place to get treated or change the overall shift toward patients finding care elsewhere.
Hospital groups are also moving into outpatient treatment, but knitting together a new giant that controls nearly 200 hospitals may distract from that effort.
While scale grants negotiating leverage, it is most effective only under certain conditions. A recent study in Health Affairs found that hospital concentration can lead to higher prices -- but that those gains largely evaporate when there is a high degree of consolidation on the insurer side as well.
According to the WSJ's report, Ascension and Providence only overlap in two states. That limits their leverage with payers. The new group could have some extra juice with big insurers because of its sheer size. But ultimately, health care markets are mostly local. And you can bet insurers will band together in any market where this combination creates a provider monopoly.
Meanwhile, patients on government programs such as Medicare and Medicaid fill a large and growing number of hospital beds. Negotiating leverage matters less for those patients. And keep in mind that the individual insurance market is deteriorating, and that GOP tax cuts may lead to health-care spending cuts.
The lack of overlap also means other merger benefits -- preventing patient leakage out of a system and eliminating redundancy -- may be limited. Cost savings due to higher volume, better coordinated care, and improved population health are easier to theorize than actually realize.
Choppy health care-waters don't automatically get more navigable in a bigger boat.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.
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