Consolidation Can Save Money But it Increases Management Headaches

Recently, Partners HealthCare, one of the largest hospital groups based in Massachusetts, said that it would acquire Care New England Health System, a large hospital operator in Rhode Island, according to the Boston Globe.

Although most of the Partners hospitals are in good financial health, executives at the organization — as at many businesses — say that it must grow to remain competitive and successful — even as a nonprofit.

With the largest network of hospitals and doctors in Massachusetts, expansion can be difficult, particularly, as the Globe noted, when regulators have said they’d put a halt on adding more heft in the Bay State. Hence, the search for takeover candidates elsewhere.

The healthcare industry has been on a tear of consolidation over the last few years. Hospitals combine under an operational umbrella. Physician practices join with others in associations whose central offices handle billing, management, purchasing, and paperwork. Even specialty areas like optometrists see a trend toward aggregation, with regional and national organizations fueled by venture capital or private equity looking to gain bulk.

Although the degree of consolidation is relatively new in healthcare, the concept is old. Many industries have gone through such a phase, as organizations seek economies of scale to expand revenues with lower overhead costs and greater purchasing power. But the road isn’t smooth and savings can be elusive.

One major problem is that any sort of association means mergers or acquisitions. As many management studies have shown over the years, the majority of M&A activity tends not to realize the value benefits it sought. Organization cultures often clash, introducing high barriers to efficient interoperation.

Organizations can combine purchasing for greater discounts in theory, but vendors have top discount levels. Past a certain point, it doesn’t make financial sense for sources of products and services to cut prices even more because the business becomes insufficiently profitable.

The trade-off for hospitals is that if enough band together in an area, a seller may have less ability to walk away, given that there are fewer available customers. But even with lower prices can come logistical issues. Will the hospital or physician operating group have a warehouse and do its own deliveries for a minimum price from the seller? If so, how much additional cost is incurred?

Larger size also doesn’t answer all problems. Equipment and drugs are still expensive. Staffing of doctors, nurses, technicians, and others involved in care delivery remains a major cost not easily aggregated away. As an example, according to the Globe, even though Care New England had billings last fiscal year of $1.2 billion, it still lost $68.3 million on operations.

Perhaps Partners, which is roughly 10 to 12 times that size, can absorb the loss and even reduce it through centralization of overhead and reduced redundancy through layoffs. But the example reminds that mergers and acquisitions aren’t necessarily an easy road to a financial goal.

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