News & Insight

Overcoming Market Power Sensitivities in Hospital Mergers: Part 1

By Thomas Babbo and John Marren. Edited by Mary Grace Babbo. 

The Rise of the Hospital Merger 

In a post-recession America, the value and scope of hospital and healthcare mergers have risen considerably. 2015 saw a large spike in the number of mergers and acquisitions, with the all-time largest valuation of mergers across all sectors, and the closing quarter of 2017 saw an uptick in large-scale hospital and healthcare mergers that set new precedents for the size of hospitals merging and the Federal Trade Commission’s (FTC) oversight. 2018’s “merger mania” is growing at a rate that is set to overtake the merger records set in 2015, as smaller firms, merger candidates grow more profitable and attractive to acquisition by larger firms. 

The Complicated Side of Hospital Mergers

Yet, despite the growing trend of health system mergers and mergers in general, not all are meant to be. Mergers that create market concentration are going to be challenged.Consider this: two large hospitals, each with significant marketshare in Chicagoland area, propose a merger with the goal of lowering cost for patients, improving quality care, and gaining market share. This is precisely what happened in the proposed Advocate Health Care – NorthShore University Health System merger, which the FTC blocked in 2015, appealed after the Illinois state court sided with the hospitals, and finally managed to end in 2017 when a federal judge backed up the FTC’s original block. 

In such a case as this, increased market share as a result of the proposed merger took priority over quality care and cost for consumers.  The major takeaway from the discussion that took place in the Advocate case is that a high market impact mergers can only succeed if there are sufficient, substantial efficiencies demonstrated and quality improvements, as well as consumer benefits to the merger. That means that a solid program of service line integration must be developed that demonstrates clear efficiencies and reductions in cost.

What’s Happening Now? 

While financial experts are concerned about the possibly troubling macroeconomic link between mergers across all sectors and recessions, lawyers and health policy experts worry that the supposed large-scale efficiencies of some hospital mergers will instead fail to lower costs, and that the FTC may not approve some of the proposed deals. Additionally, large potential mergers, like the current talks between nonprofits Ascension and Providence St. Joseph Health, create a battle between hospitals and health insurers to gain negotiation leverage over patients’ costs. 

Many hospital merger deals announced at the closing of 2017 are set to close this year, such as those between Advocate Health Care and Aurora Health Care, Dignity Health and Catholic Health Initiatives, and Carolinas Healthcare System and UNC Health Care. Yet, most of these deals still await FTC review, and face other roadblocks before their finalization. For these potential mergers to avoid the same fate of the proposed Advocate-NorthShore merger, there must be changes in the merger process. 

How We Can Help 

Through an examination of the legal, economic, and logistical obstacles to a hospital merger, the intricacies and drawbacks of hospital mergers seem daunting — but clinically integrated networks (CINs) and programs of service line integration that demonstrate efficiencies provide a solution. This series of blog posts will demonstrate some of the ways that this kind of activity can take place, but it is not a comprehensive guide.  

For more information on this type of integration, please contact John Marren and Tom Babbo.

  Jul 15, 2018  |  By    |   On Health Care