Canada: Oye! Times readers Get FREE $30 to spend on Amazon, Walmart… USA: Oye! Times readers Get FREE $30 to spend on Amazon, Walmart…Oligopoly (noun): a state of limited competition, in which a market is shared by a small number of producers or sellers.
Research by Booz & Company shows that the hospital business in the United States is changing at a rate that has not been seen for years. In 2012 alone, there were 105 merger and acquisition deals in the hospital and health systems sector, double the number seen in 2009. Here is a graphic showing a history of the number of announced U.S. hospital transactions between 1994 and 2011 and the key government actions that accompanied the activity:
The authors suggest that the forces behind this trend are related to:
1.) Federal healthcare reform (i.e. the Affordable Care Act and changes to Medicare and Medicaid reimbursement).
2.) Deep budget cuts at the state level.
3.) Insurance companies are holding the line on costs.
4.) Difficulty in using credit to raise the capital necessary to fund new infrastructure.
5.) Declining admission rates.
All of these factors are creating an environment where hospitals and health systems have to think outside the box to survive and remain profitable. The most vulnerable targets are stand-alone hospitals which on average, in 2011, saw their operating margins in negative territory as shown here:
While these deals will be publicly touted as creating economies of scale that result in greater efficiencies and reduced costs to hospitals, the Booz study shows that this is not the case. Out of a sampling of 201 hospital and health care system deals between 1998 and 2008, only 41 percent of acquired hospitals outperformed their peer group. In addition, 18 percent of acquired hospitals went from having positive margins before being acquired to having negative margins after acquisition. One would think that having more beds would result in greater efficiencies, unfortunately, of the deals that ended up with more beds, only 39 percent outperformed the broader market and of the deals that resulted in the same number or fewer beds, 42 percent outperformed the broader market. Basically, the idea that a merger or acquisition in the hospital or health sector would improve the bottom line is worse than a coin toss.
Let's go back to my opening definition of oligopoly. Booz & Company predicts that out of the 5000 hospitals in America, roughly 1000 will seek a merger or acquisition opportunity in the next five to seven years. While on a nationwide basis there is still plenty of competition, the same cannot be said for specific geographic areas. The 2012 attempted merger of OSF Healthcare and Rockford Health, both located in Illinois, is a case in point. This merger was cancelled after the Federal Trade Commission determined that the number of acute health care hospitals in Rockford, Illinois would be reduced from three to two and that the combined hospitals would control nearly two-thirds of acute-care inpatient services. That is pretty much the dictionary definition of an oligopoly.
While many independent hospitals are clinging to their independence by their figurative fingernails, the writing may well be on the wall. It will be increasingly difficult for them to retain their independence in the face of competition from their larger peers. On top of that, once their competition is eliminated, it will be increasingly tempting for the new mega-health and hospital systems to raise health care costs for Americans, especially since the Booz study shows that most mergers do not result in higher margins. Ultimately, the margins will have to rise to positive territory. Another factor that must be considered is the case where health and hospital systems load themselves with debt in order to make themselves bigger and bigger. Eventually, the debt has to be paid and we all know who will pay in the end.