Data mixed on savings benefits for health system mergers

Renton, Washington-based not-for-profit system Providence acquired Swedish Health Services’ five hospitals in 2012. Median operating cost per adjusted discharge at the 227-bed Swedish Medical Center Cherry Hill increased an average of 7% a year from 2011 to 2019, although operating cost growth stagnated from 2015 to 2017. Medical inflation accounted for about 34% of the increase in median operating cost per adjusted discharge.

Operating costs at the other four acquired hospitals stayed relatively consistent.

The Medicare cost data didn’t account for case-mix-adjusted admissions, a Providence spokesperson said in a statement. The year-over-year increase in expenses at Swedish Medical Center Cherry Hill, which is a referral center for cardiovascular and neurological care, was closer to 4% when adjusting for higher-acuity patients, the spokesperson said.

“Our communities face a host of complex challenges, including a severe national staffing shortage, inflation and global supply chain disruptions. These external forces are driving up the cost of care. Yet reimbursement from insurers and revenue have not kept pace,” the statement said.

Providence representatives said the merger enabled integration of administrative services and cost-effective IT implementations.

A 4% annual cost growth at Providence still outpaces medical inflation, according to Modern Healthcare’s analysis. Medical inflation would account for about 90% of the expense increase from 2011 to 2019 under that estimate, a figure Providence confirmed.

In July, the health system announced it would restructure to try to mitigate worker shortages, inflation, supply chain disruptions and reimbursement declines, consolidating its seven regional offices to three.

Existing research illustrates post-merger cost savings are not a sure thing, experts said.

“Do mergers achieve the full set of aspirations of health system boards and their CEOs and CFOs? The answer to that may well be no,” said Cory Capps, a partner at the economic consulting firm Bates White.

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“There may well be no savings. Certainly, there is no guarantee that there will be savings or that they are consistently large,” he said, noting exceptions can exist.

Banner Health, a 30-hospital academic medical center based in Phoenix, acquired three University of Arizona Health Network hospitals in 2015.

The median operating cost per adjusted discharge at the 649-bed Banner University Medical Center Tucson rose an average of 10% from 2013 to 2018. Costs then decreased 6% from 2018 to 2019. Medical inflation accounted for about 30% of the increase in median operating cost per adjusted discharge from 2013 to 2018. The 766-bed Banner University Medical Center Phoenix mirrored that trajectory.

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At 245-bed Banner University Medical Center South, median operating cost per adjusted discharge decreased an average of 2% a year from 2013 to 2017. But costs rose an average of 6% a year from 2017 to 2019. Medical inflation accounted for about 40% of the increase in cost per adjusted discharge from 2017 to 2019.

Banner tried to advance academic medicine and training programs when it acquired University of Arizona Health Network, not extract cost efficiencies, a Banner spokesperson said in a statement.

“We would expect to see some increases in cost per discharge within our academic medical centers over time as the levels of care at those facilities increase,” the spokesperson said.

Banner has invested more than $1 billion in the academic health system since 2015, including adding and expanding artificial heart and heart transplantation services, the statement said.

The Providence-Swedish and Banner-University of Arizona Health Network transactions show how post-merger results can vary. Such variation is reinforced by multiple studies.

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Hospital mergers only saved acquired hospitals $176,000 annually on supply purchases, according to a working paper from University of Pennsylvania researchers who analyzed about 80 mergers completed between 2009 and 2015. The savings, which fell well below hospital projections, predominantly came from hospitals close to each other, the paper found.

But a peer-reviewed 2017 analysis of 459 hospital mergers completed between 2000 and 2010 found hospitals purchased by out-of-market buyers consistently resulted in post-merger savings, unlike in-market acquisitions. All acquired hospitals, on average, reduced costs by 4% to 7% in the years following a transaction, the study published in the Journal of Health Economics found.

Another study came to similar conclusions. Hospitals’ annual operating expenses per admissions drop 3.3% after they have been acquired by a larger system, according to an American Hospital Association-commissioned analysis of 2019 cost report data.

As for the acquirer hospitals, the Journal of Health Economics study and Modern Healthcare’s analysis found no evidence of statistically significant savings after the transaction.

“There are some supply cost savings, but the real opportunities of scale are on the revenue side,” industry consultant Nathan Kaufman said.

Hospitals that integrate well can reduce their expenses, but execution is inconsistent, said David Jarrard, CEO and founder of the healthcare consultancy Jarrard Phillips Cate & Hancock. Long-term strategies related to standardizing equipment purchasing and reducing clinical variation are rarely achieved, he said.

“There is an opportunity for smart systems to redesign payment systems and their cost structure,” Jarrard said. “But they have to adopt a mindset of systemic transformation rather than addition.”

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