Rural health care preview, part 2: Health care mergers and acquisitions are the new reality

blood pressure cuff and medications

By Kelly Asche

Before the COVID-19 crisis began, the Center for Rural Policy and Development was gathering information and analyzing the impacts mergers and acquisitions among health care providers have been having on access in rural areas. We were a few weeks away from releasing a report before the pandemic turned everyone’s lives upside down. While we adapt the report to this new reality, we will be releasing parts of it while also bringing into focus how the COVID-19 response is magnifying the issues we identified in the original report.

To watch a webinar presenting this research and a Q&A with healthcare experts, click here.

Last week we published the first part of this series, discussing how the shift in payment philosophy for medical services occurring in the U.S., as well as the impacts from the COVID-19 pandemic, are having serious financial repercussions for our small rural hospitals. This situation is likely going to drive mergers and acquisitions among healthcare providers even more over the next few years. For small, rural hospitals this is their new reality, one many are choosing rather than face the future alone.

The benefits of mergers and acquisitions for rural hospitals

To meet the demands of a new reimbursement environment that emphasizes outcomes, efficiency, and coordination (for a review of this new philosophy, read part 1 of this series), health care systems are getting bigger, not only to take advantage of the economies of scale afforded to them through larger size, but also to exercise more control over the continuum of care for patients.

Research outlines the primary factors driving these mergers and acquisitions.

Access to capital: To provide the care needed to meet the demands of a value-based payment model, hospitals are finding they must make major investments in technology, equipment, and buildings.

A bigger patient pool: Increasing the number of patients a health care system factors into a number of strategies to reduce costs. With a larger patient pool, hospitals can spread the financial risk inherent in value-based payment systems across a larger group of patients, access a number financial incentive programs, improve their purchasing power, and probably most importantly, gain the ability to negotiate higher reimbursements from private health insurance companies.

Integrated care delivery: A larger health care system typically has access to a broader spectrum of services in-house, making it easier to provide a full, integrated continuum of care to each patient. It also helps eliminate duplication, improve communication, and increase outcomes.

Attracting talent: Larger hospitals tend to have an easier time filling their job vacancies.

Without the economies of scale, the problems facing all hospitals are magnified.

  • The new payment philosophy emphasizes better outcomes at a lower cost. For small, rural health care providers with low patient traffic and a small patient pool, one patient’s expensive health care needs can make up a larger percentage of the hospital’s total expenses, raising overall per-patient costs.
  • Federal programs laden with financial incentives are generally open only to larger health care systems.
  • Small hospitals, especially rural ones, have a harder time attracting specialists, which as a result makes it harder to offer that full continuum of care necessary under the new payment philosophy.
  • The value-based payment system requires new technology that not only enhances patient care, it gives providers the ability to analyze patient data to track outcomes and their own performance. The investments needed to upgrade their technology and equipment can be too high for small hospitals, while merging with a larger system provides them access to that technology and infrastructure.
  • Smaller health care providers have lower purchasing power, which not only increases spending on supplies, it also gives them less leverage with insurance companies when negotiating reimbursement costs.
  • A significantly higher percentage of smaller, rural health care providers’ patients are on Medicare and Medicaid, with their lower reimbursements that don’t cover costs. Merging with a larger system provides a more balanced patient pool.

Even during the current pandemic, smaller, rural hospitals are seeing the benefits of being a part of a larger system. For example, CentraCare Health, a large healthcare provider system in central Minnesota, has been preparing for a potential new coronavirus outbreak since January. Santo Cruz, Vice President for Government & Community Relations and Associate General Counsel for CentraCare Health Systems, explains: “Our St. Cloud location has been set up as the regional head for the 14-county area. We are able to provide information and coordinate among all of our affiliate providers to determine preparations, transportation, sharing of beds and ICU equipment, provide the modeling and analysis needed, and make the supply purchases necessary to support all of the smaller hospitals around us.”

Instead of each provider preparing by itself, smaller providers within the larger system were able to focus on providing health care through the winter while the system’s officials managed preparations for the coming pandemic.

It’s fair to say that many rural hospitals desire to be acquired or merged with a larger hospital system. As one doctor in central Minnesota explained, “When we were looking at our future projections, we knew we couldn’t make it on our own as a smallish physicians’ group. We knew we needed to merge with a larger system to help our financial outlook.”

Many rural providers feel that when they become part of a larger system, not only do their financial options open up, but also they can provide better care. At the same time, a rural provider can be attractive to larger systems simply because it can add to their market share. In addition, small hospitals typically have less competition in the area, so merging or acquiring these providers can really add to the system’s market leverage.

The bad of mergers and acquisitions

So what’s bad about mergers and acquisitions? Well, probably one of the most concerning aspects is that there is not, as of yet, significant evidence that either mergers or acquisitions are driving down health care costs, and yet, patients are losing access to services.

There is currently more evidence across the United States showing that costs increase after a merger or acquisition. 

“Extensive research evidence shows that consolidation between close competitors leads to substantial price increases for hospitals, insurers, and physicians, without offsetting gains in improved quality or enhanced efficiency. Further, recent evidence shows that mergers between hospitals not in the same geographic area can also lead to increases in price.” (Gaynor M. D., 2018)

Dr. Martin Gaynor, E.J. Barone University Professor of Economics and Health Policy, Heinz College of Information Systems and Public Policy, Carnegie Mellon University.

Research has shown that mergers can “take two years or more to generate cost savings because operating revenue tends to decline at a higher rate than operating expenses at the start of a merger” (Associates, 2018).

Other evidence indicates that a provider’s new, larger market share gives them the ability to negotiate higher reimbursements from insurance providers. There is also evidence that increases in costs post-merger are related to investments needed to integrate new staff and services, as well as developing new processes to standardize all facilities across the system.

For smaller, rural hospitals, there are particular negative impacts associated with mergers and acquisitions:

  • Many of the rural hospitals are community- or county-owned, overseen by local government officials and other leaders and stakeholders in the community. Depending on the final agreement, mergers and acquisitions can eliminate this local oversight while concentrating decision-making wherever the central administration is located.
  • One research paper examined the impacts on staffing and found evidence that salary expenses declined after mergers of health care providers, indicating a loss of jobs(Noles, Reiter, Boortz-Marx, & Pink, 2015). This is particularly troubling since health care is one of the top three employers in all of Minnesota’s rural counties.
  • The most troubling, however, is the trend in relocating services. The goal of a merger or acquisition is to find efficiencies and provide economies of scale, and there are few ways better to accomplish this then by eliminating duplicated services. Consolidating services into fewer locations reduces costs for equipment and staffing, but it’s also what rural patients fear the most regarding mergers and acquisitions—having to drive farther for important healthcare services or losing access to them altogether.

As the trend in mergers and acquisitions among health care providers continues, it will be important for policymakers and community leaders to understand what impact this has on access for rural residents. In Part 3 of this series, we will examine what access looks like currently across the state.