Who Will Survive Hospital Consolidation

Healthcare providers are under pressure on a variety of fronts.  Patients demand extensive care regardless of cost.  Payers both public and private are struggling to reduce costs, and the resulting billing struggles result in high administrative overhead.  Staffing is in short supply, resulting in high overtime and temporary staffing costs.  New technology and equipment require large capital expenditures that many facilities cannot afford.  Pharma and medical device manufacturers get a much bigger share of the healthcare profit pie.

The situation is even worse for hospitals in particular.  They’re overwhelmingly complex organizations, and as a result they’re difficult to manage.  They also have high fixed costs, and there is often over-capacity in specific geographical markets, leading to intense competition.  From a Porter’s Five Forces perspective, most of the puzzle pieces look pretty bad.

Most importantly, overall healthcare costs cannot continue climbing at their current rate indefinitely.  And like the old quote says, if something can’t continue indefinitely, it won’t.  Much more significant waves of reimbursement cuts are inevitably on the way, although no one knows when they will hit.

Considering all of these factors, it seems probable that the industry will undergo painful change and consolidation over the next couple of decades.

So what kinds of providers will survive ongoing changes in the field?  Here are the likely candidates:

  • Unique, mission-driven organizations like the Mayo Clinic
  • Disruptive providers like specialty hospitals that can offer more standardized care with a lower cost structure
  • Large organizations that can develop superior processes and leverage high-quality management talent to outperform smaller competitors (i.e., the big hospital chains)

Unfortunately, the last of the three is probably the least likely.  I assume many hospital chains will attempt to go down this road but will fail nevertheless.  Why?

  • Organizational chaos – Mergers bring scale but also dysfunction.  Many hospital chains will be unable to deal with the disruption and clashing priorities that mergers introduce.
  • Apathy – Big, impersonal organizations exacerbate the tendency among the rank and file to say, “That’s not my job.”  Large hospitals have a much harder time holding people accountable.  Processes have to substitute for individual initiative, but they often can’t fill the gap completely.
  • Complexity – Economies of scale are only good if you can really achieve them.  Because hospitals are individually so complex, just having more locations within the same company doesn’t necessarily achieve a lot of efficiencies.  Administrative tasks like billing likely become somewhat more efficient, but I doubt large hospital chains manage their physical resources any better.

As the largest hospital chain in the country, HCA would seem to be the flag bearer for the scale strategy in the hospital industry.  The recent IPO was successful, but I’m less convinced that they will actually be able to generate the operating advantages they’re looking for.  Operating margins look like they’re in the general ballpark of public healthcare providers at about 7% – not exactly a ringing endorsement of the strategy.

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  • allen

    This is really sad. Health care is an essential infrastructure for people and those enterprises struggling to be strong then how can they give quality and affordable healthcare services to the public. These enterprises should think of restructuring themselves, taking the services of a good business consultant might be useful. I am writing a medical report using writing essay service now.

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