By Grant Diggles
The Rise of Independent Healthcare Consolidation in America
The healthcare industry will be a $5.5 billion industry by 2025. Already, the space accounts for a whopping 20% of the US economy currently. Clearly, the healthcare marketplace is as crucial for a healthy economy as it is for a healthy population.
It should be no wonder, then, that healthcare consolidation deals are higher today than ever before. Consolidation occurs when one company acquires another company (i.e., when Facebook acquired Instagram in 2012) or when two companies merge together (i.e., the Kraft-Heinz merger in 2015).
For some practices, consolidation is the only way to stay competitive in today’s oversaturated healthcare industry. But here’s the thing: consolidation has some major downsides that you as a successful independent practitioner would want to avoid.
What is Healthcare Consolidation and How Does It Work?
What’s the point of consolidation? The reasons behind consolidation vary by industry and even by company. Some experts view mergers and acquisitions as necessary steps in the process of scaling up while others consider it the only way to rescue a failing business.
M&A deals in the healthcare marketplace hit $175 billion in 2017. And these deals have only increased over time. Now, the majority of healthcare consolidation deals fall into two categories: horizontal consolidation and vertical integration.
Let’s explore these two types of consolidation and how they can be detrimental to you as a small business owner in the healthcare space.
The introduction of health systems to the healthcare economy has led to a decline in independently-owned clinics. Now, 60% of hospitals are part of a larger health system. Meanwhile, in the health insurance space, the five top insurers now control 43% of the market.
Each of these instances is a perfect example of horizontal consolidation. Horizontal consolidation is when two or more companies in the same space combine forces. This type of consolidation often occurs between two competitors in the same industry.
What does horizontal consolidation in healthcare mean for you? Typically, this type of M&A activity leads to:
- Increased prices
- Fewer skilled workers
- Lower quality of care
- Declining patient satisfaction scores
Horizontal consolidation can also lead to a decline in independently-owned practices. Indeed, fewer than 50% of physicians own their practice today, instead handing over control to private equity firms or health systems that just don’t understand your business.
Today, five giant corporations control the pharmacy benefits for 125 million patients. Drug manufacturers are rapidly consolidating with logistics and supply companies. While these companies don’t operate in the same space, they do offer products and services for the pharmaceutical industry.
This is an example of vertical integration. Think of Amazon: the company might have begun as a bookseller but has become what it is today through multiple vertical integrations. Vertical integrations are meant to improve profits by adding streams of revenue.
Yet independent practitioners aren’t seeing this increase in profits. Instead, they’re actually seeing an increase in costs.
In fact, a Rice University study looked at the difference in both costs and quality of care between hospital-owned practices and independently-operated ones. Here’s what they found: neither quality of care nor patient spending improves in hospital-owned practices.
The study actually found the opposite to be true. Patients spent 5.8% more on average at hospital-owned practices vs independent practices. Meanwhile, there was no significant difference in quality of care between the two.
Why is Consolidation in the Healthcare Space Happening?
It’s no secret that the healthcare industry is in crisis. High Deductible Health Plans (HDHPs) have been on the rise. Meanwhile, administrators eliminated the individual mandate. Both of these factors have led to rising rates of uninsured or underinsured patients.
What does that mean? Patients are required to pay more out-of-pocket today than ever before.
Yet, with the rising cost of healthcare goods and services, many patients can’t afford the cost of care. Indeed, a recent CNBC report actually estimated that more than 137 million US citizens struggle with medical debt.
All this has led to an accumulation of millions of dollars in bad debt for hospitals and practices when patients just can’t foot the bill.
The Cause of Consolidation in Healthcare
Hospitals, clinics, and health systems alike are scrambling for ways to offset the burden of bad debt. One of these ways is to consolidate. That’s why cost-cutting and business growth are the two most prominent reasons for healthcare consolidation.
The last, but possibly most important reason for consolidation is to improve the quality of care for patients.
With the rise of technology, consumers in America have high expectations about how they want to be served. Patients wish for more transparency into their health care records and more ways to communicate with providers. They want faster ways to pay and access to alternative payment methods when the cost of care is too high.
To give the people what they want, though, costs money. And with providers’ bad debt problem combined with declining margins means the majority of hospitals and practices don’t have any money to spare.
Why Independent Practices Should Avoid Consolidation
Consolidation just doesn’t work. The promise of improved profits and better quality of care has yet to be fulfilled. And as discussed above, consolidation is actually leading to higher costs and no improvements in quality of care.
There are alternatives for doctors who are seeking the benefits of consolidation without losing their independence. If you’d like to learn more about the option that Health Professionals Alliance provides we’d love to chat, contact us.