Merger mania: physicians beware - Health Care Mergers - integrated health services

Physician Executive, March-April, 1998 by Thomas P. Weil, Glenn M. Pearl

In fact, the short-term impact of these mergers was generally modest and differed considerably by the conditions under which and when the corporate amalgamation occurred. Mergers that were consummated after the introduction of the Medicare prospective payment system (PPS) and those between similar-sized hospitals displayed greater positive changes in operating patterns. These findings were explained by the increased cost pressures experienced after PPS was enacted and by the greater opportunities for efficiencies perceived to be achievable in mergers that involve facilities of similar size.

Responses in 1991 received from 60 of the 74 mergers that occurred between 1983 and 1988 indicated that 58 percent of the hospitals acquired (i.e., the smaller of the two institutions) were closed as acute inpatient facilities and were converted to other services (e.g., substance abuse, long-term care) or were completely shuttered (17 percent). (9) None of the 18 mergers involving a rural hospital was reported to have resulted in a closing, being vacated, or being used for non-inpatient purposes. This outcome was probably due to the protracted travel time to the nearest facility, considering the greater proportion of elderly residents in these more sparsely populated areas.

Nevertheless, it is reasonable to assume in the long-term that the acute inpatient services in some rural hospitals will be curtailed as increased cost pressures, particularly among major medical centers that are experiencing an increasing number of vacant beds, force health systems to more effectively deploy all resources. Improved integration of telemedical services in America's health system could also make these "downgrading" decisions more palatable to a rural hospital's leadership faced with severe financial difficulties.

In mergers in which both physical plants were staffed for acute inpatient care, the acquired (average complement of 143.8 beds) and the acquirer (310.1 beds) had a greater resemblance in service mix, in the number of equivalent full-time personnel per occupied bed, and in the percent of occupancy rates compared with mergers in which one hospital's acute inpatient bed complement was eliminated. Hospitals that merged, but retained both physical plants for acute care services, illustrated greater distance (measured in miles) between facilities. Conversely, in those cases in which acute care was terminated at one of the facilities, the greater disparity between the merging hospitals in terms of their respective service mixes suggests this variable as being a major factor in eliminating acute inpatient services at one of the sites.

This study (9) evidences two potentially different merger strategies: (1) reducing direct competitors; or, (2) building the infrastructure for a larger horizontal, regional network for hospital care, although in both cases the respondents emphasized that strengthening their financial position and consolidating their services were among the key reasons for amalgamating the two organizations. It is rather significant that in the case where one of the two hospitals' acute inpatient services was eliminated, the respondents indicated that these facilities prior to the merger had been highly competitive with each other for both inpatient and ambulatory services. However, when both hospitals continued to offer acute inpatient care, significantly fewer respondents reported that pre-merger competition between the facilities was intense.