Hospitals are searching for strategies that will allow them to survive the price war begun by managed care organizations - special edition: The State of Health Care in America 1995

Business & Health, Annual, 1995 by Paul Kenkel

HOSPITALS ARE SEARCHING FOR STRATEGIES THAT WILL ALLOW THEM TO SURVIVE THE PRICE WAR BEGUN BY MANAGED CARE ORGANIZATIONS.

Hospital consolidation surged last year as managed care buyers and investors pitted hospital against hospital in cutthroat wars to lower prices. More than 650 of some 6,500 of the nation's hospitals were involved in mergers or acquisitions in 1994, eclipsing the number of hospital deals in recent years. In comparison, only 71 hospital mergers were completed between 1990 and 1993, according to the American Hospital Association (AHA), of Chicago. "With all the restructuring activity going on, local health care markets have outpaced the federal government's health reform efforts," says Peter Boland, president, Boland Healthcare Consultants, Berkeley, Calif.

With revenues under pressure, most hospitals are trimming their costs, closing underused facilities, and eliminating executive and staff jobs. The market's message to hospitals and their affiliates is simple: Reduce prices and provide better service or risk going out of business. But those moves may not be enough to stem the expected increase in hospital closings. "It will not help to close a wing here and a wing there because that does nothing to concentrate market share and spread fixed costs," says David H. Shove, a health care investment analyst with Fox-Pitt, Kelton in New York.

"In the long run," says R. Clayton McWhorter, chairman and CEO of HealthTrust Inc., Nashville, Tenn., "all the different components of the delivery system will need to find ways to network, collaborate, or integrate to be a viable force in our nation's health care delivery system." If hospital inpatient utilization trends continue to drop, more than one-third of some 925,000 hospital beds will no longer be needed, according to the American Healthcare Systems Institute, a health care research and advisory organization in Washington. Cost-containment systems spawned by managed care could force the closure of as many as 2,500 of the nation's 6,500 hospitals. "Holding onto old ways in this new and rapidly changing environment is asking for extinction," says Nancy Graham, author of "Quality in Health Care" and vice president of nursing and total quality management at Lawrence Hospital, Bronxville, N.Y. "The hospitals that survive will be part of a network or merger, with many traditional care services becoming decentralized." But as so many of the nation's hospitals struggle to survive, it becomes clear that the supply of hospitals is far greater than current demands for inpatient services. "In most competitive industries in which supply far exceeds demand, the marketplace will eliminate this excess capacity," says Larry Frye, president of Iameter Inc., a medical information and education company in San Mateo, Calif. "To thrive in this marketplace, a hospital must truly understand its changing customer base, develop targeted competitive strategies, and achieve a superior cost position."

MERGER MANIA

The "urge to merge" has grown so strong as a survival strategy that 81 percent of 1,200 acute-care hospital executives surveyed in 1994 by Deloitte & Touche, CPAs, New York, said their hospitals would not be free-standing within five years. To remain competitive and reduce costs, they said they would join a network to share such services as information systems and laboratory facilities.

In Indianapolis, for example, Methodist Hospital and five other Indiana hospitals said they would join forces in 1995 to compete for contracts to provide managed care to patients statewide. The agreement is the first step toward a statewide hospital and physician network under the control of a parent firm. When affiliated, these hospitals will offer employers and insurers more than 3,300 inpatient beds and 2,800 physicians on staff in a network that covers the state's three largest cities: Indianapolis, Fort Wayne, and Evansville.

Nine leading northeast Ohio health care providers recently agreed to the formation of a new hospital network, known as the Cleveland Health Network, which will be the largest and most comprehensive health care network in the region. Each member of the group will provide comprehensive care for the same price across all specialties, including those categories under scrutiny by Cleveland Health Quality Choice, a four-year-old outcomes measurement project in Cleveland, Ohio. Managed care buyers, such as Aetna Health Plans of Ohio, in Cleveland, have begun to use the outcomes data to select "cost-effective, high-quarry providers." That means if the quality at competing institutions is comparable, price will be the determining factor.

Only efficient hospitals need apply for admission to such elite groups. "Hospitals need to recognize that many purchasers view them as cost centers," says Allan Fine, vice president and director of the Center for Managed Care Integration Strategies, Quorum Health Resources Inc., Chicago. "All hospitals," he adds, "whether individually or through a network, need to dramatically change how they function." By pooling resources, hospital systems hope to contain overhead costs, provide patient care more efficiently, and create opportunities for managed care contracting.