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Hospital consolidation: 5 survival tactics


To achieve scale economies, large hospitals and healthcare systems should shift toward integrated organizations with standardized procedures and systematically reduced costs.

The wave of U.S. hospital mergers over the past two decades has failed to deliver on promised economies of scale, according to a new report from PwC.

Kaul“The key finding of this report is that mangaement in healthcare delivery organizations have not done all they could do to wring efficiencies out of their operations,” says report coauthor Anil Kaul, a principal at PwC. “In many cases they have gone through acquisitions to plug gaps in their portfolio or increase their market share to put them in a better negotiating position with payers.”

Consequently, they have been able to withstand the reduced reimbursements from Medicare/Medicaid by making only minimal adjustments to their cost structures, according to Kaul.

“Only continued pressure from reducing reimbursements will force health systems to make the required tough choices to realize the potential of the scale benefts inherent in their systems,” he says.

On the flip side

PrabhaManaged care executives are the flip side of the equation, believes K. R. Prabha, coauthor and director at PwC. “While the transformation will have to be performed entirely by the care delivery organizations, managed care contracting could be the impetus for this transformation through rates and incentives,” she says.

For example, payers could play a significant role in influencing care delivery choices with the proverbial carrot and stick approach, according to Prabha.

“They could force a care delivery system to make portfolio choices through more restrictive payment policies-the stick-that route care to the most efficient site of care/providers,” Prabha says. “Similarly, they could incent-the carrot-care delivery standardization within a service line across a healthcare system.”

Next: Five pieces of advice for hospital executives



Based on the report, here are five pieces of advice for hospital executives:

  • Redesign the operating model.

Katragadda“Healthcare systems need to revamp their operating models to bring more accountability and control at the system level-rather than at the level of individual facilities,” according to Suman Katragadda, director at PwC and report coauthor.

The objective, Katragadda says, is to strike the right balance of centralized control over most transactional operations, such as reporting, while accommodating local nuances in areas where it truly matters, such as pre-procedure education.

Healthcare systems should design their operating model around three clearly defined entities, he says: (1) a lean corporate core, which provides corporate governance, policies, strategic guidance, and lean set of corporate services; (2) shared-services centers and centers of expertise, which can serve as a repository of expertise and scale, for both administrative and some clinical functions; and (3) operating units, which can implement patient care procedures and other aspects that will impact financial performance.

2. Standardize clinical processes.

Common care protocols can significantly reduce costs by ensuring that patients have a consistent, experience regardless of which facility they visit.

3. Eliminate redundant service lines.

“Many organizations have multiple service lines in facilities that are just a few miles apart,” according to Kaul. “The challenge is to combine these assets in the most efficient manner possible-and eliminate overlapping resources and services.”

4. Measure performance on a system level.

Many healthcare systems fail to capture scale because they still evaluate their facilities as independent entities, rather than as parts of the larger whole.

“These systems should change their evaluation process and create new balanced scorecards that focus more on company-wide metrics-including productivity, utilization, access and experience-and the contribution of facilities to those goals,” says Prabha. “A balanced approach ensures that they are succeeding at both a facility level and a system level.”

5. Use culture as a tool for driving change and don’t let it be a barrier.

One of the key reasons that system-wide initiatives often fall short is that management doesn’t factor in the organization’s culture, according to Katragadda.

“An organization’s cultural ethos can be a major barrier to change, but it can also be a powerful tool for driving change,” he says. “In leveraging culture to drive change, management should understand the deeply engrained, self-reinforcing behaviors, beliefs, and mind-sets that drive ‘how we do things around here,’ and use those to change the conversation.”


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