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Do mergers of hospitals boost costs, inefficiency?

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The national and regional trend for hospital mergers continues unabated, but at least one expert who studies health care management says larger hospital systems are inefficient and lead to higher costs and lower quality.

Lawton Burns, professor of health care management at the Wharton School, University of Pennsylvania, told a gathering at the Lehigh Valley Business Coalition on Healthcare’s recent annual conference there is no academic evidence that hospital consolidation improves cost, efficiency or quality.

“Large hospitals are no more efficient than free-standing hospitals,” Burns said. “Hospitals are getting bigger and bigger. As they get bigger, they get less efficient.”

Hospitals with less than 300 beds are more efficient, he said.

Hospital executives often cite that larger hospital systems are more cost effective because of their size. Goods and services cost less, they argue, because they are cheaper when purchased in volume.

“I hear the expression ‘economies of scale’ almost daily,” Burns said. “It’s the most often-used rationale for doing a merger.”

Burns also said consumer costs don’t decrease as a result of mergers.

“The evidence is incontrovertible that large hospital systems charge insurance companies higher rates,” which are passed on to the consumer, he said.

Hospitals have an incentive to merge with smaller, stand-alone hospitals because credit rating agencies weigh larger hospital networks more favorably. The higher ratings enable hospitals to get access to cheaper capital, which they in turn invest into their newly acquired hospitals, he said.

“What gets rewarded gets done,” Burns said.

FINANCIAL EFFICIENCY

St. Luke’s University Health Network based in Fountain Hill, the region’s second largest network by employment after Lehigh Valley Health Network, has acquired four hospitals since 1995: Quakertown Hospital in 1995; the former Allentown Osteopathic Medical Center in 1997; Miners Memorial Medical Center in 2000; and Warren Hospital in 2012. Also, it has built and opened two hospitals since 2011.

Bob Martin, chief strategy officer, at SLUHN, said the network has had a different experience than the bleak picture painted by Burns.

“In each hospital that has joined our network, we have been able to significantly reduce the operating expenses,” Martin said.

St. Luke’s saved money by consolidating a number of departments such as human resources, finance and information technology.

“We’ve achieved a much higher level of financial efficiency than any of those hospitals could have achieved on their own, and the clinical quality was enhanced dramatically,” he said.

‘ECONOMY OF INTELLECT’

Burns said administrative and back office departments, such as human resources and payroll, are typically what gets consolidated – “chump change,” he said, when compared with clinical costs, which are about 80 percent to 90 percent of a hospital’s expenses.

But consolidation provides an “economy of intellect,” which is more cost effective for smaller hospitals, Martin said.

“Health care is very highly regulated, and those regulations change all the time. It takes an incredible amount of expertise just to keep up with those changes, to understand them and figure them out and implement them,” he said.

“If you’re a stand-alone hospital, there’s no way you can afford people who are experts in those areas.”

WHEN IS TOO BIG?

While Burns’ ideas run counter to the consolidation trend, Martin acknowledged there may be a point of diminishing of returns for large hospital systems.

“I don’t know if there is a magic number,” he said. “I think there is a point where you could be conceivably less efficient.

“Our network is still of a size where we have a team of people that can cover the network and keep track of what’s going on. I have counterparts in $20 billion networks in multiple states with 50 hospitals. That’s a lot to keep track of.”

BETTER FOR SMALLER HOSPITALS

The Hospital and Healthsystem Association of Pennsylvania, based in Harrisburg, backs consolidation.

“Consolidation can eliminate unnecessary duplication of health care services and excess capacity, freeing up resources to invest where they are needed the most,” association chief strategy officer Paula A. Bussard said in a statement. “Another benefit is that consolidations allow hospitals to implement new care models that improve health and health care, including more outpatient care and population health initiatives.”

She said hospital mergers and acquisitions undergo a rigorous review process by the state and federal governments.

Economies of scale, along with reduced need for hospital care, allow hospitals to manage Medicare and Medicaid payment reductions without cutting needed services, Bussard said.

“This can help smaller hospitals secure access to capital for technology and infrastructure,” she said.

GEOGRAPHIC LIMITS

St. Luke’s has been solicited by hospitals in the Philadelphia area that want to join its network, Martin said, but it has been “extremely cautious” about taking on new hospitals outside the region.

“What kind of sense does it make to have a member hospital that’s an hour and a half away?” he said.

Not only would distance be a challenge – St. Luke’s physicians live and work in the area – but the networks use different insurance companies.

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