Welcome to Health Reform Watch, Sarah Kliff’s regular look at how the Affordable Care Act is changing the American health-care system — and being changed by it. You can reach Sarah with questions, comments and suggestions here. Check back every Monday, Wednesday and Friday afternoon for the latest edition — and read all previous columns here.

There are 5,724 hospitals in the United States. By 2020, Gary Ahlquist predicts that about 1,000 of them will have a new owner.

Alhquist should know: He leads the health care division at consulting firm Booz & Company and recently completed a sweeping new study of health care mergers and acquisitions. It showed that, in recent years, hospital mergers have surged.

Hospitals are under a few pressures that make mergers seem like a sensible choice. Medicare reimbursements are growing slowly. The volume of patients they see has also shrunk during the recession, as some Americans appear to put off care—and some procedures shift into outpatient settings.

New Accountable Care Organizations also put pressure on health care systems to become bigger, so that they can coordinate a patient's entire care, from the primary care doctor to the very specialized surgeon.

"About 20 percent of hospital institutions in the United States are at or near underwater right now," Ahlquist says. "We project they will see somewhere between 12 and 25 percent reductions in their net revenue, depending on the institution."

That has led many hospitals to consider mergers: A bigger health care system, the thinking goes, would be able to lend a hand to a smaller, struggling hospital. In return, the acquiring hospital gets a bigger network that could pay dividends in attracting new patients.

In practice, though, the process isn't quite so rosy.

Ahlquist recently looked at 219 hospital mergers over the past decade. Forty-one percent did outperform their peers in the market two years after the acquisition. But many continued on with the same financial outcomes they had pre-merger. And, perhaps most disturbingly, about one in five acquired hospitals (18 percent) performed worse after the merger.

"If the capabilities don't match up, these mergers don't work," he says. "If the mothership hospital doesn't have the capabilities to get the baby ship hospital in shape, they just end up propping up their performance for a few years and everyone gets tired and says, they need to do something, maybe cut it off. That's a lot of what we see."

Ahlquist's study did identify two factors that were associated with higher-performing mergers. One was a heavily concentrated insurance market, and the other the size of the hospital doing the acquisition.

In the latter situation, he hypothesizes that a bigger hospital system does better because "they've done it many times before. Because they're much larger, it's a quicker absorption as opposed to a merger of two equals."

As for why hospital mergers do better in really concentrated insurance markets, that likely has to do with clout. A larger health care system can often demand higher prices for its services, especially if it can bill its hospitals as necessary to have in any network.

"You'd imagine the causal effect there is, in the near term, more bargaining power," Ahlquist says.

He uses the words "near term" for a reason: As the government becomes a bigger and bigger health care payer, the ability to extract high prices from insurers just won't matter as much. Just last year, the government crossed the threshold of financing half of all health care spending in the United States.

Hospitals also have another hurdle to face with this strategy, as more American's begin purchasing their own health insurance in 2014. Booz has found in research that three-quarters of consumers would be willing to go to a more narrow network (one where they might need to drive a little further to the hospital, or not see the same specialist they used to ) if the price were 10 to 20 percent lower, and they would stil have access to their primary care doctor.

"What it's saying to the payers who are building this networks is, if we have a broad primary care network, we can narrow down everything else to deliver good prices," Alhquist says.

One big question I had for Ahlquist was about the best strategy for a small hospital to pursue right now. Most mergers don't boost financial performance, but these stand-alone institutions are facing some tough financial times. What could they do to turn their finances around?

"They have not got many choices," Ahlquist says. "If they need 20 to 25 percent lower costs, there are a few traditional methods. You could join up with a group purchasing organization, but that might only get you half way there. After that, I'm looking at a fundamental chopping out of services, closing institutions that are part of my system. Maybe you're implementing a strong bundled payment system. These are things we'd call really transformative."

They don't have much time to decide, either. With the pace of mergers growing rapidly, Ahlquist compares the current situation to a game of musical chairs.

"The music is starting to slow down," he says, "And you don't want to be the last one standing with no dance partner."

KLIFF NOTES: Top health policy reads from around the Web.

Louisiana shows a surprisingly new openness to Obamacare. "The Jindal administration, which has rejected an expansion of Medicaid to increase health coverage for the uninsured, is expressing some interest in a tentative deal between Arkansas and the Obama administration that would provide health coverage through private insurance markets." Bruce Alpert in the New Orleans Time-Picayune. 

Employers aren't happy with a $63 fee in the health care law. "Employers are bracing for a little-noticed fee in the federal health-care law that will charge them $63 for each person they insure next year, one of the clearest cost increases companies face when the law takes full effect. Companies and other plan providers will together pay $25 billion over three years to create a fund for insurance companies to offset the cost of covering people with high medical bills." Janet Adamy in the Wall Street Journal


Move over, Arkansas: North Dakota weighs the most restrictive abortion ban. "One bill would ban most abortions if a fetal heartbeat was detected, something that could happen as early as six weeks into pregnancy depending on what type of method was used. A second bill would prevent women from having abortions based on gender selection or a genetic defect, such as Down syndrome. Guttmacher Institute spokeswoman Elizabeth Nash said North Dakota would be the only state to ban abortions based on a genetic defect." James MacPherson in the Associated Press.