The reported talks are the latest sign of an industry in flux. Last week, two other hospital systems, Colorado-based Catholic Health Initiatives and California-based Dignity Health, announced they had agreed to merge to create a joint system with 139 hospitals across 28 states. Chicago-based Advocate Health Care and Milwaukee-based Aurora Health Care also announced plans to merge to create what they said would be the 10th-largest not-for-profit health system, with 27 hospitals and more than 3,300 doctors.
“It feels like a land grab on the part of some systems, seeking to get larger,” said Leemore Dafny, a professor of business administration at Harvard Business School. “Once a couple of these are announced, then more start to get underway, because people don't want to be left out. ... There's a widely held belief among health system executives that costs are lower when you have a bigger enterprise.”
Hospitals generally argue that such deals provide greater scale — a bigger entity could drive better deals on medical devices or drugs, for example. Melinda Hatton, the general counsel for the American Hospital Association, said that hospitals are facing pressures from decreasing reimbursements — as well as the need to evolve to keep up with a health system increasingly rewarding providers financially not for the number of services they provide, but the quality of their care.
“It's an opportunity to achieve scale, so you can do the things you want to do to prepare for the future,” Hatton said.
A study published in the Journal of Health Economics found that after hospitals were acquired, they experienced cost savings of 4 to 7 percent.
Whether cost savings trickle down to patients through lower prices, however, is a topic of debate. Many economists argue that such deals provide hospitals the clout to negotiate higher prices with insurers.
“This is one of those classic mergers; it’s a hospital system merging with another hospital system, where we think the opportunities for value creation are quite small,” said Amitabh Chandra, a health economist at the Harvard Kennedy School. " 'We do the same thing, and we negotiate as a conglomerate.' That unambiguously will increase prices.”
But the precise type of deal matters. Dafny's work has shown that when hospitals acquire systems in other states, there is, on average, no effect on prices. But when hospitals acquire systems in their own state, prices rise. There is little geographic overlap in the potential deal between Ascension and Providence St. Joseph Health.
John Hanley, a managing director at Ziegler, a health-care investment bank, said the latest deals show a shift in merger activity away from larger hospitals buying up smaller regional players toward mergers of large health systems in different geographic areas — and more might be around the corner.
“It's like a domino,” Hanley said. “If you're a multistate system now and you see these multistate systems getting bigger, how do we respond? How do we react? The easiest reaction is ... some will jump into this and get bigger.”