New Report Highlights What the Hospital Consolidation Debate Often Overlooks — and Why It Matters for Patients

Hospital consolidation is often discussed as if the only question that matters is whether a proposed merger increases commercial insurance prices. That question surely matters. But it is not the only question that matters — and treating it as such can obscure both why hospitals seek to integrate and what happens when attempted transactions are blocked. A new Kaufman Hall report brings fresh thinking, backed by insightful data, to this broader discussion. Its central point is straightforward: we need a more “comprehensive analysis of hospital M&A transactions — one that considers impacts on all patients served, broadens the focus to impacts beyond pricing, and considers the consequences if an M&A transaction is not permitted to proceed.”

Patient Mix Matters

Nearly 60% of acute-care hospital patient days are attributable to Medicare, Medicaid and Medicare Advantage patients. But as Kaufman Hall observes: “None of these patients is likely to experience any pricing impacts from hospital M&A transactions, as the prices for services provided to Medicare and Medicaid patients are directly set by government payers or, in the case of Medicare Advantage and Medicaid managed care, are based on government-set rates.”

This matters because conventional merger analysis gives outsized attention to only one potential effect on one segment of patients — higher negotiated rates paid by commercial insurers. That conventional analysis gives too little attention to a different risk for another segment of patients: losing access to care altogether if a transaction falls apart. Kaufman Hall explains that the elderly and low-income populations served by Medicare and Medicaid “may be more at risk when a facility closes or reduces service lines.” And we now know, based on Kaufman Hall’s analysis, that hospitals that are potential acquirees in mergers “on average serve a higher percentage of Medicare and Medicaid patients and face greater operational and financial challenges than their potential acquirers.” Thus, when a merger is blocked because of potential increases in commercial insurance prices, we cannot ignore what will happen to Medicare and Medicaid patients whose prices won’t change, but their access to care will. Kaufman Hall’s important insights prove that a sound antitrust analysis must consider both populations.

The Road Not Taken

In the same vein, the public discourse on hospital consolidation should ask a question that too often receives insufficient attention: What is likely to happen if a transaction does not occur? The Kaufman Hall data make that question difficult to dismiss. Among 88 transactions that were ultimately canceled, potential acquirees experienced, in the following year, a median 50% reduction in operating profit margin and a 38% reduction in days cash on hand. Labor compensation ratios declined, and the average age of plant increased as well. Those measures bear directly on a hospital’s ability to maintain services, retain caregivers and invest in facilities and equipment.

The report does not suggest that every canceled transaction causes a hospital’s financial condition to deteriorate; many of these hospitals were already under financial pressure. But that is precisely the point. Hospitals often seek partners because they need capital, scale or operational support. Blocking or abandoning a transaction does not return the parties to some frictionless status quo. It can leave a struggling hospital to confront the same financial problems, but now with fewer options for solving them.

The communities at issue are also disproportionately vulnerable. Kaufman Hall’s analysis of 88 hospital transactions since 2006 found that hospitals seeking to be acquired served communities with greater vulnerability than their prospective acquirers, and greater vulnerability than the national average. And among the target health systems in 12 recently challenged transactions, a majority had experienced a facility closure, workforce reduction, service closure, bankruptcy or quality downgrade within the four years before the proposed transaction. Those facts must be part of the antitrust analysis.

Competition Is More Complicated Than a Hospital Count

The report also tests another common assumption: that two hospitals serving the same community necessarily compete head-to-head across the services they provide. Kaufman Hall examined 221 counties with only two short-term acute-care hospitals owned by separate entities. When competition was examined service line by service line, the hospitals often had markedly different service portfolios. In many communities, one hospital provided most of the volume for particular services while the other concentrated elsewhere. In that respect, these markets reflect a principle recognized since Adam Smith in The Wealth of Nations: specialization — and the resulting “separation of different trades and employments from one another” — can be a feature of an efficient market, not evidence that competition has failed. Two hospitals can compete vigorously for patients without each trying to be all things to all people.

That does not mean competition is irrelevant. It means competition should be measured as it actually exists. A simple hospital count or market-wide concentration measure can miss whether two facilities are close substitutes for particular services, whether they instead provide complementary services, and whether a combination could preserve services that one hospital may not be able to sustain independently.

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Hospital mergers receive careful antitrust review. But careful review is not the same thing as narrow review. The relevant question is not just whether a transaction might affect the prices commercial insurers negotiate. It is what the transaction — or its failure — is likely to mean for patients: whether healthcare services remain available, whether hospitals can invest in their workforce and facilities, and whether local communities retain access to care.

The Kaufman Hall report provides important evidence for that more complete inquiry. Consolidation policy must look beyond just commercial insurance prices to account for the real-world patient populations hospitals serve, the financial circumstances that lead hospitals to seek partners, the competitive dynamics of the services they actually provide, and the consequences when a proposed partnership does not happen. Patients and communities are better served when all of those facts are on the table.

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