In today’s healthcare climate it’s becoming more challenging for hospitals to remain financially viable. This is especially true for stand-alone, independent hospitals. According to Moody’s researchers, median operating cash-flow margins of 160 surveyed hospital systems dropped from 9.5% in 2016 to 8.1% in 2017. [1] What’s causing the decrease in profitability? Higher labor and supply costs, higher drug costs, and lower reimbursement from commercial and government payers. If you’re a small hospital with a tight budget, then you’ve probably entertained the idea of consolidating with a larger system with hopes of controlling costs and growing margins. But the data suggests that both financially and in terms of patient care, consolidation might not be the ideal solution.
The Effects of Consolidation
Across the country, large corporate organizations are snapping up smaller healthcare independents. Today, two in three U.S. hospitals are part of a multi-hospital system. In addition, 1,035 of the 4,840 community hospitals in the U.S. are owned by private investors – that’s 21.4%, up from 16% ten years ago. [2] Unfortunately, hospital consolidation usually does not create the financial efficiencies independent hospitals hope to gain when they agree to an acquisition.
Acquired hospitals should manage their expectations as evidence shows they can realize just a 1.5% gain in marginal efficiency following a merger. [3] Studies also reveal that the average price of hospital services increases 6%−18% as a consequence of these mergers. [4] Consolidation typically results in a rise of prices through facility fees and other fixed costs. Not only is consolidation bad for prices, it can also negatively impact patient care. When hospitals consolidate they concede their independence and are no longer free to make decisions they feel are best for their community, and instead must defer community decisions to a larger corporate entity.
Collaboration – an Alternative to Consolidation
By many measures, regional coalitions, like TPC, can be a superior alternative to consolidation. Uniting together in healthcare collaboration allows hospitals to aggregate volume without having to merge assets or concede their independence. A majority of the value is achieved through a shared purpose and willingness to act as a system. As a result, hospitals enjoy greater purchasing power and improved supply chain efficiency all while keeping care local and affordable. As supply costs can account for 25-30% of a hospital’s operating budget, with costly Physician Preference Items (PPI) accounting for up to 60% of supply spend, a collaborative effort can drive enhanced value and improved performance, even in complex categories. As a result, collaborative partner hospitals can realize a 20% decrease in supply costs. [5]
The TPC Model
TPC is a partnership that allows independent community hospitals to aggregate their volume to contain costs and leverage their collective strength and size as if they were a single entity. By collaborating, TPC Member hospitals have driven to improve their individual and combined financial, operational and clinical performance. They work together in supply chain, purchased services and revenue cycle to achieve more together than they could alone. In addition, TPC clinical and administrative leaders become part of a virtual network in which they can share best practices and drive better decision making in order to improve patient outcomes and satisfaction. By aligning with like-sized, like-minded facilities, Members benefit from economies of scale, pooled resources and collective expertise.
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[1] http://www.paulkeckley.com/the-keckley-report/2018/9/11/does-a-hospitals-ownership-matter
[2] http://www.paulkeckley.com/the-keckley-report/2018/9/11/does-a-hospitals-ownership-matter
[3] https://www.healthleadersmedia.com/strategy/how-much-can-ma-cut-costs-lower-your-expectations
[4] https://www.ncci.com/Articles/Pages/II_Insights_QEB_Impact-of-Hospital-Consolidation-on-Medical-Costs.aspx
[5] https://static1.squarespace.com/static/52cd8717e4b02c4c62599d9a/t/58d521a1be659456292aada2/1507043003253/TPC_Supply+Chain+World_Spring+2017.pdf