Megamergers Continue, but Some Are Better Than Others

Instead of the promised benefit—patients paying less for quality care—horizontal mergers can actually cost consumers more. However, vertical mergers have the potential to create a new, profitable business model that can benefit consumers.

Of late, announcements of megamergers between hospital systems, insurers and private companies have been dominating the healthcare news cycle. Take, for instance, Baylor Scott White and Memorial Hermann announcing their plan to join forces, or the recently finalized CVS and Aetna merger, though it may be delayed.

Despite good intentions—lower costs, better care for consumers—mergers and acquisitions rarely live up to expectations. One study of mergers between January 2001 and August 2017 found that instead of a positive impact on shareholder value, the acquiring companies’ shares underperformed. However, of the 2 types, vertical mergers hold greater promise than horizontal ones for delivering value.

As is the case in marriage, 2 weak entities coming together will not result in a strong partnership. Nor will joining one weak partner with a strong partner. A good marriage requires 2 strong individuals, and the same can be said in the instance of these healthcare mergers. Requiring substantial focus and discipline, they are not for the faint of heart. That’s why it’s absolutely essential for businesses to seriously assess whether one would be advantageous, and what detrimental side effects could arise as a result.

Horizontal mergers—like Baylor Scott White and Memorial Hermann, or the recently approved merger between Catholic Health Initiatives and Dignity Health—are typically approved by the Federal Trade Commission (FTC) and Department of Justice (DOJ) so long as their union won’t completely take over the market in which they exist. Often, what the FTC and DOJ don’t realize is that these mergers decrease competitive pressure on the merged entities and increase it on smaller organizations without the economies of scale and market power to negotiate with suppliers and payers. Horizontal mergers’ overlooked impact is that, struggling to stand out, smaller organizations will likewise come together. This increases consolidation further, thins patients’ options for care, and also stifles an organization’s incentive to innovate, stunting the delivery model’s evolution and forcing us to make do with the same unsatisfying outcomes. This growing concentration is apparent in a few metrics. For example, as of 2016, physician-owned practices became a minority (47%), and today, 10 companies account for more than half of investment-grade healthcare bonds.

Instead of the promised benefit—patients paying less for quality care—horizontal mergers can actually cost consumers more. With power in the hands of only a few institutions, consolidated systems that dominate their markets can raise prices without having to worry that they will lose business. We’ve seen this in other industries, too, which prompted the DOJ to look into price gouging schemes by airlines that dominated key routes.

With these mergers the assumption by the hospital is that there’s safety in numbers. Unfortunately, this is not the case. No matter how large, a hospital system is still subject to regulatory changes, which cost an average size, 161-bed hospital $7.6 million in administrative services each year. And that’s not to mention that the bigger the business, the less nimble they can be in response to these changes.

On the other hand, vertical mergers—like CVS and Aetna, or Cigna and Express Scripts—can combine each individual organization’s expertise and eliminate redundant functions to lower consumer costs and create more easily accessible, local healthcare options.

Vertical mergers have the potential to create a new, profitable business model that can benefit consumers. As an example, the CVS—Aetna merger pairs an insurance provider with a retail pharmacy. As a result, consumers will be able to receive treatment more quickly and conveniently through the CVS Minute Clinic network. These have been revamped to not only offer vaccines and tests for strep throat/ear infections, but to also monitor glucose levels and provide weight loss and medication counseling—instead of having to visit hospital emergency rooms or urgent care clinics.

While this type of merger is preferable to those that simply add more capacity, any merger has room for error. Chief among them is failure to acknowledge cultural incompatibilities. The union of Amazon and Whole Foods is an example of just that, with Whole Foods employees describing their new day-to-day work experience as “onerous and stress-inducing.”

For 2 fundamentally different organizations to create a successful business model, they have to do a handful of things right, including setting a clear vision that describes what the joint business will set out to do and why; bringing together each company’s history and core enduring values; thinking about how customers will be cared for; considering the commercial portfolio; and identifying what infrastructure tools will be needed to carry out its mission.

What’s more, it’s important to keep employee concerns at the forefront. Some employees may be used to a work environment in which they have input in the decision-making process, can be creative, and have room for growth. Other environments may be more rule-bound and bureaucratic. How can a compromise be reached?

While mergers may seem successful on the surface, they rarely achieve what they promise, and may do more harm than good—especially when they occur horizontally. Mergers and acquisitions, like marriage, is hard work, requiring effective communication between 2 strong, dedicated units. Like any relationship, the decision to enter into one should be taken anything but lightly.

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