The prevailing argument for M&A activity has been that stronger competition will cause hospitals to reduce prices to compete for patients. But since that hasn’t been the case, Robert Pearl suggests a much different approach: that closing facilities instead of expanding them would ultimately cause prices to go down. In reading his article below, I thought how could that be? Wouldn’t that mean the remaining facilities can raise prices without local competition? The answer is that the closures force productivity from within.
We currently have an abundance of health services but not enough demand or reimbursement to keep up with rising costs. The market is flooded to the point where hospitals are paying more than they can bring in revenue. Like the farmers in Pearl’s comparison, if healthcare facilities produce fewer services, they can do so at a larger scale than before and with much less administrative overhead. Closures give remaining facilities the opportunity to tailor services to meet the regional demand and end up serving more patients.
It’s difficult to accept that we may need closures in order to transform the healthcare landscape. It’s an uncomfortable thought that incites panic, which he compares to the “rural crisis” of the past. Productivity outweighed tradition in that case and may do so again, despite the growing pains and more immediate consequences such as loss of jobs and access to services. Some rural communities have already started to embrace their hospital closures, coming to understand that they just didn’t need that volume of service and are more efficient without it.
This doesn’t mean that M&A activity needs to slow down; it just has to be done for the right reasons. Although most health systems are currently focused on market gain, M&A strategies should instead aim for consolidation and sharing resources in order to achieve increased revenue and value-based care.