Impact of the Consolidation of the Healthcare Market

Consolidation of Healthcare Sector

Impact of the Consolidation of the Healthcare Market

In today’s world, consolidation is key. In the past few years, financial institutions, airlines, and even retail department stores have all consolidated and transformed. Now the healthcare industry is going through its transformational phase for the purpose of consolidation.

Technological innovations and noteworthy regulatory changes backed by market dynamics are the key drivers of the rapid consolidation of health systems. Today, hospitals are acquiring not only other hospitals but also insurance business as well as physician practices. Healthcare service is no longer limited to the traditional volume driven, fee-for-service (FFS) system. Rather, the focus is on value-based care (VBC), which demands diversification and innovation on the part of healthcare providers. Most of the consolidation that has been happening in the healthcare market is horizontal in nature –i.e. hospitals acquiring other hospitals.

 

Ways in which consolidation is taking place

The U.S. health system consists of four verticals: large chains, mid-tier systems, Academic Medical Centers (AMCs) and small community health systems. It would be wrong to assume that consolidation of these verticals is a recent phenomenon. All of these groups have undergone consolidation with the aim of broadening their geographical reach, market share, and launching their new service lines.

That being said, the current trend of consolidation is no longer limited to traditional affiliations, collaborations, and joint ventures. As the focus has shifted to value-based care, healthcare systems require better technology and improved capabilities to deliver the best results. Situations like these have led to the consolidation of medical service providers with technical service providers in order to provide the right service at low costs. This is occurring most frequently in cases of large chains.

When it comes to mid-tier healthcare systems, the focus is on consolidation within the region as well as in neighboring market regions. The consolidation is done through the extensive integration of healthcare providers, from the primary level to post-acute care. This kind of consolidation serves two purposes:

  1. Value-based service provided to that particular population
  2. Acquisition of a better share in that particular regional market

Finally, there are AMCs, which tend to consolidate and emerge as specialist health systems dedicated to a specific type of illness.

 

Impact of consolidation

1.Higher prices for healthcare purchasers

Higher prices are perhaps one of the greatest impacts of health care market consolidation. Also, as regulators push for transparency regarding quality and pricing from various health systems, there are greater chances for the emergence of differential payment for higher quality services. At the same time, government payers who are looking for ways in which to decrease prices will pressurize health systems to reduce their costs and manage risks.

Overall, the market is sure to be quite volatile in the beginning. Those healthcare systems that can leverage the market and manage risks are sure to deal with the pressure in an effective manner.

2. Tough atmosphere for small hospitals and insurers

Due to the apparent rise in payment rates, small hospitals will be faced with some challenges, including having to transition to electronic medical records, which is capital intensive. In fact, this transition has resulted in the emergence of contracting models like Accountable Care Organizations (ACOs). Also, there is a trend among younger physicians of wanting to work with large organizations, rather than serve in small hospitals or partner in small practices. This makes it even more difficult for small hospitals to survive.

Small insurers will also find it difficult to continue in this challenging environment, as multi-state employers prefer insurers who can serve their employees throughout the country, rather than just locally.

3. Fostering of competition

The Affordable Care Act (ACA) sees to it that both public and private insurance exchanges create healthy competition so that there is less of a barrier to entry for insurers. This in turn will benefit potential customers.

Apart from the insurers, competition will also be fostered among healthcare systems, which will help purchasers get better value for services. Also, with the enforcement of the anti-trust policy, there is sure to be better pricing for services, as well increased chances of cross-market mergers and reduction in independent practice associations.

With all of this in mind, it is a bit too early to predict the exact outcome of the consolidation of healthcare systems. But with the system undergoing rapid consolidation, it has become even more important for industry stakeholders to consider regulatory scrutiny so that a strategy for the long-term viability of the healthcare system can evolve.

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