Across the country, hospitals are turning to mergers, affiliations, and partnerships to navigate the changing health care landscape. In fact, it’s happening right here at home, with the Greenville Health System (GHS) announcing they’re joining forces with the Midlands-based Palmetto Health.
Together GHS and Palmetto Health would combine to form the state’s largest health system, one that will serve 1.2 million patients a year, earn a projected $3.9 billion in annual net revenue, and reach half of South Carolina residents. If approved by the Federal Trade Commission (FTC), the deal would create a new company under which both hospital systems will operate, and would become one of the 50th largest hospital systems in the nation.
But as popular as these mergers and partnerships are — and as necessary as they may be in some cases — determining whether a merger is a success and failure is often “opaque,” according to Lawton Robert Burns, a professor of health care management in the Wharton School at the University of Pennsylvania. Adding to that, the wall separating a win and a loss is narrow. “There’s often a thin line between the two,” Burns added.
For many, the principal concern is how the new partnership will affect consumers. Again, the answer is not always clear.
“The answer depends heavily on how much integration is involved in the partnership,” said Clemson University associate professor of economics Matthew S. Lewis, who has studied hospital competition.
“Generally, cost savings from mergers come either from an elimination of duplicative costs or an ability to share expertise and best practices across system hospitals. The greater the degree of integration, the greater the chances that costs may be rationalized or practices may be actively disseminated across system hospitals.”
He added, “However, greater integration can also cause more disruption to the current operation of the system, which may result in some unwelcome changes to consumers’ experiences in the short run.”
GHS has said the partnership would allow the two health systems to offer services that they would not be able to offer separately. In addition, hospital officials have said combining the hospital systems could expand medical school training and clinical research. However, some fear it will reduce competition and increase costs.
While GHS officials say the proposed plan is not a merger*, their plans to band together with another hospital mirrors a trend seen through the country, one that experts say likely will continue as hospitals try to navigate a changing health care environment where hospitals are paid based on outcomes, not numbers of services provided.
“In a merger, you either find that one organization becomes part of the other organization or both go away and create something new. In this case, Palmetto Health and GHS will continue to be separate legal entities and continue to own their respective facilities. The new health company will provide the strategic direction and financial oversight for Palmetto Health and GHS.” — Sandy Dees, senior media relations coordinator for Greenville Health System
“Quality of care provided is being emphasized over quantity of care provided,” said Shipp Ames, spokesman for the South Carolina Hospital Association.
South Carolina has seen plenty of hospital mergers in the past, but the pattern has been hospitals in rural areas merging with larger systems, Ames said. If approved, the GHS-Palmetto partnership would be the biggest hospital deal ever in the state, surpassing the merger of Roper and Bon Secours St. Francis in Charleston and Richland Memorial Hospital and Baptist Health Care in Columbia in the late 1990s.
“We’ve not seen a merger of this scale in South Carolina,” Ames said.
This mirrors a national trend. Three large-scale mergers — defined as those targeting organizations with nearly $1 billion or more in revenues — were announced in the first quarter of this year, nearly equaling the number of large-scale mergers announced in 2016, according to Kaufman, Hall & Associates, a strategic and financial consulting firm in Skokie, Ill. The three big deals announced in the first quarter of 2017 all involved not-for-profit organizations.
“I definitely see the trend of hospital mergers continuing, particularly mergers of hospitals across different geographic markets, as these mergers tend to generate less antitrust scrutiny but can still yield benefits through lower costs or higher prices,” Lewis said. “But being in completely different consumer markets also means there is relatively little they can do to share physical resources or specialty practices.”
The GHS-Palmetto partnership isn’t the first time GHS has looked at joining other major hospitals in dealing with increasing health care costs and the threat of out-of-state hospital companies entering South Carolina. In the mid-1990s, hospitals in Greenville, Spartanburg, and Anderson wanted to merge and asked for a public referendum. The idea prompted an immediate public outcry; ads depicting the proposed hospital as an “800-pound gorilla” were common. The referendum was defeated.
This proposal has prompted opposition as well. Some members of the Greenville County Legislative Delegation have asked the state attorney general to look into the partnership. These are the same legislators that asked the FTC and the state Supreme Court to investigate GHS’ transformation into two separate, nonprofit groups, the Strategic Coordinating Organization (SCO) and the Upstate Affiliate Organization (UAO). The UAO will handle the day-to-day operations of GHS, and the SCO will guide the UAO.
The Supreme Court refused to take up the matter, but the issue is not entirely settled. A lawsuit is still pending in Greenville County Court of Common Pleas.
Burns said that two-thirds of mergers and acquisitions across all industries don’t add any value to the consumer. Between one-quarter and two-thirds add value to the shareholders.
And when it comes to hospital mergers, acquisitions, and partnerships, Burns and other researchers say they often come with higher prices but no discernable bump in quality.
The Robert Wood Johnson Foundation found in 2012 that hospital mergers generally resulted in higher prices, sometimes by more than 20 percent in already concentrated markets.
A 2016 Northwestern University Kellogg School of Management study found that cross-market mergers result in price increases of between 6 and 10 percent, even if the hospitals are more than 90 minutes apart, the distance between Greenville and Columbia.
However, Lewis says that price increases are mostly a concern for mergers of hospitals in the same geographic market. “Since very few consumers would consider traveling between Greenville and Columbia for hospital care, this may not be a major concern,” he says. “On the other hand, recent evidence has shown that some mergers involving hospitals in different markets have resulted in price increases.”
“This may be because larger systems tend to have more experience and expertise in more successfully negotiating higher reimbursement rates from insurers. However, both GHS and Palmetto Health are both reasonably large and sophisticated systems in their own right, so the advantage gained in this dimension may not be noticeable.”
Burns said in his research if two hospitals merge into one like a marriage, on average costs are lower but nothing happens when it comes to quality. Using that same analogy, if hospitals merge and operate as separate systems, similar to a couple getting married but living in separate houses, costs often go up and quality remains the same or decreases.
“There’s not a lot of benefit for the consumer,” he said. He added that strategic alignments where hospitals remain separate entities “don’t do anything and show no benefits.”
“It puts the burden of proof on those two hospitals to show what their game plan is to outperform those lackluster results,” he said.
Malcolm Isley, vice president for strategic services for the Strategic Coordinating Organization for GHS, said the hospitals will be developing specific strategic approaches to improve access to high-quality, affordable care when the affiliation is final, which will be after FTC review.
“In the meantime, we are strictly adhering to the laws, rules, and guidelines set forth by the FTC and others which limit the amount and kind of information GHS and Palmetto can share with one another at this time,” he said.
Isley said what is known is that while GHS is not technically merging with Palmetto Health, the quality and affordability benefits outlined in a new American Hospital Association-funded study demonstrate what is possible and what GHS will be working to achieve through the affiliation with Palmetto Health.
The analysis, “Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis,” conducted by Charles River Associates (CRA), shows that recent hospital mergers decreased costs due to economies of scale and reduced costs of capital and clinical standardization.
The analysis, which studied mergers between 2009 and 2014, showed that the mergers’ annual operating expenses went down 2.5 percent and had the potential to drive quality improvements through standardization of clinical protocols and investments to upgrade facilities and services at acquired hospitals. The study also found that mergers typically expand the scope of services available to patients and build upon existing institutional strengths to provide more comprehensive and efficient care.
“The findings are clear: Hospital mergers facilitate greater efficiency that reduces costs and encourages better quality care,” said Monica Noether, vice president at CRA and the paper’s lead author.
Lewis said he expects the merger wave to continue, regardless of whether Republicans are successful in their threat to repeal and replace former President Barack Obama’s health care law.
“Uncertainty in national health policy certainly isn’t good for hospitals,” he said. “This could make systems more cautious in entering into new agreements, or it could strengthen their desire to share resources. Overall, I think the merger wave will continue regardless of what happens to the Affordable Care Act.”
That being said, consumers could ultimately see a decrease in health care costs. “Looking forward, however, one of the biggest opportunities for slowing down the persistent escalation of health care costs seems to be in some of the promising new and innovative approaches to offering care, such as the increasing use of telemedicine,” Lewis added. “This is one area in which a larger system may be able to invest more in the development of new and more cost-effective forms of care.”