Why Hospital Need to Scale

By Kenneth Kaufman

We have all seen the attacks on hospitals for exercising their right to merge and make decisions about how to best fulfill their missions in a rapidly changing competitive environment. In this blog post, Kaufman Hall presents its point of view on this critical issue. For more information, see the American Hospital Association’s resources on hospital integration.

Each day seems to bring a new outcry that hospitals are attempting to get bigger in order to raise prices. A recent article, for example, said that hospitals have “enormous clout”…are “behemoths” that are “throwing their weight around”…have “essentially banished competition and raised prices for hospital admissions.”

Reading these articles, you would think we were living in 1985, rather than closing in on 2020.

The healthcare environment that these articles describe no longer exists. In 1985, hospitals competed with the hospital across town for inpatient business. Today, hospitals are struggling to hold onto large chunks of their outpatient business in the face of new competitors that have scale and technological knowledge never before seen in healthcare.

UnitedHealth/Optum and CVS Health/Aetna are aiming to unbolt outpatient business from legacy hospitals. Amazon, Apple, and Google are investing heavily in healthcare from numerous angles, looking for the most effective entry points to care and services. Hospital organizations are doing what any company would do when confronted with a highly disruptive environment like this: They are trying to gain the financial and intellectual resources to compete in a new world.

Hospitals are making this transition in the face of a difficult financial reality. The Moody’s 2019 outlook shows revenue growth for hospitals will continue to decline under pressure from weak inpatient volume and low reimbursement payments. At the same time, expenses continue to grow faster than revenue. This puts hospitals in an extremely difficult economic and competitive position—one in which the status quo is simply not an option.

The normal response of any company in any industry in this situation would be to seek scale in an effort to meet this different level of competition and adjust to a new business model. That is exactly what is happening among hospital stakeholders.

The opening sentence of a recent Crain’s Chicago Business article states the obvious and the inevitable: “The news that Walgreens is in preliminary talks to link up with Humana showcases just how critical it has become for healthcare players of all stripes—from pharmacies to hospitals—to bulk up….” Of course. “Bulking up” is the logical response.

Legacy hospital organizations need to grow along with everyone else. Scale will help ensure that America’s hospitals can keep pace—that they can continue to build on their deep community connections, expertise treating the full range of health conditions, and history of serving our most vulnerable populations.

In this competitive milieu, pricing is of minor consequence. It is immaterial to competitive position. Raising prices would not have helped Borders to compete against Amazon, or Blockbuster to compete against Netflix, and it won’t help hospitals compete against healthcare’s new entrants. UnitedHealth’s revenue grew 12 percent in the third quarter of 2018, compared to the third quarter of 2017. Moody’s projects 2019 mean revenue growth among rated hospitals will be 3 percent to 4 percent. The new competitors like UnitedHealth and CVS Health/Aetna are among the largest companies in the country and, in some cases, the world. The very largest hospital systems are ten times smaller.

Scale will be critical, but it is not an end in itself. Scale is a means to gain intelligence—to get the best intellectual capital, to tap information about a vast group of people, to test new ideas, and then to scale those ideas. A recent New Yorker article described scale at Google as “the beginning of a feedback loop—bigness would be the source of Google’s intelligence; intelligence the source of its wealth; and wealth the source of its growth.”

The competitors that hospitals face are not just large; they also are among the smartest organizations on the planet. These companies draw on a huge amount of data, apply sophisticated analytics, and have the capabilities to develop radically new tech-enabled care and digital connections.

​This is the state of play today. Scale is the platform that will allow hospitals to acquire the resources—such as more working and intellectual capital, and significant digital capabilities—to compete in this brand new healthcare marketplace.

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