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30 July, 2010 Posted by John G. Self Posted in Healthcare, Leadership
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The Consolidation Myth: Being Nimble Matters

Posted July 30th, 2010 | Author: John G. Self

"If your hospital is attractive financially, has a good payer mix, makes a margin, and dominates its local area, it's a fat target for larger systems that see growth and scale as the way to thrive under healthcare reform."   — HealthLeaders.Com

In anticipation of ongoing reductions in reimbursement and additional legislative attempts to change the way healthcare services are delivered, the consolidation of community hospitals into larger  regional healthcare systems is frequently touted as an answer to controlling costs, having access to capital, and improving quality.  

The problem with the consolidation scenario is that it rarely, if ever, results in reduced costs and bigger does not guarantee improvements in quality, safety or service.  The only possible advantage, assuming the independent hospital has done a good job in managing its operations, is improved access to capital, but that too can be misleading.  Well run, financially stable hospitals with solid balance sheets can get capital.  

Consolidation often occurs because the local leadership team and board have not done  a great job managing their operations and, over time, positioned their hospital in such a hole that selling out is the only answer. However, the days in which regional systems will step in and invest in a sinking community hospital are nearing an end. 

The regional systems are eying new sources of revenue, not dogs with fleas.

Consolidation eliminates competition.  The lack of competition allows prices to rise, which is exactly what has happened in metro market after metro market, when consolidation occurred (competitors were eliminated).

No one knows for sure what the future holds for healthcare reform, but I believe that we will see significant structural change along with the inevitable reductions in reimbursement. In this scenario, who has the best chance of surviving?  The large system with substantial overhead and the inability to change on a dime?  I don't think so.

I am putting my money on the well-managed smaller, nimble providers that can anticipate change and quickly respond. 

Running a big health system, one CEO confessed, is like managing an aircraft carrier with a fleet of support ships and systems to keep it on course and safe.  

In tough economic times with a threatening regulatory environment, think of that large health system as an aircraft carrier in the narrow Houston Ship Channel, trying to turn around.

(c)John Gregory Self

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