Medical ‘land grab’ underway as large hospitals try to get larger

Talks among groups latest sign of industry in flflux.

Twolarge, non-profifififififitCatholic hospital chains are discussing a possible merger, according to theWall Street Journal. If a deal is struck, it would create the largest hospital system in the country, reflflecting an ongoingwaveof consolidation in the health care industry.

One hospital system, Ascension, runs 141 hospitals in 22 states and the District of Columbia. The other, ProvidenceSt. JosephHealth, runs 50 hospitals in seven states. Spokespeople from both hospitals declined to comment ontheWSJ report. Ifcombined, theentitywould be bigger thanthe largest forprofifit health system today, HCA - which includes 177 hospitals in 20 states and in the United Kingdom.

The reported talks are the latest sign of an industry in flflux. Last week, two other hospital systems, Colorado-basedCatholicHealthInitiatives and California- based Dignity Health, announced they had agreed tomerge to create a joint systemwith139 hospitals across 28 states. Chicago- based Advocate Health Care and Milwaulkee- based Aurora Health Care also announced plans tomerge to createwhat they said would be the 10th largest not-for-profifit health system, with 27 hospitals and more than 3,300 doctors.

“It feels like a land- grab on the part of some systems, seeking to get larger,” said Leemore Dafny, a professor of business administration at Harvard Business School. “Once a couple of these are announced, thenmore start to get underway, because people don’t want to be left out... . There’s a widely-held belief among health systemexecutives that costs are lower when you have a bigger enterprise.”

The announcement also comes in a health care environment where insurers are increasingly integratedwith care providers. Last week, CVS agreed to acquireAetna for $69 billion and the country’s largest insurer, UnitedHealth Group, agreed to acquire a large network of medical clinics, DaVitaMedical Group.

Hospitals generally argue that such deals provide greater scale - a bigger entity could drive better deals on medical devices or drugs, for example. Melinda Hatton, the general counsel for theAmericanHospitalAssociation, said that hospitals are facing pressures from decreasing reimbursements - aswell as the need to evolve to keep upwith a health systemincreasingly rewarding providers fifinancially not for the number of services they provide but the quality of their care.

“It’s an opportunity to achieve scale, so you can do the things you want to do to prepare for the future,” Hatton said.

A study published in the Journal of Health Economics found that after hospitals were acquired, they experienced cost savings of between 4 and 7 percent.

Whether cost savings trickle down to patients through lower prices, however, is a topic of debate. Many economists argue that such deals provide hospitals the clout to negotiate higher prices with insurers.

“This isoneof thoseclassic mergers; it’s a hospital system merging with another hospital system, where we think the opportunities for value creation are quite small,” said Amitabh Chandra, a health economist.