We are now 7 years into the ACA and consolidation in the healthcare marketplace primarily on the provider side, is still an ongoing process.

The Carolinas HealthCare System and UNC Health Care Merger

Carolinas HealthCare System and UNC Health Care are in exclusive negotiations to merge their operations. “The merger will focus on increasing access and affordability, advancing clinical-care expertise, growing the academic enterprise, and contributing to the region’s economic vibrancy.”

However, notably absent from the announcement is the fact that this merger is largely driven by concerns surrounding Medicaid/Medicare reimbursement and the anticipated further downward pressure on reimbursement rates, which will inevitably squeeze margins. Adding to the complexity is the uncertainty surrounding the ACA, making for a challenging landscape ahead.

Economies of Scale and Vendor Consolidation

Many independent hospitals today are connected to a larger healthcare network for referrals to specialists and to cover some operational expenses. Many others have been absorbed by a network and are owned by health systems.  Although there are hundreds of institutions that are operating independently, many are connected to some larger system.  These mergers are intended to generate economies of scale, trim costs, consolidate vendors renegotiate pricing for a host of services, and do “hand to hand” combat with insurers.

Tenet HealthCare, one of the largest for-profit hospital chains is looking at ways to “further strengthen the company”. This is a sign of possible merger activity or more acquisitions by Tenet who is being pressured by shareholders to protect itself in the midst of this uncertainty.

Healthcare Real Estate Investment Trusts Consolidation

Healthcare Real Estate Investment Trusts (REITs) like Sabra Health Care and Care Capital Properties are also merging, given that they invest in properties leased by healthcare businesses. They serve as landlords and are concerned about changes in reimbursement that could impact their tenants over the long term. Tenants typically pay rent through insurance reimbursement. Do you see the connection?

Pharmaceutical Industry and Healthcare Mergers

Pharmaceutical companies are participating in many mergers and acquisitions as well. Physicians have merged into mega-practices to control costs and enhance leverage in health care contracting. Hospitals have acquired private medical practices, with only 1 in 3 doctors projected to remain independent by the end of this year. I think it will take longer than that.  And then, of course, you have numerous mergers between insurers.

The Role of Central Planners in Healthcare Consolidation

The central planners behind the Affordable Care Act were convinced that consolidation in health care would lead to decreased health care spending by eliminating duplication, standardizing treatment protocols, and incentivizing better utilization. As three of Obamacare’s primary authors wrote in 2010, the law was designed to “unleash forces that favor integration across the continuum of care.” No part of health care was supposed to be spared – doctors, hospitals, insurers, pharmaceutical companies, and others were provided with regulatory and financial incentives to merge.

Challenges for Vendors in a Consolidated Healthcare Market

This prediction panned out. In the 7 years since Obamacare’s passage, there has been a surge in health care consolidation. Costs are still not totally under control. It’s still a bloated beast.

The Bad for vendors

  • Possibly More RFQ’s/RFP’s
  • Possibly more involvement of vendor managers vs. a purchasing dept.
  • Possible pressure on vendors to drive down their cost, ala Wal-Mart pricing model.

The Good for vendors

  • Centralized decision making processes
  • 1-3 people involved
  • Decision makers are stationary, not moving from location to location, therefore accessible.
  • Faster decision making process.

Stay focused, be relentless. Push harder.
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