When hospitals and health systems merge they often cite lower costs and operational efficiencies as the main reasons, and a new report from the National Bureau of Economic Research indicates that savings indeed take place -- but only modestly.
The research found that hospitals, on average, save about 1.5 percent per year on common expenses in the supply chain, a number typically far lower than most of the estimates made prior to the finalization of these transactions.
That data was culled from 1,200 hospitals during a six-year period from 2009 to 2015. In a merger or acquisition, organizations often claim that capital cost reductions and economies of scale will result in savings, and the findings show that savings do in fact reduce prices for certain common supplies, such as physician preference items.
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But the cost savings are scant when compared to most projections, with the acquired entity typically saving just $176,000 annually across almost 50 supply categories. Reduced costs for physician preference items average about 2.6 percent.
For the acquiring entity, supply chain costs actually rise slightly, at an average of $302. They do save about 6.4 percent on inexpensive commodities, but that's balanced by a 1.1 percent rise in physician preference item costs.
The type of merger matters, however. Physician preference item savings, for example, were 5.2 percent at hospitals acquired by independent facilities or smaller health systems, while acquisition by larger systems yielded a number of just 3.7 percent.
Mergers and acquisitions in healthcare have been accumulating at a mighty clip over the past several years, and a big part of the reason is scale. Consolidation helps healthcare organizations increase the scale of their business and retain, or even increase, their market share.
Perhaps because of that, mergers and acquisitions activity in healthcare has been on the rise, with a record-breaking first quarter setting the pace for what is proving to be a busy year.