As Business and Payment Models Evolve, Nimbleness Trumps Scale

In February, Dallas-based health systems Baylor Scott & White and Memorial Hermann decided to call off a proposed merger, claiming they were “capable of achieving [their] visions for the future without merging at this time.” What looks like a bit of face-saving public relations language might be truer than it immediately appears.

Hospital megamergers—especially those that are horizontal, bringing together 2 organizations whose functions are fundamentally the same—are truly a disservice to consumers. By removing competition, these mergers reduce transparency and accountability and can also lead to higher costs. A recent Harvard Business School study found that when merging hospitals were in different geographic markets, but the same state, prices increased by 7% to 10%.

Because of this, consumers and regulators should be particularly concerned whenever they see 2 hospitals systems thinking about merging. Those hospitals should be wary, as well; there is a very good chance that a merger isn’t in their best interests, either.

The current flurry of mergers dates back to the passage of the Affordable Care Act. Hospitals thought that merging would protect them from regulatory changes and help them increase their ability to invest in information technology, a key component of some government mandates. There was also an arms race with insurers, as each side looked to scale to provide an upper hand during contract negotiations.

However, size is not protective against the real threats that hospitals face, which come from innovative challengers who are completely rethinking care delivery.

In 2018, Amazon announced it was entering into healthcare alongside Berkshire Hathaway and JPMorgan Chase. Through the joint venture, they hope to improve consumer healthcare and simultaneously reduce costs, including those for prescriptions—the retail giant purchased PillPack, as well. Amazon has the tools and fresh perspective to really transform the traditional approach to healthcare, and once it does, hospitals will have to step up to the plate.

In the face of such innovation, larger organizations can struggle to react quickly. And expensive investments in extravagant brick and mortar facilities can make it even harder to shift course toward nontraditional care pathways—even when the need becomes clear.

For example, the current fee-for-service payment model is hugely inefficient, and as Amazon Chief Executive Officer Jeff Bezos famously said, “Your margin is my opportunity.” One of the goals of Amazon’s joint venture is to provide high-quality care that is “free from profit-making incentives.” That should be a chilling thought for hospitals thinking about doubling down on their current models.

Hospitals in and of themselves were never meant to be destinations of choice, and systems hoping to stay competitive must abandon their old business models and turn to ones that make care more affordable and accessible via new technologies and partnerships. Ambulatory care and outpatient centers are a promising alternative, as are telehealth services.

But before these changes can be made, hospitals must first take a serious look at their current services, payment model, commitment to quality, stakeholders, and value. Hospitals may find that certain facilities are failing to achieve their intended purpose, and they may choose to instead invest in other services that add value, such as telemedicine or community resources. Further, when transparent pricing—a hot topic today given that hospitals are now required to post their chargemaster lists online—is tied to quality, patients once again benefit. Bundled and capitated payments are one way to ensure transparency, and an evidence-based approach that is capable of making revenue projections is something stakeholders will be able to get behind.

Whether hospitals like it or not, the industry is speedily moving and advancing, and the only way for them to see continued success is if they stay nimble and capable of adapting to new developments. Looking to the future, healthcare systems should concern themselves less with size and instead shift focus to adopting business and payment models that bring value.