The pace of healthcare consolidation has been accelerating significantly. Between 2006 and 2016, the number of announced hospital and health system transactions increased 55 percent. As I discuss these trends with healthcare executives across the country, the question I hear most often is: What is the endgame?
Leaders at almost every health system I visit are contemplating some form of new partnership in an effort to help their organizations develop new capabilities, lower overall cost structures, and stay relevant in the face of well-funded new competitors.
As the industry continues to consolidate, healthcare leaders naturally seek to understand the path ahead and identify a final destination. Because we are in uncharted territory, a look at another industry that has gone through massive consolidation—the banking industry—may provide some insights.
Macro-Trends in Banking
Once dominated by smaller community banks in nearly every city and town, the U.S. banking industry has shifted to a focus on branch banking, the expansion of regional banks, and a growing concentration of assets among a handful of very large, national institutions. The number of commercial banks declined dramatically from 14,434 in 1980 to 8,315 in 2000, and 5,112 in 2016.
The industry sees more than 200 mergers on average annually. Today, the five largest U.S. banks control more than 55 percent of the $17 trillion in assets held by U.S. banks, up from less than 10 percent held by the five largest banks in 1990.
The financial crisis, of course, has had a lasting impact. While loosening of regulations on the industry spurred rapid expansions in the 1980s and 1990s, the declining health of the financial sector contributed to a drop in banking merger transactions starting in 2007, coupled with a rise in transactions involving failed or failing institutions in 2008 to 2010.
Many institutions are closing branch locations due to tightening financial sector regulations and the rise of internet banking. Nationwide, banks have closed more than 10,000 branches since the financial crisis, at a pace of about three a day. Nearly 870 brick-and-mortar bank sites closed their doors in the first half of 2017 alone. For example, Wells Fargo & Co., the nation’s third-largest financial institution by total assets, announced plans earlier this year to close 400 branches over two years.
Parallels Between the Two Industries
The forces driving transaction activity in banking—and those that led to the financial crisis—are vastly different from the forces affecting healthcare change. Yet, parallels can be drawn between overall trends in the two industries.
Just as banking shifted away from independent community banks in favor of larger regional banks, healthcare has shifted away from independent community hospitals in favor of regional facilities. At least 80 rural community hospitals in 25 states ceased inpatient operations between 2010 and 2016.
Just as banking moved to an emphasis on branch locations, widespread focus on improving patient access and lowering healthcare costs is spurring the opening of outpatient facilities that can offer more convenient care at a lower cost point. Health systems across the country are aggressively expanding alternative sites, such as retail clinics, urgent care centers, stand-alone emergency departments, and other community-based access points—essentially the “branch banks” of healthcare.
Finally, just as banking saw the rise of large multi-state and national institutions that control a disproportionate share of industry assets, healthcare is seeing a growing emergence of large, regional, statewide, and, in some cases, multi-state health systems. The largest deal announced in 2016, for example, was the merger of two not-for-profit, Catholic healthcare systems: Englewood, Colo.-based Catholic Health Initiatives and San Francisco-based Dignity Health. If completed, the merger will create the nation’s largest not-for-profit health system.
From 2012 to 2016, the number of healthcare organizations targeted for partnership transactions that had a credit rating equivalent to A- or above—often indicative of significant scale—rose from one to nine, with a high of 15 in 2015 (see figure below). While these large-scale mergers still make up a relatively small portion of overall partnership transactions in healthcare, they suggest the potential rise of mega-systems that could mirror trends in banking with the evolution of JPMorgan Chase, Bank of America, and Wells Fargo.
Similarly, expanding use of virtual health services and rising competition from companies such as Teladoc, MDLive, and American Well, may ultimately transform the fundamental care delivery model as ATMs and internet banking are changing the financial services delivery model.
What’s the Endgame?
Perhaps the strongest lesson to be drawn from banking consolidation is that there is no endgame. To paraphrase Heraclitus: Change is the only known constant.
Like executives in banking and other industries, healthcare executives will face increasing forces driving ever more rapid change and new approaches to growth:
- Economic pressures will continue to demand major changes to cost structure, which in turn drive industry consolidation
- New technology and consumer expectations will continue to feed off of one another, creating the need for new, expensive capabilities
- Scale will continue to bring a competitive advantage, with the definition of scale broadening over time
Hospital and health system transactions historically have involved expansion of larger organizations targeting smaller entities that were struggling financially. Trends in recent years, however, demonstrate that partnerships are a critical strategy as organizations seek to provide coordinated, cost-effective care across the continuum. Many organizations are actively pursuing strategic initiatives aimed at reducing healthcare costs, implementing new technologies and consumer-oriented capabilities, and building economies of scale—objectives that provide proven benefits and reinforce sustainability in tumultuous times.
Just as with banking, the future of healthcare is wrought with countless uncertainties, but hospital and health system leaders cannot afford to take a “wait-and-see” approach. They must work to adopt a new mindset oriented toward helping their organizations make leaps of change rather than incremental change, and continually redefining organizational scope and capabilities.
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