By Paul Levy
First Posted at Not Running a Hospital on 3/11/2013
Paul Levy, Host of (Not) Running a Hospital

Paul Levy, Host of (Not) Running a Hospital

Here we go again.  The cyclic fads of health care are leading hospital boards and CEOs back into the merger game.  Stand-alone institutions are being acquired or are acquiring.  Single hospitals are becoming systems.  This is all driven by a belief that the payment system will change in a manner that will reward the ability of providers to manage the continuum of care, with a form of payment in which the risks of meeting some form of capitated annual budget will fall away from insurers and more to providers.

It is time for prudent people to ask whether mergers are the best way to set up health care systems that manage care under a capitated budget.  You’ve heard the arguments for this, of course.  Let me be the devil’s advocate and offer some contrary views.  I’m going to put them in extreme form to make the points. If you like, you can tone them down a bit, but the underlying issues still arise.

1)  The people who run hospitals do not have the competence to run health care systems.  There is little in the training of people who have become CEOs of single hospitals to run groups of hospitals and associated physician practices.  By the time they (or their boards) figure out what they don’t know, they have wasted millions and reduced the overall effectiveness of the component organizations within the system.

2)  There is no such thing as a merger. Every merger is a take-over of one institution by another.  “Cost savings” from this chimera are chimeras.*  A merger inevitably makes evident cultural differences and produces jealousies and alienation.  The business benefits that are supposed to emerge are often lost in the crush of overly aggressive and overly passive aggressive participants. McKinsey reports: “Anyone who has researched merger success rates knows that roughly 70 percent of mergers fail.”  And they weren’t just talking about hospitals!

3)  A merger offers little that cannot be accomplished by a strategic alliance between the parties.  In an alliance, you can still have the benefits of coordinated care and payment risk sharing.  You avoid, though, the cultural problems noted in number 2, above.  Indeed, you might be more successful achieving your common goals because each of your own constituencies feels a loyal commitment to success.


*  I’ve been wanting to use that word twice in a single sentence for years!  A chimera is an organism, organ, or part consisting of two or more tissues of different genetic composition, produced as a result of organ transplant, grafting, or genetic engineering.  It  is also a fanciful mental illusion or fabrication.