Health Care Consolidation

The health care industry is starting to go through a comprehensive consolidation. Our hospital and physician practice clients are negotiating potential mergers at an unprecedented level of activity. We have observed that the majority of health systems in the northeast region are developing and/or expanding their physician practice networks as part of their strategic plan.

The typical benefits of consolidation to the physician practice are improved physician compensation, security from changes in the health care market and an opportunity to focus their efforts on patient care. Health systems have also benefitted by improving cash flow, expanding their continuum of care of their patients and developing a care model focused on the needs of the population they serve. 

The major incentives we have seen for this change are as follows: (1) new payment methodologies; (2) lower traditional fee-for-service reimbursement rates; (3) higher operating costs; (4) capital required for investment in facilities and equipment; and (5) the compliance concern of overpayment audits.

New Payment Methodologies 

The Centers for Medicare and Medicaid (CMS) and  private payers are moving from compensation based on a volume of visits and/or procedures to a combination of volume and patient outcomes. The initial standards for patient outcomes have been developed by the payers and physician organizations over the last three to five years. We expect further modification to the standards to patient outcomes. Health care providers who consistently score well with patient outcomes will earn higher reimbursement for their services in the future. 

Lower Traditional Fee-For-Service Reimbursement Rates 

The federal and state budget issues will result in lower reimbursement rates for all health care services. This market change requires health care providers to consider the need for efficiency and possibly consolidation with other health care organizations. The back office support functions would be a key opportunity for a reduction of costs when organizations consolidate. We see many health systems and physician practices negotiating possible mergers in the northeast region of the country.

Higher Operating Costs 

Costs to provide medical services continue to increase at a rate greater than inflation. These costs relate mainly to salaries, supplies and space costs. Health care organizations are starting to aggressively outsource a number of their responsibilities. The billing and collection process appears to be one area that a number of health care organizations are looking to outsource to reduce significant salary and benefit costs. This strategy also hopes to increase collections as part of the change to an outside vendor.

Facilities and Equipment Investment Capital 

The competition in the industry requires health care organizations to continuously update their equipment and facilities. This requires a certain amount of working capital and access to financing. The current credit market has made this difficult for a number of health care organizations and they are looking for well-funded partners and/or investors.

Overpayment Audits 

Overpayment audits have become very aggressive in the current marketplace. Five to seven years ago an overpayment request of $10,000 to $20,000 for a physician practice would have raised some concern. Today the overpayment requests typically start at $500,000. Hospitals would receive overpayment requests for $100,000 to $200,000 and these requests now start in the $2,000,000 to $5,000,000 range. These compliance concerns have also fostered a desire to consolidate operations with partners who can afford to set up the proper controls and make the larger payments when required.


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