The rise of mega-hospitals

by Michelle Crouch and Charlotte Ledger, North Carolina Health News
April 22, 2024

By Michelle Crouch

When it comes to growth, it seems like hospitals can’t get enough of it.

Across the country, a tidal wave of hospital mergers and acquisitions in recent years has created multi-billion-dollar hospital giants that serve large swaths of the population. For example, just in North Carolina:

• Atrium Health’s massive combination with Advocate Aurora in 2022 formed the country’s third-largest public health care system. The system’s $28 billion footprint now stretches south to Georgia and across the country to Illinois and WIsconsin.
• HCA Healthcare’s controversial 2019 purchase of Mission Health in Asheville brought the nation’s largest for-profit hospital system into the state. With $65 billion in revenue and 186 hospitals in 20 states and the United Kingdom, HCA is a health care juggernaut.
• Novant Health is smaller, but it, too, is focused on expansion. In the past year, the Winston Salem-based system opened a new hospital in south Charlotte, purchased a medical center in Pender County and three coastal South Carolina hospitals, and inked a $320 million deal to acquire two Lake Norman-area hospitals.

In all, U.S. health systems announced more than 428 deals between 2018 and 2023. At the same time, hospitals snapped up large numbers of physician practices and specialty clinics. Some experts estimate that as much as 80 percent of the nation’s hospital markets are “highly consolidated.” 

Even so, those same experts say more consolidation is on the way, as hospitals keep looking to cut costs and boost revenue.

What does that mean for patients? Despite hospital promises about benefits, most research indicates that mergers and acquisitions drive up prices and do little to improve the quality of care. 

It’s also not clear in an era of mega-systems where that leaves Novant, Charlotte’s No. 2 hospital system — with $8.3 billion in revenues — and other smaller systems that hang on throughout the state.

The debt Novant took on to buy the South Carolina hospitals for $2.4 billion prompted two credit rating agencies to downgrade some of its bonds. And the Federal Trade Commission filed an antitrust suit earlier this year to block its purchase of the Lake Norman hospitals.

“Novant might be a small fish at the national level, but all that matters (for an antitrust claim) is that it’s a big fish in Charlotte,” said Zarek Brot-Goldberg, a professor of public policy at the University of Chicago who studies health care markets. “Hospital competition is pretty local. For the most part, unless you have something rare, you’re not going to fly from Charlotte to Chicago to get care.”

 

Why are hospitals supersizing?

Hospitals see growth as their best bet to cope with rapidly rising health care costs, lower payments from insurers and patients who increasingly demand the latest and most expensive health care technologies, industry experts said.

The larger a hospital’s footprint, the more bargaining power it has when it negotiates prices with health insurance companies, said Mark Hall, a professor of law and public health at Wake Forest University.

Hospitals also cite economies of scale and operational efficiencies they say will enhance patient care, Hall said.

Ken Haynes, Advocate Health’s southeast region president, told the Atrium board in December that the combined system achieved more than $180 million in savings from the combination in 2023 — more than triple what it had hoped to save. Haynes said the system aimed to achieve another $363 million in savings in 2024 by consolidating workstreams, leveraging contract savings and improving labor efficiency.

“We know that by coming together, we are stronger and better able to weather the storms that the entire health care sector is facing,” Haynes said.

A study by Kaufman Hall, a health care consulting firm, found that health care mergers and acquisitions increased significantly in 2023. More than a third of transactions cited financial distress as a driver for the deal, the study found.  

A lifeline for rural hospitals?

A merger can be what saves a small, rural hospital from closing, said Steve Lawler, CEO of the North Carolina Healthcare Association, which represents hospitals.

With rural hospitals facing significant financial challenges, Lawler said, they often have only two options if they can’t find a bigger partner: significantly reduce services or shut down completely — as Martin General Hospital in northeastern North Carolina did in August 2023.

“There’s this idea that when there is all this consolidation, that there is some king or empire maker in the back room, when (hospitals) are just really trying to figure out how to deliver better service and better care, and how to be relevant long term,” he said.

Some research shows that when rural hospitals get acquired by larger systems, lower-profit services such as primary care and labor and delivery services get pushed toward the big urban buyer, argued Jan Probst, a retired professor of health economics at the University of South Carolina.

That’s played out in North Carolina, which has seen a wave of closures of maternity units in recent years, even in hospitals owned by larger systems.

“What will probably happen in North Carolina is, as the systems merge, they will decide to reduce the inefficiency of unused capacity in the large urban facilities by removing services from smaller institutions,” she told NC Health News last year.

The health care industry isn’t the first to go through a wave of massive consolidation.

Many long-time North Carolina residents no doubt remember the flood of mergers and acquisitions in the financial services industry in the late 1990s and early 2000s, when Charlotte-based NationsBank was on a buying spree and later merged to become global giant Bank of America. There was another series of mergers during the financial crisis of 2008, when Wachovia was swallowed by Wells Fargo. The airline, tech and telecom industries went through similar integration.

“Consolidation is inevitable in health systems,” argued Matthew Hanis, a Charlotte-based consultant and expert in the business of health care. “It’s the sheer nature of the business that they are in, because they manage massive amounts of capital. With any capital-intensive business, the more you consolidate, the more you improve your operating margin.”

Studies: As hospitals grow, prices rise

Growth may help hospitals save money, but patients may not benefit from those cost savings. 

A substantial body of research has found that hospital mergers lead to higher prices for patients, with increases ranging from 6 percent to 30 percent in concentrated markets. Even mergers of hospitals not close to each other have been shown to raise prices.    

Prices rise because insurance companies lose bargaining power when they negotiate with large hospitals on reimbursement rates, Brot-Goldberg said.

Here’s how that can play out, Brot-Goldberg said: To get the lowest prices on care, an insurer will threaten to drop a hospital from its network, forcing its patients to go to a competitor. But if there is no competing hospital, Brot-Goldberg explained, “hospitals can essentially set whatever price they want. They can say, ‘If you don’t want us in-network, good luck. Your patients will have no other place to go.’”

And when that happens, premium rates on insurance policies rise.

In a 2022 publication, the FTC noted: “Most studies show that competition among health systems — not consolidation — results in the lowest prices and optimal quality benefits for patients, as well as optimal wages and benefits for employees.”

There’s also evidence that when hospitals consolidate, wages for specialized health care workers fall. A study published in 2021 by the American Economic Association found that as hospitals consolidate, they lay off workers, and the remaining workers have fewer options for taking their skills elsewhere. The researchers found that four years after a merger, wages for nurses dropped by 6.8 percent, and wages for other, lesser-skilled medical workers dropped by about 4 percent from what they would have been without a merger. 

“This type of wage depression could dissuade qualified hospital employees (already in short supply in many parts of the country) from seeking employment, which could undermine the quality of patient care and access to services,” the FTC noted. 

Does consolidation hurt quality of care?

Studies examining whether mergers and hospital consolidation hurt patient care have had mixed results, Brot-Goldberg said. A comprehensive look at the issue, published in The New England Journal of Medicine, found that mergers were “associated with modestly worse patient experiences” but did not increase death or readmission rates.

“Mergers don’t seem to severely harm hospital quality, necessarily,” Brot-Goldberg said, “but there is no evidence that they are beneficial, either.”

In North Carolina, news headlines after two controversial purchases have not been positive: 

• In Wilmington, not long after Novant Health took over New Hanover Medical Center, patient complaints prompted a state inspection that found dire nursing shortages and emergency room wait times that resulted in an unsafe environment for ER patients, according to WECT.com. (Novant said it has hired nurses and made other changes to rectify the problems.)
• And in Asheville, after HCA Healthcare purchased Mission Health, physicians and nurses accused the for-profit health system of delays and lapses of care that harmed patients and resulted in patient deaths, according to Asheville Watchdog. In February, federal authorities placed Mission in immediate jeopardy, the most severe sanction a hospital can face. (HCA said it is addressing concerns.)

Smaller hospitals may be acquisition targets

As hospital consolidation continues, Hanis said, smaller hospitals are either going to be swept up by a larger system — or have to find a way to grow larger themselves.

“If you’re $5 billion (in revenues) or under, you’re either already merged, something is keeping you safe or nobody wants you,” Hanis said.

Novant’s $8.3 billion in revenues should help keep it from being a target, Hanis said. 

Hanis said he wouldn’t be surprised if Novant was eyeing another mid-size system for a merger, such as ECU Health in eastern North Carolina or Prisma Health, a $6 billion system based in Greenville, South Carlolina.

Novant did not directly respond to questions about its expansion plans, but it sent a statement that said, in part, that it is “always open to new opportunities, including mergers and acquisitions.” It went on to say: 

We recognize there will always be a need for new clinic and hospital locations, but our approach to creating a healthier future blends in-person and virtual care with novel partnerships to extend our expertise beyond the walls of our facilities. Everything we do at Novant Health starts with the patient and is built around community health needs.

Strong leadership, high profits and geographic isolation from competitors can help protect a hospital or health care system from acquisition, Hanis said. He singled out Gaston County’s Caromont Health as a hospital that has all of those factors in place. 

More pushback on hospital monopolies?

The Federal Trade Commission is supposed to protect American consumers from health care monopolies, but it has largely taken a back seat over the past two decades. That’s partly because of a lack of resources and partly because the agency was gun-shy after it lost a few antitrust suits against hospitals in the 1990s, experts said.  

“There have been more than 1,000 hospital mergers in the last 20 years,” Brot-Goldberg said. “If you’re one agency, how much can you really do?”

Recently, however, the FTC has taken a more active role against health care mergers and the harms they can cause, said Barak Richman, a professor of law and business administration at Duke University.  

One of its first tests: The antitrust suit against Novant’s $320 million acquisition of Lake Norman Regional Medical Center in Mooresville and Davis Regional Medical Center in Statesville.

In its complaint, the FTC said the deal would grant Novant control of nearly 65 percent of the market in the Eastern Lake Norman area, likely leading to “millions of dollars in increased healthcare costs” and reducing investments in improving quality of care.

Over the past three years, N.C. Treasurer Dale Folwell has taken the state’s hospitals to task on their increased appetite for consolidation. This past week, his office filed an amicus brief in support of the FTC’s case against Novant. 

Folwell’s interest in the case comes from his role as the head of the State Health Plan, which oversees the care of more than 700,000 state employees and their families. 

“When mergers eliminate competitors (like this one), taxpayers and state employees are forced to subsidize the resulting monopolist’s profits,” he wrote in the brief. “Hospital systems with a high market share demand greater reimbursement from insurers and third-party administrators, and those costs are ultimately passed along to the Plan.”

Novant: Hospital purchase will benefit quality of care

Novant responded to the FTC with a 37-page filing, saying the FTC’s case is “premised on a distorted and artificially narrow view of healthcare competition in the Charlotte area.”

Most notably, Novant said, the FTC’s analysis specifically excluded a planned Atrium hospital in Cornelius (Atrium Health Lake Norman) that will compete with the Novant facilities when it opens in 2025. 

“Novant Health’s purchase of these hospitals will ultimately benefit quality of care, long-term outcomes and competition,” a spokesperson for Novant told Becker’s Hospital Review. “Our commitment to purchase is, fundamentally, a commitment to restore services lost over time and to provide new, leading-edge technology that will enhance the clinical capabilities available to the greater Charlotte community.”

Richman said “it’s not a slam dunk case” for the FTC, but he’s heartened that the agency seems to be taking a more aggressive approach. 

“The policy community has been working for a long time to convince policymakers this is a problem,” he said, “and I think we are finally succeeding.”

This article is part of a partnership between The Charlotte Ledger and North Carolina Health News to produce original health care reporting focused on the Charlotte area. Want more information? Read more here.

North Carolina Health News is an independent, non-partisan, not-for-profit, statewide news organization dedicated to covering all things health care in North Carolina. Visit NCHN at northcarolinahealthnews.org.

This article first appeared on North Carolina Health News and is republished here under a Creative Commons license.