Health Systems' Scale Not Linked to Higher Revenue

Jeff Goldsmith in Modern Healthcare

Bigger isn't necessarily better.

New data from Navigant challenge the common perception that scale will improve healthcare providers' operations, researchers said. The report, which covered 104 highly rated health systems comprising about half of nation's hospitals, showed that there was no correlation between higher revenues and better operating margins from 2015 to 2017.

The largest for-profit systems had steeper declines in operating income than their smaller peers, granted they started with much higher revenues. The data opposes some of the rationale that drives the speeding train of mergers and acquisitions, said Jeff Goldsmith, national adviser for Navigant.

"There is no relationship at all between profitability and the size of the system," said Goldsmith, adding that most of the health systems analyzed had AA and A credit ratings. "This flies in the face of the conventional wisdom that has driven mergers." 

Some that did the worst were roll-ups, where small struggling systems were acquired by bigger ones that wanted to dominate a market, Goldsmith added. 

Two-thirds of the health systems analyzed experienced operating income declines over the three-year period. Health system operating margins dropped by 38.7% from 2015 to 2017. Not-for-profit system margins fell by 34% while for-profit system margins fell by 39%. More than a quarter lost money on operations in at least one of the three years, and 11% had negative margins throughout. 

Hospitals' expenses grew by 3 percentage points faster than their revenues, leading to a combined $6.8 billion erosion of earnings, a 44% reduction. Top-line operating revenue growth fell from 7% (2015 to 2016) to only 5.5% from (2016 to 2017).

"Overhead should go down as percentage of operations when you merge, but that isn't necessarily the case," Goldsmith said. 

 

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