Merger and acquisition announcements often tout the benefits of bundling purchases and standardizing their services and supply chain, but a new paper shows that doesn't yield the savings executives expect.
Labor expenses, purchased services, and supply chain are the top three cost-cutting priorities for healthcare executives, which align with providers' biggest expenditures. The cost of labor is the top priority for 44% of 101 chief financial officers and operations executives, followed by purchased services at 21% and supply chain at 17%, according to a recent survey by Navigant Consulting, Inc. and the Healthcare Financial Management Association.
While those results vary based on the sophistication of the health systems' process management software, data-sharing, and governance structure, the savings are less than expected on average, according to a working paper from University of Pennsylvania's Wharton School academics published in the National Bureau of Economic Research.
Horizontal hospital mergers saved acquired hospitals $176,000, or 1.5%, annually on average, which represents only 10% of what is claimed in the merger justification, according to the paper that analyzed hospital supply purchase orders from 1,200 hospitals from 2009 to 2015. Those savings primarily affect neighboring systems that maximize price negotiations for high-tech physician preference items. But there is mixed evidence supporting acquirers' savings.
"When organizations come together it expands these problems that already exist," said Chris Gormley, the CEO of Medpricer, which aims to help providers streamline purchased service data. "The reason why they haven't tackled purchased services is because there is decentralized data and poor contract management."
While the acquirers saved 6.4% on inexpensive commodities, that was more than offset by a 1.1% expense increase in physician-preference items, according to the paper. The average acquirer ultimately accrued $302 more in annual supply chain costs.
Acquired hospitals saved 2.6% in physician preference item costs, such as hip implants, primarily due to negotiating leverage with vendors rather than a decrease in utilization. Smaller adjacent hospitals gleaned more savings for physician preference items, the paper found. That may be because it's easier to manage a smaller group of doctors, said Rob Austin, an associate director at Navigant.
"To get better pricing on physician preference items there needs to be more standardization," said Austin, adding that systems either need to reduce the number of suppliers or concentrate volume with certain suppliers. "You need doctors to agree. Usually with a merger of competing, large groups, that gets harder."