How Growth Affects Patient Outcomes and Cost of Care

There are two basic types of strategic growth in business: organic and inorganic. Organic growth occurs when management focuses on marketing, planning, and attracting new clients to increase profitability and revenue. The cost of organic growth is minimal (compared to inorganic growth, discussed below), and the process is much more flexible. It involves changes in internal operations allowing a company a rate of growth that works best for them.

Organic growth does come with some uncertainty. Numerous factors can slow or altogether stop organic growth, and can potentially be as costly as inorganic growth.

Inorganic growth, by contrast, involves merging with or acquiring another company, immediately rewarding business owners with markedly increased market share. While inorganic growth is relatively fast, it is often expensive. Because of this, companies tend to put off these pursuits until organic growth has stopped or the business has cash reserves on hand that would cover the merger or acquisition cost.

In Forbes, Brad G. Kuntz notes that organic growth – also known as "growth from within" – requires time, patience, and nurturing. Yet, as Hakutizwi writes, organic growth offers the most control over how growth occurs:

"Generally speaking, if you're focused on continually improving your marketing efforts, improving your product or service, and identifying new or more profitable markets you can successfully enter, you're going to find that growth is more predictable and controllable over the long term."

This kind of growth can also bring a sense of pride due to the knowledge that you and your team built your company from the ground up.

Organic growth brings challenges as well; this form of expansion can move quite slowly. Because of this, businesses must avoid the temptation to bite off more than they can chew; one needs to make sure expansion keeps pace with the company's ability to manage change; to not to stretch resources too thin, especially labor and capital; and (most importantly for health care) to maintain its core mission of optimal patient care.

Inorganic growth, on the other hand, happens at a much faster pace. Kuntz and Hakutizwi agree that it can give your company immediate access to a bigger market share, increased assets, new skills and resources, and sometimes to easy capital. "Unlike slow, steady organic growth, growth through acquisition or merger is generally much faster," Hakutizwi quotes David Annis and Gary Schine, authors of the book, "Strategic Acquisition: A Smarter Way to Grow a Company," to explain the benefits of growth by acquisition:

"Growth through acquisition is a quicker, cheaper, and far less risky proposition than…expanded marketing and sales efforts…acquisition offers a myriad of other advantages such as easier financing and instant economies of scale. The competitive advantages are also formidable, ranging from catching one's competition off guard, to instant market penetration…to the elimination of a competitor(s) through its acquisition."

But this form of growth also brings big risks: branding issues, management challenges, increased complexity, and system capabilities need to be addressed in the context of a now-blended organization, representing a unified mission and vision to the broader client / patient base. Hakutizwi again notes that mergers and acquisitions often require reorganization and/or integration of the workforce and management teams which almost invariably leads to stress among personnel.

According to Kaufman Hall, hospital mergers between similarly-sized organizations are driving the recent increase in healthcare mergers and acquisitions. These organizations tend to be large to begin with, he says. Ten hospital merger and acquisition transactions involved healthcare organizations with net revenues of $1 billion or more in 2017.

One of the largest deals announced in 2017 involved two health systems operating across most of the country. Colorado-based Catholic Health Initiatives inked a merger agreement with Dignity Health in California in December 2017. Together, the organizations would create the largest non-profit health system in the country with 139 hospitals and over 700 other care sites across 28 states. The merger would also bring in more than $27 billion in revenue.

Similar deals between like-sized organizations include the finalized merger between Advocate Health Care and Aurora Health Care, the proposed merger between Beth Israel Deaconess Medical Center and Lahey Health in Massachusetts, and the potential combination of Bon Secours Health System and Mercy Health.

Anu Singh, Managing Director at Kaufman Hall, explains:

"Increasingly larger organizations are exploring mergers of equals in which an alignment results not in incremental change, but in transformative change… these changes include the ability to manage the health of populations, reduce the total cost of care, and introduce innovations such as precision medicine."

Hospitals are also busy acquiring physician practices to extend their reach into the community and capture more of the care continuum. Hospitals acquired 5,000 physician practices from July 2015 to July 2016 alone, a recent Physicians Advocacy Institute and Avalere Health analysis revealed. Hospitals owned nearly 30 percent of physician practices by late 2016, accounting for a 107 percent boost in the number of hospital-owned practices since 2012.

Leaders of healthcare organizations tend to highlight how merging with or acquiring another provider will reduce costs, improve care quality, and expand patient access.

For example, when Bon Secours Health System and Mercy Health announced their intention to create one of the nation's largest hospital systems, Mercy Health's President and CEO explained that the merger would decrease costs:

"As consumers grapple with the implications of healthcare reform in a dynamic marketplace, Mercy Health and Bon Secours share a vision to improve the health of the communities we serve as the low-cost, high-value provider," he said. "Working together, our strong faith-based heritage fuels our mutual focus to provide efficient and effective health care for each patient who comes through our doors."

Beth Israel Deaconess Medical Center's CEO Kevin Tabb, MD, made similar assertions when he announced the proposed merger deal between his health system and Lahey Health.

"Together, we will improve patient care, help contain rising healthcare costs, and better position our member hospitals in a rapidly changing healthcare environment," stated Tabb, who was tapped to head the combined system.

But just because healthcare leaders say their merger and acquisition deals will improve costs and outcomes, do those projected outcomes materialize?

A study conducted by the Charles River Associates for the American Hospital Association (AHA) indicates that hospital mergers and acquisitions can indeed reduce healthcare costs. Acquired hospitals saw operating expenses per admission drop 2.5 percent after a deal, resulting in $5.8 million in savings at each acquired hospital. However, it may take some time to realize these cost savings. The deals usually take two or more years to demonstrate cost savings because operating revenue tends to decline at a higher rate than operating expenses at the start of a merger [Deloitte, HFMA].

Most importantly, hospital M & A does not negatively impact care quality, researchers reported. In fact, the study linked hospital mergers and acquisitions to a decrease in 30-day readmissions rates for acute myocardial infarctions, heart failure, and pneumonia of about 1 percent. With such findings, fears about a disconnect between optimal patient care and robust growth in market share will likely diminish over time, possibly fueling acceleration of M & A rates in the health care industry.

Do you wish to pursue organic growth? Or are you positioned to consider merging with or acquiring another organization? Let Ektelligen help you to decide your path to growth. We will assist you in assessing your strengths, opportunities, and growth goals, to help you arrive at an evidence-based decision for crafting an effective, risk-managed growth strategy for your organization. Contact an Ektelligen representative today.