Health systems are aggregating into regional, superregional, and national health systems, predicated on a strategy of gaining economies of scale, standardizing and improving care, and building balance sheet strength. However, in few instances have these systems elevated the performance of their individual hospitals or returned the benefits of scale to consumers in terms of lower costs.
Over the past 20 years, the benefits of scale have often been achieved within single facilities, but only occasionally have they been achieved by regional health systems and rarely by multiregional and national systems. Several studies have shown that healthcare provider consolidation often weakens performance rather than enhancing it. That is changing rapidly, and the benefits from continued consolidation to all stakeholders—patients, communities, employers, payers—are now starting to be realized.
So, what’s changed? Data and the tools to understand the data. Never before have we had so much data, and never before have we been able to put it to use like we can today. Without scale, a health system can’t collect enough data, can’t adequately invest in the technology infrastructure and analytical capabilities needed to use it, and can’t apply the findings across a large enough population to make the required investment worthwhile. Quite simply, without adequate scale, healthcare provider organizations will find it difficult to be relevant while those with scale apply insights derived from big data to improve quality, reduce costs, and manage the risk of caring for a population.
We believe health systems must scale to achieve a level of market indispensability characterized by an integrated provider network able to invest in data analytics, bear risk, and offer patient-friendly physical and virtual care settings. But scale doesn’t guarantee relevance. Bigger doesn’t result in better. Only those health systems that grow while advancing performance through the investment in and application of data analytics to inform clinical, strategic, operational, and financial decisions will prove relevant and achieve the vision they have established for themselves.
Why Is Scale Important?
Larger health systems, on average, provide better care at lower costs than smaller health systems. And the gap will grow.
The largest 50 metropolitan statistical areas (MSAs) in the United States account for approximately half of the nation’s population. In studying these MSAs, on average, the largest three health systems in each MSA substantially exceed the median performance of all health systems in the MSA. As illustrated in figure 1, the financial performance, as measured by operating margin, and quality performance, as measured by CMS Star Ratings, of the largest health systems consistently surpass overall market performance.
Better performance is not only associated with health system size—there is also a correlation between market leaders’ performance and the market concentration where those systems operate. As shown in figure 2, the median operating margin of the top three health systems in highly concentrated MSAs is over 7%, compared to a median operating margin of less than 0% across all market participants in MSAs of moderate and low concentration. Based on these results, one could infer—and they would be correct—that performance is optimized by large health systems in highly concentrated markets.
Published October 28, 2020
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