The Risky Side of Hospital Mergers and Acquisitions

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If your profession is at all related to healthcare, you know all about the mergers and acquisitions (M&A) boom that began around 2007 and has seen hundreds of hospitals and healthcare facilities blended together. In 2011 alone, 90 such transactions took place, to the tune of nearly $10 billion. The Patient Protection and Affordable Care Act (PPACA) may well fuel continued M&A activity as hospital administrators fear a tightening of revenues.

“The Affordable Care Act is built around more widespread and effective preventive care, and if it works, that means a decrease in in-patient revenues,” says Dan Nash, Healthcare Practice Leader for Zurich in North America. “When hospitals merge and become part of larger systems, they can spread fixed costs and have easier access to capital at better rates, and greater ease in implementing sophisticated technology.”

These new, larger health-care entities also face new risks with the PPACA as the new sheriff in town, and simply by dint of the mergers. Nash and his team at Zurich spend their days considering these risks, and how they can help current and future customers deal with them. “For example, all community-based nonprofit hospitals—and that’s about 80 percent of all hospitals—now must perform effective community outreach regarding preventive care once every three years,” says Nash. “When hospitals merge, they are creating larger communities to serve. And when the community grows, the cost of compliance with community outreach and other regulations increases as well.”

A larger community also means more people to serve, many of whom will be new patients who previously did not have insurance or access to regular healthcare of any type. This influx can mean unfamiliarity with the community as a whole, “and I don’t think most hospitals are going to know as much about this new, larger community as they’ll need to,” says Nash. “For example, are they older or younger? Prone to obesity? And obesity in many cases leads to diabetes, which is one of the biggest epidemics facing not only healthcare entities, but governments and businesses, as well.” According to the American Diabetes Association’s 2011 Fact Sheet, 8 percent of the U.S. population has diabetes at a cost of $245 billion annually in healthcare costs and lost productivity. Another 79 million Americans have prediabetes.

But the risks to healthcare facilities created by obesity go beyond those numbers. “For hospitals, this creates entirely new levels of risk,” says Nash. “Do you have commodes that are properly sized for an influx of obese patients? Do you have properly sized gurneys? If you don’t, what kind of liability does that leave you open to? Healthcare providers have a lot of work to do regarding what their community is really like.”

M&A for hospitals also means more doctors as employees, and that creates risk, too. “Again,” says Nash, “you end up dealing with some unknowns. Are the new physicians up to your standards? How do you know if one is better than another?”

More important, says Nash, is that hospitals now have more concentrated malpractice risk. “And that means more liability,” he says. “When most doctors were independent contractors, you could bifurcate that risk somewhat. What are hospitals doing in terms of reviewing the doctors’ risk management protocols with them as employees?” These concerns emerge at a time when the Association of American Medical Colleges projects a shortage of 124,000 physicians by 2025. Universal health coverage could increase the shortfall at a time when significantly more people have access to healthcare—yet another risk for hospitals.

Mergers in many cases also mean taking ownership of buildings, some of which may be brimming with risks—particularly older structures. Zurich’s health-care risk engineers are dedicated solely to Zurich’s Healthcare Practice. “They don’t dabble in manufacturing business, or work with financial institutions,” says Nash. “This is rare in the industry, and our teams will look over a building from top to bottom to identify possible risks.” This service even includes supplying the hospital with a kit to make any necessary emergency repairs, such as a burst pipe. “Zurich is a great resource for large institutions, as well as small ones,” says Nash, noting that the smaller hospitals left behind in the M&A boom might have a tougher time of things moving forward. “We can help a healthcare group of any size or an individual hospital plan to limit its exposure to risk across the practice.”