Too Big to Fail vs Too Small to Succeed
In 1990, there were more than 12,000 commercial banks. Today, the number is half that. The massive restructuring provoked by deregulation in the 1980s and 1990s led to monster conglomerates that now control 44% of all banking assets. Has consolidation improved that industry? Is the banking bailout’s mantra of “too big to fail” a good recipe for 21st century health care?
The current wave of deals makes this a pressing question. The pending merger between Advocate Health Care and NorthShore University HealthSystem, announced just last week, would make it the 11th largest system in the nation. And this summer’s headlines were replete with announcements of mergers and partnerships. Ascension Health announced a contracting relationship with CHE Trinity Health in Michigan. Tenet Healthcare and Dignity Health announced a joint venture with Ascension to operate a portfolio of hospitals in Arizona. Many other systems announced their intent to explore strategic partnership or merger options. It’s important to advise your leadership team that adopting the banking industry’s approach to scale is not the best or only strategy. There are many market factors and strategic options to consider.
Let’s put aside for a moment the Federal Trade Commission’s and payers’ well-placed concerns about negotiating leverage. Like banking, health care is both highly regulated and requires an increasingly staggering amount of IT infrastructure to make it work efficiently. We don’t really know if bigger health care is better health care. In fact, evidence supporting benefits of consolidation and scale is decidedly mixed. Back-office efficiencies at large systems have demonstrated value, but frontline health care improvement is an entirely different and elusive undertaking. To date, being part of a larger system has guaranteed little on the patient unit or in the primary care physician’s office. Added overhead cost and organizational complexity can easily stifle innovation where it’s needed most.
Yet, moving forward, Sg2 believes there is tremendous opportunity in aggregation for the purpose of scaling talent, IT, clinical services and new care delivery models. Patients and their families clearly will benefit from moves that increase health systems’ abilities to sensibly adopt, and deliver on a larger scale, standardized pathways, post-acute care transition models and palliative care protocols―regardless of whether accomplished through merger, partnership or affiliation. Consolidation should not be considered a destination, but rather a means to secure an efficient and more consistent approach to exceptional patient care.
Scale, though, also begets big brands. Most of you have a fairly stable (but perhaps not emotional) relationship with one of five large national retail bank chains, even if you don’t really know the difference between Wells Fargo and JPMorgan Chase & Co. A decade from now, there will no doubt be some megabrands that dominate the national health care landscape: Mayo Clinic, Kaiser Permanente, UPMC, Cleveland Clinic, Johns Hopkins, MD Anderson Cancer Center, Memorial Sloan Kettering Cancer Center. Perhaps there will be a few others. And they’ll be joined by some less-conventional juggernauts like CVS, Walmart or Apple. Still, in a multitrillion dollar industry, there will be plenty of room for a mix of local, regional and national players.
Even smaller players will be capable of building brand equity and a brand promise. Providers of all size must appreciate, however, that attaching a health care facility or provider to their brand will be fundamentally different than opening a new retail bank branch. Health care delivery is astoundingly complex, local and personal.
That’s a bit hard to appreciate given the traditional focus of health care branding: slick TV commercials, new technologies, and elusive concepts of health and wellness. The branding work now required should focus less on the facilities you operate and more on the health care product you deliver. That product must offer a predictable experience, a positive outcome and a competitive price; it also must be delivered when, where and how patients want to consume it.
Aligning yourself with one or more of the megabrands mentioned previously may indeed help support your new brand promise in a variety of ways. But it will not recuse you from the tough work of closing the gaps in your System of CARE.
Which leads us to the flip side of the bailout question: How do we define “too small to succeed?”
Health systems can successfully remain independent, just not in the way we think today. As the health care economy fundamentally reconstitutes itself, Sg2 believes balance sheet–based ideas of independence may be constraining innovation. Yes, financial health is critical, but that doesn’t mean that you need to be a $3 billion enterprise to survive. There are other paths to a sustainable future.
The exceptional, locally run health delivery systems that will exist 5 to 10 years from now won’t be isolated. Rather they will coexist and collaborate with a wide range of local, regional and national partners in areas such as virtual care, tumor-specific cancer programs, risk contracting, diabetes management and analytics.
The topics of consolidation, alliances and the future definition of independence will continue to dominate the monthly meetings of most health system boards. Our advice is to proceed carefully, with both urgency and patience. Look both ways before you rush to the conventional models of achieving scale. Opportunities and challenges are ahead for both big and small enterprises. Your challenge is to determine what organizational approach(es) will work best in the markets you serve. You have more options than you think.