Testimony: PA House, Subcommittee on Health Facilities Informational Meeting on Hospital Consolidation

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Testimony: PA House, Subcommittee on Health Facilities Informational Meeting on Hospital Consolidation

Statement of
The Hospital and Healthsystem Association of Pennsylvania

for the

Pennsylvanian House of Representatives Health Committee, Subcommittee on Health Facilities Informational Meeting on Hospital Consolidation

Harrisburg, Pennsylvania
October 4, 2023

The Hospital and Healthsystem Association of Pennsylvania (HAP) appreciates the opportunity to provide an overview of hospital mergers and acquisitions.

Given the extraordinary challenges placed on the health care delivery system, hospital mergers and acquisitions represent a tool in stressed hospitals’ toolboxes to respond to financial pressures and mitigate risk while balancing their commitment to their communities. Well-constructed mergers strive to advance the goals of providing higher quality, farther reaching, more equitable, more innovative, less costly, or more stable patient care for the communities both organizations are proud to serve.

The urgent challenge currently before the commonwealth’s policymakers is to systematically strengthen the financial stability of Pennsylvania’s hospitals.

At Risk: Hospital Viability

Among the significant factors contributing to consolidation activity is an ongoing and increasing threat to the financial viability of American hospitals.

This spring, the American Hospital Association (AHA) issued a report¹ that details the extraordinary financial pressures that are threatening hospitals, health systems, and patients’ access to care. The strain is so significant that the authors frame it as a “new existential challenge.”

The Financial Stability of America’s Hospitals and Health Systems Is at Risk as the Costs of Caring Continue to Rise reports that expenses across the board increased at double digit rates during 2022 compared to pre-pandemic levels. You are likely already aware of the deep challenges related to rising workforce and pharmaceutical costs. Maybe less well known are details related to the substantial financial pressure from other essential operational requirements including, for example, medical supplies, food/nutrition, sanitation, facilities management, and information technology.

From 2019 to 2022, the national decline in hospitals’ median operating margin ranged from -37 percent to -133 percent.² More than half of all hospitals operated at a financial loss during 2022, which the report rightly notes is “an unsustainable situation for any organization in any sector.”³

A recent financial analysis by the Pennsylvania Health Care Cost Containment Council confirms these alarming trends in Pennsylvania. Its June report⁴ documents that 39 percent of Pennsylvania hospitals posted negative operating margins in fiscal year 2022, which means that the hospitals lost money providing care. In addition to that 39 percent, another 13 percent had margins of less than 4 percent, which is generally considered the minimum necessary to be sustainable for the long term.

On average, labor accounts for roughly half of a hospital’s budget. The health care labor market has experienced a fundamental shift during the past five years. We all know that COVID-19 has been a worldwide economic disruptor. It is not unreasonable to imagine that some of the deepest and most lasting impacts would manifest with the people, facilities, and systems who shouldered the largest share of its burden.

Experienced, exhausted professionals have exited direct-care settings and there is fierce competition to recruit and retain an increasingly scarce clinical workforce—particularly across certain specialties. Additionally, the personnel needed to support clinical professionals are being hired away by logistics and retail organizations, for example, that do not require 24/7/365 coverage and that offer extremely competitive starting pay. Hospitals are filling gaps by contracting with temporary agencies, many of which are taking advantage of market dynamics and have raised their fees to what some have called “price gouging” levels.

While the trend is not as pronounced in Pennsylvania as it is in other places, private equity firms—not constrained by the Stark law’s limits on physician practices—have been acquiring physician groups and specialists at increasing rates.⁵ Hospitals and health systems are closely monitoring this activity and making sure they are ready to effectively respond to broader trends in the physician market.

The cost of labor is expected to continue to rise as wages across all industries steadily increase and as recruitment and retention of the health care professionals needed to provide safe, high-quality care remains difficult and costly.

Non-labor expenses are also stressing hospital finances. Widespread inflation is driving up costs associated with pharmaceuticals, medical supplies, equipment maintenance, facilities management, and purchased-service expenses for things like clinical sub-specialties, IT support, and food services. In less than five years, non-labor expenses have increased more than 16 percent on a per patient basis.⁶

Chronic underpayment by government payors is another significant factor that exacerbates hospitals’ financial distress. Nationally, during 2019, Medicare and Medicaid paid about $75.8 billion less than the cost of care, according to the AHA.⁷ Here in Pennsylvania, about 63 percent of our acute care hospitals rely on government payors for at least half of their care-related revenue.⁸

In Pennsylvania, even before the pandemic, Medicaid and Medicare paid roughly 84 cents and 81 cents, respectively, on average for every dollar that hospitals spend to provide necessary care for some of our most vulnerable neighbors.^{9, 10} Merging with a hospital or health system can help some hospitals ease these financial burdens and improve patient care.

Nationally, commercial market dynamics and payor practices place stress on hospital finances. Insurers wield substantial market power in negotiating commercial rates, and new payment models come with considerable downside risk for hospitals and often do not fully account for the provision complex, high-acuity care. Excessive commercial payor administrative practices coupled with limited discharge options leave patients stranded and add to hospital costs. Risk mitigation can be achieved by serving larger, more diverse patient populations which can be particularly challenging for smaller hospitals or for facilities that are forced to reduce services or close beds due to workforce shortages.

It is not hard to envision how these and other financial stressors can collide and contribute to a downward spiral that threatens any given hospital’s ability to keep its doors open and provide high-quality patient care.

The Goal: Access to Quality Care

The ideal situation for consolidation activity occurs between entities that are individually strong. In other instances, mergers and acquisitions are a tool that some health systems use to keep financially struggling hospitals open, averting bankruptcy or even closure. Kaufman Hall conducted an analysis that reveals that almost 40 percent of hospitals were financially distressed prior to merger/acquisition and that, of those, more than 80 percent of bankrupt hospitals analyzed remain in service today.¹¹

Mergers can preserve local access to hospitals that serve vulnerable rural and urban communities. In many instances, but for operating under a system umbrella, hospitals could not have remained in those communities. Since 2010, six rural hospitals and one urban hospital in Pennsylvania have closed, a number which would be much higher had it not been for the ability of health systems to merge.¹² The additional resources provided through affiliation help to temper challenges presented by fluctuating or low patient volumes, heavy reliance on government payors, and increased regulatory burden.

Moreover, when hospitals join systems, patients and communities often benefit from advantages that the facility was unable provide on its own—thus strengthening the continuum of care and improving patient outcomes: a win-win. As an example, leveraging the negotiating power of a system, a hospital is able to generate greater economies of scale in purchasing costly, cutting-edge equipment that it likely would not have been able to invest to purchase otherwise.

A National Council on Compensation Insurance Insights report indicates that clinical processes improve as protocols become more standardized and resources become more robust. Patients benefit from more access to specialty care and better coordination as they move along the continuum.^{13, 14} A recent study published in JAMA Network Open found that certain hospital mergers are associated with lower mortality for patients admitted to the hospital for heart attack (9.4% pre-merger to 5.0% post-merger), heart failure (3.5% pre-merger to 2.7% post-merger), stroke (7.5% pre-merger to 5.8% post-merger) and pneumonia (4% pre-merger to 2.8% post-merger).¹⁵

Mergers are also associated with a 3.3 percent reduction in operating expenses, which helps reduce the gap between increasing expenses and insufficient payments.¹⁶ Some of most broadly circulated reports that seek to correlate hospital consolidation and pricing are based on old claims data and represent only about 13.5 percent of covered lives.¹⁷ More credible analysis would review current claims data and ensure representative samples of beneficiaries.

Action Steps: Enhance Hospital Stability

Enact policies that support hospitals’ current, hard-working health care professionals and enable hospitals to reduce reliance on costly agency staff.
Work to ensure Pennsylvania’s health care career pipeline can supply the future talent we need to take care of the commonwealth’s aging population.
Remove unnecessary bureaucracy associated with professional licensing to get caregivers to the bedside.
Enable health care professionals to practice to the fullest extent of their training.
Support pilot programs that explore collaboration and promote innovation in care delivery.
Solidify and build upon advancements made by the Pennsylvania Rural Health Model.
Assess and adjust Medicaid and Medicare payment rates to ensure that they cover the actual cost of providing care.

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Topics: Medicaid, Medicare, Rural Health Care, State Advocacy

Revision Date: 10/4/2023

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Testimony: PA House, Subcommittee on Health Facilities Informational Meeting on Hospital Consolidation

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