Goliath vs. Goliath: Hospital Mega-Mergers and the Fight for Your Healthcare

Vijay Kedar, Contributor

A turbulent year for healthcare policy, 2017 was capped off with a spree of healthcare mega-mergers. Some transgressed traditional industry boundaries, reflecting the evolving dynamics of a sector in dramatic flux since the 2010 implementation of the Affordable Care Act. CVS’ $69bn acquisition of Aetna, the nation’s third largest insurer, introduced the possibility of converting CVS’ 10,000 pharmacy and clinic locations into community-based sites of care. United Health Optum’s $4.9bn acquisition of DaVita Medical Group added a physician group and urgent care clinics to United’s existing portfolio of 30,000 doctors.

The traditional lines between payers and providers are being crossed and large hospital systems are struggling to keep up. In December, Catholic Health Initiatives announced a merger with Dignity Health, creating a system of 139 hospitals and $28bn in revenue. Days prior, Advocate Health Care and Aurora Health Care agreed to merge in a $11bn deal. While these would appear to be defensive moves responding to insurers’ aggressive foray into the business of care delivery, hospital executives tout the ability of the combined entities to reduce costs and increase access for patients. Will these hospitals mergers result in lower healthcare costs and are they good for the healthcare system writ large? Not necessarily.

From an industry-wide scope, these mergers are the latest volley in the ongoing battle between the nation’s largest hospitals and insurers for negotiating leverage over healthcare prices. Over the last several decades, consolidation has been employed on both sides. Driven by decades of M&A, the nation’s four largest insurers (Anthem, United, Aetna, and Cigna) now comprise over 83% market share. Similarly, between 2010 and 2015, health systems announced 561 transactions covering 1,260 hospitals. On the surface, the trend of consolidation to gain scale and negotiating leverage is not new. However, the paradigm shift from fee-for-service to value-based care casts these negotiations in a new light. Increasingly, payers (led by CMS and followed by private insurers) are holding hospitals accountable for a greater share of financial risk in managing medical costs. For value-based contracts, hospitals will need to drive care from high-cost settings such as acute care facilities to lower-cost settings like outpatient surgery sites, urgent care centers and retail clinics. While integrated health systems have been developing or acquiring such facilitates, the insurers are themselves snatching up some of these lower-cost care sites, capturing the volumes of care delivery services that are shifting downstream.

What’s more, as their reimbursement mix evolves to value-based care, hospitals are faced with contradictory priorities. Value-based revenues tie them to cost benchmarks, driving them to invest in preventive care, transition patients to lower-cost sites of care and chip away at the 10% of all healthcare spending on procedures that are ultimately deemed unnecessary or harmful. However, at present, the majority of health system revenues continue to stem from fee-for-service payments, in which they are incentivized to maximize volume, fill hospital beds, and invest in highly specialized surgical units.

This is a difficult balance for hospital systems to manage and further consolidation primarily supports the fee-for-service objective. In these mergers, the primary assets are large acute-care facilities, serving as the anchors of the health system network. Increased scale will enable health systems to negotiate higher prices with insurance counterparts. As a result, some studies, such as research by Professor Leemore Dafny on cross-market hospital mergers, indicate that such mergers tend to result in higher, rather than lower, prices for consumers. In enabling hospital systems to control additional care sites, these mergers may also support their objective to influence the patient journey and the routing of patients across the care continuum.

To leverage these advantages to create real value for patients, hospital systems will need to invest in their value-based futures. They will need to overcome interoperability challenges to align financial and clinical systems and provide clear cost and quality benchmarks to clinical teams. They will need to engage and empower their physicians, who drive clinical decision-making and subsequently control the vast majority of medical cost. They will need to build real relationships with patients and play a greater role in guiding them to the most appropriate settings of care. For if they do not, they will remain mired in a fee-for-service past and burdened by expensive capital costs and bloated administrative overhead. Most notably, they will lose share to the insurance companies increasingly infringing on care delivery and capturing control of the invaluable patient journey.

2017 has set the stage for a clash of the titans in the nation’s largest industry. At stake: your healthcare and the future of the care delivery landscape. Let’s see what 2018 brings.


Vijay Kedar (HBS ’19) is an entrepreneur, investor and writer. Professionally, Vijay spent the last several years building the business at Oscar Health, a technology-forward health insurance company. Prior to Oscar, Vijay was a private equity investor at Goldman Sachs. Personally, his interests include skiing, golf, spicy food and Pittsburgh sports teams. Vijay received an A.B., Cum Laude, from Harvard College.