Two weeks ago, I noted the heightened M&A activity across the nation and here in Georgia for hospitals. Other bloggers on HealthFlock like Mark Reiboldt have also noted the expected wave of consolidation in a recent post. With so much talk about the topic, I think it worthwhile to pause and ask ourselves what value consolidation brings to our industry. From my vantage point, I have heard some argue that this is desperately needed for entity survival; others loudly state that it’s a fade and will inevitably lead to poor returns and future divestitures, as seen by failed mergers in other industries.
To give an opinion, I’ll first note a few reasons why we’re seeing increased M&A activity in the industry. According to in-depth analysis, The Advisory Board Company has claimed that five forces are responsible for this trend (to which I would generally agree):
So, if the above would try to convince hospital leaders that scale is increasingly important in healthcare, does that mean that size is all important? Not so, according to recent research that has questioned the validity of the “bigger is better” mentality. The consulting firm Booz Allen & Company, in “Consumer packaged Goods: Escaping the Consolidation Mentality” (2011), point to consumer-oriented industries as an example and argue that scale is not the surest way to business success. Consolidation does not have to occur for organizations of all sizes to thrive. While they note that market leaders like Procter & Gamble use its size and scale to great advantage, markets are dynamic and more diverse than commonly thought. The authors argue that it is not always the firm that acts opportunistically to changing markets (with brand extensions, new products, or acquisitions) that end up winners.
Instead, companies must strive for “coherence,” or a company’s ability to concentrate its resources and collective intelligence to deliver a well-aligned group of products and services with a focused strategic direction. A coherent company can “focus its investments on relatively few capabilities, increasing its mastery of those critical areas. It gains in efficiency.” While size may have provided an advantage in the past, new conditions in the market—outsourcing, alliances, viral marketing, etc.—limit the value of size today. To punctuate their point, the authors studied total shareholder returns and saw that the evidence did not validate the assumption that a bigger firm always outperforms a smaller one.
To be sure, consumer goods is a far cry from healthcare. But if you believe the five forces above are a reasonable explanation for increased consolidation (e.g. M&A activity is a result of both market opportunities and new regulatory and competitive pressures), I would argue that being a larger fish in the ocean will not be the differentiating factor in an organization’s future success. Like in the consumer goods market, those that survive in healthcare will be able to distinguish their existing products in ways that patients value. For those who operate and compete in healthcare, whether a part of a small physician practice or major health system, delivering superior levels of quality and customer service to our patients will remain the competitive advantage (and not simply consolidation for scale’s sake) and set the course for future success.