IN 2014 through an analysis of hospital M&A trends, we predicted the rapid consolidation of health systems over the following 10 years due to regulatory, technology and market dynamics. We estimated that by 2024, only 50% of health systems would remain and independent hospitals would no longer exist. Much has happened since then.
Considering where the industry is now heading, we updated our original modelling in 2020 based on analysis of the latest trends and data. Compared to today, in 2030, we expect:
Our new forecast predicts that hospital M&A will likely occur in nearly every market, some to consolidate towards a more focussed care delivery model and others, for survival:
Health systems should consider how they can control their own destiny and innovate care delivery with an eye towards longer term business model transformation by:
One can never accurately predict what may happen in a decade; however, transformation of care delivery models and, therefore, hospital consolidation will likely continue.
To understand past hospital M&A trends and forecast future expected consolidation, the Deloitte Center for Health Solutions analysed multiple databases and trends at both the hospital and MSA level. More details on assumptions are discussed later in the paper. Our high-level methodology included:
The industry has consolidated much since 2014, in pursuit of cost efficiencies through scale and improved market position for value-based care. Independent hospitals combining with other independents and mid-sized systems in their local market drove some of the M&A in the sector. But much of the change in the health system landscape was due to mid-sized and large health systems merging with each other across the country, resulting in fewer independent hospitals and larger health systems. The industry also experienced a shift in care away from the hospital towards more outpatient and virtual care delivery during this period due to technological advances in clinical procedures and growing pressure to treat patients in lower cost settings. These trends—particularly the use of virtual care—were accelerated by the COVID-19 pandemic.
The 10 largest health systems grew significantly in market share and income. Between 2012 and 2018, the market share (based on patient income) of the 10 largest health systems grew to be nearly a quarter of the market. This is due to growth in both income and consolidation. Income grew for the 10 largest health systems nearly twice as much during this period compared with the rest of the health systems and independent hospitals in the market (82% vs. 45%).
Health systems are larger. While the total average number of hospitals per health system increased slightly (from 6.4 in 2013 to 6.5 in 2018), the larger systems got even bigger. The largest health systems (those with more than 30 hospitals) saw their average number of hospitals increase the most among all the health system size cohorts (figure 2).
Source: Deloitte analysis of Medicare Cost Report data. Federal hospitals were excluded from the analysis.
More care shifted away from the hospital. Advances in clinical technology continued to allow more types of care to be safely provided outside of a hospital. Outpatient and other alternative care settings became even more popular in the past five years with consumers and payers due to their convenience, lower cost and better value. Outpatient care now makes up a larger portion of hospitals’ income.
What we didn’t accurately predict five years ago was the level of acceleration of the shift in care away from the hospital. The adoption of virtual health accelerated dramatically during the COVID-19 pandemic.3 Greater scrutiny of disparities in care can also transform how hospitals will operate in the future with more focus on improving the health of those in the health systems’ communities with the consumer and equity at the centre of efforts.4 The increasing presence of and opportunities for outside entrants and disrupters to the industry are a growing threat to incumbents.5 These trends are expected to result in care delivery becoming more virtual, prevention/well-being–focussed, consumer-centric and equitable. What does this mean for hospitals today and how does this lead to M&A?
Fewer hospitals will likely be needed in 2030 leading to the rapid consolidation of health systems. We expect these trends to lead to a drop in demand for inpatient beds over the next 10 years with commensurate lower inpatient hospital income and demand for fewer hospitals, resulting in continued significant consolidation among hospitals and health systems during the period.
We forecast that at the national level, inpatient hospital income will be 35% lower and demand for hospital beds will be 44% lower (our median estimate) than today. Fewer beds mean fewer and smaller-sized hospitals. In our vision for the future of health, hospitals will be smaller and much more specialised.6 (See Appendix for more details on methodology.)
Health systems will likely be confronted with significantly lower income and decisions about where care can and should be delivered. Care in hospitals will likely become much more specialised. Those looking to innovate will seek consolidation to gain more capabilities, resources and relationships. We believe that M&A is likely given the imperative for companies to compete in this changing world, the entry of disrupters and the broader push for care to be delivered in a more equitable, preventive and well-being–focussed manner. All of the M&A tools—mergers, acquisitions, integration and divestures—can help organisations innovate in the future. Some organisations will seek M&A to develop a broader portfolio of care delivery options and nonhealth care businesses. Others may end up seeking consolidation to survive. Either way, M&A is a leading strategy to create opportunities for relationships, capabilities and services.
M&A activity during the next 10 years will vary by market. We expect to see hospital M&A in all geographic areas due to the forecasted significant decline in inpatient hospital income and beds. However, it will likely be most pronounced in MSAs in markets with declining or flat population growth and hospitals with poor financial performance.
To project likelihood of M&A by specific market, we categorised all 390 MSAs based on the performance of the hospitals in the market and demographic factors (figures 3 and 4). The categories that we developed—numbered 1 (most likely to consolidate) to 4 (least likely to consolidate)—include MSAs across the country sharing similar traits that will likely lead to health system M&A (see sidebar, “Methodology,” for more details).
Health systems should consider how they can leverage the tools of M&A—acquisitions, mergers, integration and divestures—to transform themselves, innovate care delivery and succeed in the future.
The demand for fewer beds, but also the need to gain new capabilities, may require innovation in care delivery and thinking differently about how to approach M&A. In the past, M&A was about scale. But with care trends shifting care delivery towards a more consumer-centric, equitable, well-being and prevention-oriented approach, now health systems should be smarter about their strategies, asset portfolios and capabilities. With an eye towards the future, they should focus their strategy on using M&A to innovate through new relationships, capabilities and services.
Executives should consider the following approach to position their organisation for the future:
With rapid consolidation expected in nearly every market and to control one’s own destiny, health systems should start strategic planning immediately to position for success in the future.
The pandemic might have been unprecedented in its impact but even as we set out on the road to recovery, we expect change to be a constant in the health care industry. Care delivery is changing. Hospital business models are changing. The concept of scale is changing. Executives should be clever about how they get there.
Assumptions for income projections:
Assumptions for bed demand: High, medium and low scenarios for each of the following assumptions based upon 2014–2018 national hospital trends from the Medicare cost report and assumptions based on historic performance and our future of health vision.
Assumptions for MSA-level analysis:
Amid uncertainty and change, health care stakeholders are looking for new ways to transform the journey of care. By focussing on the differentiated needs of plans and providers, our US Health Care practice helps clients transform uncertainty into possibility and rapid change into lasting progress.