Size vs quality? Examining hospital mergers

Hospital mergers and reconfiguration are increasingly centre stage in the NHS.

Several years of financial austerity, with more in prospect, is placing severe stress on hospital finances. The ability of hospitals to deliver the necessary annual cost reductions (in the order of five percent per annum) through tactical savings schemes is fast diminishing.

‘That bigger is better is a hypothesis that underpins a number of hospital merger projects’

Instead, more radical options for cost saving are being considered, including mergers and major reconfiguration − as evidenced by the Department of Health’s unsustainable provider regime, now active for the first time in South London.

While most mergers are accompanied by claims of imminent financial and clinical benefit, formal research evidence is less sanguine (although some of this evidence is now quite old and much of it not from the UK). This was the subject of a recent seminar held by the Nuffield Trust − at which high profile case studies were explored.

Evidence from the US related to private sector hospital mergers generally shows they deliver few of the anticipated benefits. The evidence base was also explored in a report published by the Nuffield Trust last year in Can NHS hospitals do more with less? In particular, a study 10 years ago into NHS mergers by the London School of Hygiene and Tropical Medicine suggested that mergers distracted management from their immediate priorities and did not deliver their intended financial savings.

The big questions

A study last year by the Centre for Market and Public Organisation at Bristol University examined the large swathe of mergers that followed Tony Blair’s election in 1997 with some surprising findings. While these mergers did reduce available capacity, they had little or no impact on clinical quality or productivity. They also appeared to deliver some negative outcomes, such as increased treatment waiting times and a decline in financial performance post-merger.

‘It is a common claim that creating larger hospitals will allow the reaping of economies of scale’

But if hospital mergers have so far failed to live up to expectations is this due to the poor execution of a potentially good idea, or a more fundamental mismatch between the perceived benefits of mergers and what they can actually deliver?

There are two questions that are particularly relevant here. The first: is there a link between scale of operation and clinical quality − is bigger better? The second: is there a link between scale and efficiency − is bigger cheaper?

That bigger is indeed better is a hypothesis that underpins a number of hospital merger projects. But what does the evidence tell us? There are many studies that support this hypothesis across a range of clinical conditions. However, on closer examination, the quality of that research is often limited. In particular, there is little risk adjustment for the different complexity of cases that might be treated in different hospitals. There is also little consistency as to the most appropriate size for a hospital.

Intuition and evidence

So we might deduce that there is a correlation between higher volumes and higher quality but be far less certain at what level that quality gain might be achieved. Nor is it clear from the evidence whether this relationship between size and quality is causal.

Is higher quality created by higher volumes or are better hospitals simply attracting more patients?

As to the second question, is bigger more efficient, again the evidence is ambiguous. The Bristol University study suggests not, at least so far.  And yet it is a common claim that creating larger hospitals through mergers will allow the reaping of economies of scale.

‘A large increase in mergers may have the unintended consequence of reducing quality of care by dampening competition’

A review of evidence by Monitor concluded again that the evidence supporting this contention is relatively weak. However, there was some consensus that economies of scale may exist at greater than 200 beds.

Notwithstanding the evidence, intuitively there are a number of factors that suggest that economies of scale should exist, at least for some services.

For example, major hospital services such as A&E and obstetrics are dependent on expensive common support services (such as intensive care and diagnostics). This constitutes a significant fixed operating cost, as does the new requirements for increased consultant medical cover for longer periods of the day, if not round the clock.

These fixed costs would be more easily spread over a larger activity base. This intuitive position is supported by Monitor’s report that modelled different cost curves for a number of services illustrating reductions in unit cost at higher levels of scale.

A challenge for Monitor

But if well executed, mergers at least have the potential to deliver benefits. There is a further question about the impact of any reduction in competition that might occur. Again, we have some evidence to guide us.

Research by both Bristol University and the London School of Economics suggest that in fixed price markets (an important caveat) higher levels of competition are correlated with a modest improvement in the quality of care and, in the LSE study, greater efficiency.

These findings are contested but, if valid, might suggest that a large increase in the number of mergers may have the unintended consequence of reducing quality of care by dampening competition.

The merits or otherwise of mergers is therefore a complex topic, and one that is likely to occupy Monitor once it takes on its new role as the economic regulator in healthcare.

This article was previously published on the Nuffield Trust blog.

Richard Lewis is a partner at Ernst and Young and a senior associate at the Nuffield Trust