Size may not be everything: reviewing hospital mergers

Blog post

Published: 24/02/2012

The NHS Trust sector is now forecasting a surplus of just 0.1 per cent of income in 2011-12, with seven NHS Trusts alone forecasting an operating deficit of over £180 million combined. This is a marked deterioration from previous years and casts further doubt over the sustainability of many NHS Trusts.

For a great many Trusts seeking solutions to entrenched financial problems, the preference has been to merge into ever bigger units. The notable exception being Hinchingbooke Hospital, where the private health care provider Circle takes over management of the Trust (and its deficit) this month on a 10 year contract.

The trend raises some important questions about the tensions between different elements of health policy. Can the Department of Health (DH) deliver choice and competition for patients and a viable network of Trusts?

This month the Co-operation and Competition Panel (CCP) delivered its verdict on one of the first big proposals aimed at placing a group of London Trusts on a financially sustainable footing – the merger of Barts, the Royal London, Whipps Cross and Newham University NHS Trust.

The CCP originally found that the merger was not consistent with the principles and rules for co-operation and competition and would reduce choice and competition for elective and routine non-elective care in Newham, possibly causing a negative impact on quality.

Despite this, it has ultimately decided to recommend the merger on the back of parties agreeing to behavioural safeguards. Commissioner support for the merger was clearly very influential and a sign of how important commissioners will be in shaping the degree of competition and choice in the future NHS.

But, the CCP were not unanimous and some believed an alternative option of merging Newham and the Homerton Univerity Hospital NHS Foundation Trust was a suitable alternative.

For mergers to be approved, the benefits arising from the potential economies of scale must outweigh the negative effect of dampened competition. The relative benefits to be achieved through economies of scale and the impact of a loss of competition and choice were at the heart of the dispute between parties in this most recent case.

The research evidence shows that scale does matter in health care – for both quality and cost – but these benefits may not be continuous. A recent Nuffield Trust evidence review concluded that cost per case falls as a hospital's size increases to 200 beds, remains roughly constant until about 600 beds, above which diseconomies begin to appear. Many of the NHS Trusts contemplating merger would result in organisations with 600 plus beds.

The studies reviewed by the Nuffield Trust did not examine quality and it may be that quality gains from scale are sufficient to offset the increased cost. But economists at Bristol in a widely reported paper, have raised further doubts about the benefit of mergers.

Gaynor et al looked at the impact of the 112 NHS hospital mergers which occurred between 1997 and 2006. Although admissions, staff numbers and beds fell by an average of 11-12 per cent a year, operating expenditure did not fall at the same rate and mergers did not stem the increasing size of hospital deficits.

Crucially they found no significant improvement in productivity or quality attributable to mergers and waiting times also rose.

Although the Bristol results are similar to those found for the wave of mergers between private hospitals which occurred in the USA in the 1980s and 1990s, two caveats should be mentioned.

Hospitals are large and complex organisations and it may be that whilst the management upheaval and cost of a merger is felt immediately, benefits take longer to emerge (the Bristol team looked at the impact over a four year period).

Second, the research compares merged hospitals with un-merged. As the merged were not a random sample it may be that without merger, productivity and quality would have declined anyway or even worsened further.

Whatever the merits of the Barts and the Royal London case, the new NHS Trust Development Authority should look closely at the CCP report and the research evidence to ensure, before it puts its weight behind a wave of hospital mergers, that merger really is the best way to deal with poorly performing hospitals in the NHS.

Outside the DH, many are yet to be convinced that it will deliver significant productivity and quality gains (the Public Accounts Committee is particularly sceptical). But if merger isn’t the answer, what is the future for these struggling providers? Clearly there are no simple magic bullets.

But if the NHS is to put in place a sustainable model for many of the NHS Trusts seeking Foundation Trust status, the key – missing – step is a proper understanding of why these organisations are financially challenged.

If it’s because they are too small to be viable financially or clinically, a merger may deliver better outcomes for patients and taxpayers.

But if size isn’t the problem and the issue lies in wider health economy problems, or transforming efficiency through clinical leadership, increasing the size of the organisation is unlikely to deliver.

This blog is also available to read on the Health Service Journal (HSJ) website.

Suggested citation

Charlesworth A (2012) ‘Size may not be everything: reviewing hospital mergers’. Nuffield Trust comment, 24 February 2012.