Size versus 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 per cent per annum) through tactical savings schemes is fast diminishing.

Instead, more radical options for cost saving are being considered, including merger 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 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 into private sector hospital mergers generally shows that they deliver few of the anticipated benefits. The evidence base was also explored in a Nuffield Trust report last year: Can NHS hospitals do more with less? In particular, a study ten 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. 

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 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.

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 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.

So we might deduce that there is indeed 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 cited above suggests not – at least so far. And yet it is a common claim that creating larger hospitals through merger will allow the reaping of economies of scale.

A recent review of evidence published by Monitor concluded that again 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. 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 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.

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 (LSE) suggests 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 hotly 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 health care.

Dr Richard Lewis is Partner at Ernst & Young LLP, and Senior Associate at the Nuffield Trust. Please note that the views expressed in guest blogs on the Nuffield Trust website are the authors' own.

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