Giant hospitals neither cheaper nor better

By Sigrid Folkestad

10 March 2014 13:11

(updated: 21 March 2016 13:12)

Giant hospitals neither cheaper nor better

Resource-intensive mergers in the hospital sector are based on a desire for better and cheaper hospitals, but when the positive effects cannot be documented, it is about time we showed less enthusiasm for such mergers, according to NHH professor Kurt R Brekke.

The mergers that have taken place in the hospital sector in recent years were intended to result in cost reductions and better patient treatment.

'So far, few such gains have been seen,' says Professor Kurt R Brekke of the Department of Economics at NHH.

Brekke is critical of the argument that hospital mergers result in more health perkrone spent and benefit patients.

'The alleged effects have not been documented. There is no basis for claiming that giant hospitals and big health trusts are the right medicine,' says the health economist.

Can be damaging

In a new study conducted by Brekke together with Luigi Sicilliani and Odd Rune Straume, they look at the effects of hospital mergers. Do they result in lower running costs, higher quality of services and do patients benefit?

The study shows that hospital that have merged have weaker incentives for offering quality services and for running efficiently. The reason is that a merger reduces the competition for patients. The study also shows that the overall effect on services offered to patients depends on how hospitals in the same geographical catchment area that are not part of the merger adapt their services as a result of the merger. If these hospitals also reduce the quality of their services, then the merger is clearly negative for patients.

Bigger hospitals = better quality?

When hospitals merge, there are, in theory, two effects relating to quality that can occur. They pull in opposite directions.

One says that, the bigger the hospital, the better the learning, which in turn will lead to higher quality and improved patient treatment. One former minister of health has also underlined this, stating that the merger at Oslo University Hospital (OUS) resulted in 'strong professional environments and good results'.

If it merges, a hospital will be able to treat more patients in the same unit, which means that, in theory, a learning effect may occur, resulting in improved quality.

The USA and the UK

'Let's say that you have one hospital that performs one operation a year and another that performs the same operation a hundred times. In that case, you assume that the quality is much better at the hospital where they do it a hundred times.'

Several studies have checked whether this theory holds true after hospitals have been merged.

'This is an effect that may exist, but that no studies of hospital mergers have been able to identify.'

Studies from the USA and the UK have looked at learning effects following a merger. Brekke believes that the studies from the UK in particular can shed light on the situation in Norway.

'If you look at the UK, which has the same kind of publicly funded health care system as us, quite a few studies have been conducted that look at the effects of extensive mergers. They find no quality improvements. Researchers are unable to document such significant positive effects of mergers, not even in the long term.'

More expensive beds

The other effect that can occur in connection with a merger is that the quality is reduced because you eliminate or weaken competition. The more hospitals that are merged, the fewer players are left, which can result in lower quality and poorer patient welfare, also at those hospitals that are not part of the merger. When a merger leads to poorer quality, you can in theory achieve a financial gain.

The main argument and what health care professionals are concerned with is precisely that quality will be reduced when a large geographical area is left with only one big hospital. When this giant hospital is not located in one place geographically either, as is the case with OUS, the risk of negative effects of a merger increases.

'The effect of hospital mergers on quality and cost efficiency is something I plan to study in more depth,' says Brekke. He also believes that it is important to look at the consequences of a hospital merger for the health trusts in the same geographical area that are not part of the merger. If the merger entails changes at the merged hospitals, there is reason to believe that this will affect the services provided at nearby hospitals. In other words, the total effect of a merger includes more than just the services provided at the merged hospitals.

New master's theses at NHH

In addition to Brekke's research, two new master's theses that he has been supervisor for show that there are no traceable positive effects on quality and costs after a hospital merger.

One of the students has been given access to data that show running costs before and after a hospital merger. The student's master's thesis shows that the costs per bed increase in step with the size of the hospital.

According to calculations carried out in advance, the Oslo University Hospital merger in 2009 was supposed to lead to savings of approx. NOK 900 million a year. Before the turn of the year 2013/2014, OUS was looking at a total deficit of NOK 300 million, NOK 200 million of which was budgeted.

'Yet many people still buy into the argument that mergers lead to increased efficiency and economies of scale? That is exactly what I am critical of. It's rhetoric. Everybody is saying it, but where is the evidence? That is my point of departure.'

Probability of death as indicator

In a master's thesis that looks at changes in quality following hospital mergers, Maren Louise Nordhus found that quality is slightly reduced at hospitals that merge.

Specifically, she investigates this by looking at the probability of death 30 days after admission for a hip fracture, heart attack or stroke. She has observations from 55 Norwegian hospitals during the period 2002 to 2012.

The main finding is that mergers have no positive effects on quality at the hospitals. If you look at each of the quality indicators in isolation, i.e. the probability of death following admission for one of the three conditions, the mortality rate is slightly higher, which indicates slightly poorer quality at the merged hospitals.

Pragmatic view

Brekke recognises that mergers can have positive effects, but that, for labour-intensive organisations like hospitals, they may be difficult to achieve.

'I take a pragmatic view of the matter and do not rule out that mergers can lead to savings. That may well be the case. In the hospital sector, however, there are other factors than equipment expenses that drive up costs.'

It is a labour-intensive sector, and approximately 60 per cent of the expenses are payroll expenses. Some treatments are more equipment-based, but most treatment requires labour. In Brekke's view, if you want to reduce running costs, you must downsize staff or organise the work differently.

Considering reorganisation

The professor believes now is the right time to reorganise the hospital sector. The new Government is considering changing the health trust model and removing the four regional health authorities, as it promised to do in its political platform early last autumn. That way, each hospital will have better control of its own organisation.

'It is a step in the right direction,' says Brekke. 'Let each hospital be a unit. They should not be organised in big groups like the regional health authorities.'

Brekke believes that the DRG system, which is a performance-based funding system that rewards hospitals based on the number of patients it treats, should be expanded. With the held of DRG (diagnosis-related groups), patients are placed in a group that forms the basis for calculating how much money is reimbursed to the hospital. The higher the level of activity, the bigger the reimbursement to the health trust.

'Norway was quick to introduce performance-based funding, but it has chosen to limit the DRG component to 40 per cent. Most countries in Europe have now followed our example, but most choose 100 per cent DRG funding. Norway should consider doing the same,' says Brekke.

A bigger study under way

The researcher believes that it is important to study the effects of hospital mergers and closures.

'The hospital sector is a big part of the economy and provides extensive welfare services. Protests against hospital mergers and closures stir up strong feelings, but these emotions have a substance that goes beyond local patriotism. If you close down the hospital in Lærdal, and patients have to go to Voss or Førde, that is a long way to travel to receive treatment. If something serious happens, it could be a question of life or death.'

'If a merger entails closing down all or parts of a hospital, and you are unable to document higher quality or improved cost efficiency, long travelling distances may be all that is achieved.'

'That increases the risk of undesirable incidents. And what arguments are you left with then?' asks Brekke, and says in conclusion:

'So far, these mergers seem to be resulting in more losses than gains, but it is necessary to study the question in more detail,' says the health economics researcher at the Department of Economics at NHH.

In 2009, Ullevål Hospital, Rikshospitalet, the Norwegian Radium Hospital and Aker Hospital were merged into one giant hospital. It is Norway's biggest domestic enterprise with 20,000 employees and a budget of NOK 17 billion. OUS is organised under the South-Eastern Norway Regional Health Authority, which is responsible for providing hospital services to the population of Østfold, Akershus, Oslo, Hedmark, Oppland, Buskerud, Vestfold, Telemark, Aust-Agder and Vest-Agder counties. The health region is responsible for providing specialist health services to 2.8 million people.