In contemporary times stiff competition exist in global business arena, where organizations do all within their power to curve a niche for themselves and make an edge over their competing rivals. In this instance, many organizations have resorted to corporate alliance, integration, merger and networking. For the sake of financial, managerial and resource consolidation this corporate marriage is seen as a means to an end. Adducing the rationales behind corporate marriages, Huck and Konrad (2004:104), has it that “a temporary overvaluation of own stock or an undervaluation of the target firm might make acquisitions attractive.
A second set of motivations are synergies which include complementarities in production or marketing, economies of scale, improvements in risk characteristics or financial constraints, or tax advantages. A third set of motives include asymmetric competence on the part of the management of the acquiring firm or empire building. Fourth, the effects of merger and acquisition on market concentration and market power considerations play a major role”.
In the late 1980s and 1990’s, there were increasing occurrences of corporate alliances, mergers, networking and acquisitions in health care industry. “By 1998, 66 percent of hospitals had either acquired or formed a long-term contract with one or more physician organizations. These relationships vary from loosely networked, open confederations to exclusive, fully integrated organizations” (Cuellar & Gertler, 2002). But in recent times this trend is on the decline. What are the reasons behind this decline in integration, merger, networking and corporate alliance in health care industry? This is what this essay intends proffering answer to.
In the 1980’s hospitals were buying dude ranches in Montana and bottling companies in Ohio. They were expanding into janitorial services, catering firms, condominiums, travel agencies, and health clubs. Unrelated diversification was intended to spread risks or develop new sources of revenues to support acute operations; however many of the diversified businesses have been divested or liquidated as losing money or not in the best interests of a hospital. Some unrelated diversifications broke even or were marginally profitable, but they did not justify the diversion of the time.
“Merely having a large asset base, owning a lot of beds or health-related businesses or employing a lot of physicians does not, by itself, create value. What many healthcare executives really seem to be seeking in integration is to maximize the use of their assets, not reduce the per capita cost of care or improve the health of their communities” (Healthcare Forum Journal, 1994). Many hospitals administrators lacked the skills to manage these non-acute care businesses. In addition, boards of trustees questioned the additional capital needed and wondered when these diversified businesses would become profitable.
Some managers with the view of empire building resorted to mergers. “Managers in large companies wield considerable power, and may have their own motives for advocating merger activity. For many managers the opportunity to increase their power, status and salary will be a function of the size of the company and thus may have a vested interest in empire building” (Field and Peck, 2003). In the 1990’s hospital employed related diversification to create or move into new markets or vertical integration to manage the health of a population. Simply owning an asset to increase revenue was not an effective strategy.
“Hospitals and physicians wanting to improve their competitive position for managed care contracts try to lower costs or develop strategies to counter managed care bargaining power. One response to the rise of managed care is for hospitals and physicians to integrate” (Cuellar & Gertler, 2002). Often related diversification and vertical integration was achieved through collaboration or joint ventures with similar providers. The 1990’s marked a period when many industries were moving away from vertical integration, this was when hospitals rushed towards adopting vertical integration.
According to Healthcare Forum Journal (1994), “Kaiser is the exemplar of vertical integration in healthcare: a medical care plan that owns its own facilities and, through a captive group, employs its own physician cadre. Kaiser is the largest actor in California’s health insurance market, and at $10 billion in annual revenues the largest HMO in the United States…However, by the early Nineties, Kaiser was losing markets share in most of its major Pacific markets and losing enrollment a rate of 3 percent annually”. In many industries there is the phenomenal reduction in vertical integration.
“The classic industrial model of vertical integration no longer produces value in most major industries” (ibid). During this period, integrated health care systems were being formed and consolidated to: • Compete with other integrated systems and managed care organizations in delivery of high quality care to enrollees and other patients. • Give providers enough market clout to force managed care organizations to renegotiate contracts that are more favorable to them. • Dominate markets so that providers and their managed care components will be virtually free of meaningful competition.