New Laws and Rising Costs Create a Surge of Supersizing Hospitals

The consolidations are being driven by a confluence of powerful forces, not least of which is President Obama’s signature health care law, the Affordable Care Act. That law, many experts say, is transforming the economics of health care and pushing a growing number of hospitals into the arms of suitors.

The changes are unfolding with remarkable speed. Two big for-profit hospital chains, Community Health Systems of Tennessee and Health Management Associates of Florida, are combining in a $7.6 billion deal.

In New York City, Mount Sinai Medical Center, which is one of the country’s oldest and largest private nonprofit hospitals, is buying the parent of Beth Israel Medical Center and St. Luke’s and Roosevelt Hospitals. Tenet Healthcare of Dallas, which operates in 10 states, is buying Vanguard Health Systems of Nashville, a network of 28 hospitals and facilities that includes Detroit Medical Center.

In fact, Booz & Company, a consulting firm, predicts that 1,000 of the nation’s roughly 5,000 hospitals could seek out mergers in the next five to seven years.

“There’s immense logic for them to become large super-regional systems, even some national systems,” said David W. Johnson, a managing director for BMO Capital Markets, which advises nonprofit health systems. Some chains are merging to increase their size and their negotiating clout with insurers, while others are trying to reduce costs and improve care, he said.

Some economists and health insurance companies worry that the trend could raise health care costs.

“The rhetoric is all about efficiency,” said Karen Ignagni, the chief executive of America’s Health Insurance Plans, a trade group that represents insurers. “The reality is all about higher prices.”

Whatever the outcome, hospitals are merging faster and in greater numbers than they have in years. After holding steady through much of the 2000s, the number of deals doubled to 105 in 2012 from 50 in 2009, according to Irving Levin Associates, a health care research firm. That is still less than half the annual peak during the last merger wave, in the late 1990s, but Booz and others say this is only the beginning.

Hospital executives say they have little choice but to combine given the coming changes in the industry. Many hospitals are struggling with lower payments from the federal government and declining patient admissions. They are also being confronted with fundamental changes in how they are paid under the Affordable Care Act and by private insurers.

Instead of being paid on volume, rewarded for filling beds and performing more tests and procedures, hospitals are becoming responsible for more of the total cost of a patient’s care. As a result, they have an incentive to keep patients healthy — and out of their facilities.

By combining, hospitals can reduce costs in back-office activities like billing and devote more financial resources to investing in expensive electronic medical records systems and physician practices to better follow patients outside the hospital. Under the new state exchanges created by the federal health care law, consumers will be able to tell the difference in hospital prices between markets that have consolidated and those that have not, Ms. Ignagni said.

The plans have similar designs, but a policy offered by the same insurer in, for instance, Northern California, where hospitals have merged, will be more expensive than one offered in Southern California, where the systems are smaller, she said.

Federal regulators are concerned that the growing number of mergers could lead to anticompetitive practices. The Federal Trade Commission has increased its examination of the deals and has blocked a handful of transactions.