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Lessons in health system consolidation from the State Bank of Lodi

I grew up in a small town in Wisconsin with one bank, the State Bank of Lodi. The State Bank of Lodi had two branches; its flagship operation in the 2,000 person town of Lodi, and one branch five miles down the road in the neighboring town of Dane, where I lived.

I can remember the day I opened my checking account at the State Bank of Lodi. I deposited a $20 bill, the majority of which was used to pay for checks and my monthly checking fee. In response to rising “consumerism,” my branch eventually installed a drive-thru window with extended hours of 7:00 a.m.–4:00 p.m. The only financial product it offered at that time was a CD. I remember seeing ATMs, but they were not an option through my bank.

Like many community banks, the State Bank of Lodi was eventually acquired by a large regional bank in the early 1990s, a trend that has resulted in roughly half the number of banks today compared to 1990.

A new piece from the Deloitte Center for Health Solutions explores a similar phenomenon occurring with health systems. The great consolidation: The potential for rapid consolidation of health systems parallels the current environment in the health system space to that of banking, retail, and airlines. In each of these industries, the combination of regulatory and market pressures led to rapid consolidation as smaller and larger players attempted to defend and grow market share in the face of evolving industry demands.

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The ATMs of the 1990s are likely tomorrow’s telehealth applications; a lower cost way to provide and receive care. Free checking services are akin to “free” preventative care visits. Of course, these “free” services require significant costs, and therefore, a larger base of revenue and assets is needed to recoup these investments. Similar to the way the State Bank of Lodi couldn’t afford to offer free checking, an ATM network, or investment options beyond a CD, the majority of stand-alone hospitals, and even many health systems, cannot afford the required investments to manage population health based upon EBITDA. The natural result is consolidation in the industry. Deloitte’s analysis in this new report – using three independent approaches where results converged – estimates that only 50 percent of today’s health systems are likely to remain in the next decade.

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Consolidation has already begun, as demonstrated by the growing number of hospital acquisitions the past few years. Given the current market landscape, it is likely only going to grow. In the face of this potential rapid consolidation, staying the course is no longer an option. Health systems should consider differentiating their service offerings and outcomes or acquiring/aligning with another organization in order to compete in an increasingly complex and costly environment.

It is hard not to be nostalgic for the State Bank of Lodi, an institution that was founded in 1897. But, like in many industries, market, regulatory, and competitive change happens. While the small towns of Lodi and Dane may have “lost” their banking namesake, they gained access to more expansive financial services at a lower cost on more convenient terms. Similar changes among health systems may also improve the convenience and offerings of the US health care system.

Read the full report to learn more about the potential for rapid consolidations of health systems.

 

Author bio

Ion Skillrud is a member of the Deloitte Consulting LLP Life Sciences and Health Care Practice where he focuses on serving health care provider clients. Ion’s engagement experience includes merger planning, post-merger integration, functional carve out, and a variety of sustainable margin initiatives. Ion resides in Saint Paul, MN with his wife and three children.