Consolidation in healthcare has been a consistent trend for several decades, but as a result of the Affordable Care Act and an increasing need to control costs, not only has the pace of horizontal consolidation accelerated, but we are now seeing a spate of vertical integration. The result: in every sector, fewer, bigger, and more diversified customers.

Horizontal consolidation, where two hospitals merge or a hospital becomes part of a larger system, has been the staple for decades, bringing advantages such as increased purchasing power and access to capital. Notably, the recently announced horizontal “mega-deals” — (e.g., Catholic Health Initiatives and Dignity Health, Ascension and Providence St. Joseph) — have accelerated consolidation in the acute sector. Becker's Hospital Review estimates the result will be 300 fewer independent operators in the acute sector as these deals are consummated.

Moreover, vertical consolidation has gained traction, allowing many acute systems to acquire or add non-acute capabilities to defend or enhance their competitive positions in their markets. Hospitals have been acquiring physician groups and, per the American Hospital Association, more than 100 systems now sponsor their own insurance plan. Recent high-profile deals (e.g., CVS and Aetna, Humana and Kindred, and Optum and DaVita) have prompted many hospitals to diversify, adding insurance, post-acute, and retail health capabilities to their core offerings in inpatient, outpatient and physician services. Prompted by such deals, not to mention speculation that Amazon will also enter the healthcare fray, hospitals are rethinking their strategies on how to adapt to a changing landscape.

In this environment, the questions for hospitals are straightforward: How big is big enough? Is remaining independent an option? What sources of revenue and what capabilities are necessary to achieve long-term sustainability and growth?

For professional services organizations (PSOs) that support hospitals (such as healthcare staffing firms), the implications are clear:

• Buying power in the acute sector will increasingly be concentrated. There will be fewer buyers and terms and conditions in these relationships will change based on the strategy of the organization.
• The capabilities that position PSOs to be relevant and valued by hospitals require understanding and competencies beyond the acute sector. Knowing the core — inpatient, outpatient, and physician services — is not enough.
• Positioning a PSO based on expertise, analytics, pricing and reputation will require ongoing attention. Given the generally greater and more complex requirements of larger systems, competing to win in this environment will require a higher level of sophistication and investment.