Senior healthcare leaders and board members routinely ask us the following two questions:
- “How big does our organization ideally need to be?”
- “Once our organization grows to that level, how will we be better off?”
In our experience, exploring the answer to these questions can lead organizations down a variety of strategic paths, and most organizations have not yet developed a clear perspective on how they intend to make the most of greater scale.
Our view is health system leaders need to develop or refine a local, regional, and ultimately, national growth perspective on what scale means for their organization, and how they intend to get there. And given the dangers of falling behind, time is of the essence.
Our analysis of 2023 performance data for the 50 largest health systems by revenue uncovered intriguing relationships between the scale strategies of these organizations and their EBIDA margins. On the other side of the coin, our colleagues recently explored the connections between member lives and revenue margins for insurers.
From the perspective of scale, we are already observing that organizations at a scale disadvantage are falling behind their peers, and we expect they will fall further behind in the next few years. However, a “scale for scale’s sake” approach in isolation is a highly challenged strategic path that can lead to underperformance. The highest performing organizations are pursuing what we call “smart scale,” which is generally typified by:
- A leading and durable competitive position in the markets they serve
- A strong focus on developing and/or accessing capabilities and talent which drive the organization’s clinical excellence, growth strategy, and operational distinction
- A well-developed point of view on what scale means for their organization, and what level of scale is required to unlock the above positioning and capabilities
Pathways to achieving smart scale
We recently analyzed the 50 largest health systems by revenue to uncover which strategic pathways have reliably led to high performance. Our analysis found that health systems pursuing growth and scale can be broadly categorized into five cohorts, listed here in order of their relative size: Diversifiers (comprising 43% of the top 50 health systems), Market Maximizers (37%), Insurance First (10%), and Scale Traditionalists and Focus Factories (10% combined). Together, Diversifiers and Market Maximizers comprise 80% of the 50 largest systems.
Each cohort is described in detail below along with our observations of high-and-low performing organizations in each cohort.
Diversifiers
This cohort includes systems that are diversifying revenue sources across a portfolio of care services and geographies.
High-performing organizations in this cohort are prioritizing services with high growth and high margin potential (including ambulatory surgery, specialty pharmacy, and select service lines), and/or are pursuing growth in growing, favorable regions and markets.
Low-performing diversifiers often have a disjointed presence across a regional footprint without clear connection points for clinical strategy, physician alignment, and business unit growth.
Market maximizers
These systems are generally focused on maximizing their scale and position in both existing core markets and attractive new markets. For example, this cohort includes many academic aggregators—or academic health systems leveraging strong brands and complex care capabilities to pursue regional scale—and community systems focused on scaling up in their core markets.
High-performing market maximizers are often located in fast-growing, demographically favorable markets, where they possess the top or second position; for example, academic medical centers with robust community divisions and ambulatory asset bases driving their large referral network for tertiary and quaternary volume.
Low-performing organizations in this cohort are achieving only parity market share position in fragmented markets. These organizations are often competing locally with other high-performing systems; for example, community systems operating in the same or adjacent markets as strong academics.
Insurance first
This cohort includes systems leveraging scale through an integrated approach to healthcare financing and delivery (e.g., vertical integration) to maintain and increase access to the premium dollar.
High-performing vertical integrators have unlocked the value of integration by effectively developing synergies between hospitals, health plans, and other services and assets.
Low-performing systems often have disconnected care delivery and health plan strategies, which can limit their ability to realize value from integration.
Scale traditionalists
This group includes systems pursuing traditional corporate scale—with a focus on economies of scale as a key driver—across a wide variety of markets.
Right now, there are few high performers in this cohort relative to the rest of the industry.
Low-performing organizations are achieving fragmented national scale with sub-optimal market positions—in other words, they are not generally attaining the top or second position in their most important or high-potential markets.
Focus factories
Focus factories are systems focusing on distinct business units—for example, ambulatory platforms and behavioral health services—to maximize value creation across several markets.
High-performing focus factories are leveraging their resource flexibility to double down on a select set of services. This cohort also includes for-profit systems that can pursue geographic and market growth without mission-based considerations and potential limitations of not-for-profit systems.
The focus factory approach is a relatively new strategic development for health systems. As a result, there is limited data available on how successful this strategy will be, and it’s too early to identify low-performing organizations in this cohort.
Closing thoughts
The imperative for smart scale is no longer a debate: it’s a data-based reality.
Bigger can indeed be better—but only when health system leaders develop and refine a realistic point of view about how to secure and retain a durable, long-term market presence.
For example, while achieving local scale and essentiality is critical to viability, maintaining a middling position in multiple markets will not unlock the benefits of smart scale. Ideally, pursuing one of the smart scale approaches explored above begins a virtuous cycle that in turn opens up new opportunities.
Importantly, there is no one-size-fits-all solution.
Health systems can and should explore multiple pathways that can be pursued in isolation or in tandem to achieve smart scale in context of their unique market situation.
Finally, time is of the essence.
A Kaufman Hall analysis of S&P data on health systems’ publicly reported financial results found that a system with $1 billion in revenue would have been within the top 40 systems in 2015. According to a recent Hospitalogy analysis, a $1 billion system in 2024 would have fallen outside of the top 100 systems.
Developing a point of view on what smart scale means for their organization—and how they intend to get there—should be a top priority for all health system leaders in 2025 and beyond.
Kaufman Hall Vice President Alex Bresler contributed to this article.
