Access to capital, slim operating margins, and cost pressures have long played a role driving hospital mergers and acquisitions.

Adria WarrenEb LeMasterThe goals of consolidation in health care, particularly for community hospitals, have included achieving important economies of scale in general administration, finance, general accounting, payroll, IT, planning, marketing, supply chain and material management, and revenue cycle.

“Historically, larger health systems have been able to demonstrate more efficiencies, and leverage more bargaining power,” says Adria Warren, partner at the law firm of Foley & Lardner, LLP, Boston. “Now, with the move to value-based care and population health models, we’re seeing shifts in how hospitals position themselves strategically, to take advantage of new opportunities to provide high-quality, cost-effective care.”

Where We Are Now

The steady increase in consolidations that began in 2009—with the numbers doubling over the period of 2011 to 2015—showed signs of abating in 2016, with change-of-control transaction announcements down 25 percent, according to Eb LeMaster, managing director at Ponder & Co., a Brentwood, Tenn.- based financial advisory firm for not-for-profit healthcare providers. LeMaster attributes the slowdown to a variety of factors, including the need for the industry to catch up with the many acquisitions and mergers that have been underway. Other factors LeMaster cites include:
  • Concerns about regulatory challenges and approvals as systems get larger
  • Financial challenges for some large for-profit entities
  • A growing preference for looser affiliations, such as clinically integrated networks
  • Uncertainty about the effect of changes to payment and healthcare delivery models, especially the potential repeal of the Affordable Care Act

“The nature of mergers is changing,” LeMaster explains. “It’s not just about a stronger system taking over a weaker one or one that’s in trouble. When two relatively healthy systems come together, there are a lot more issues and dynamics to work out, which can slow down the whole process.”

Where We’re Headed

It is likely that the implementation of value-based care will continue to feed mergers and acquisitions, especially among not-for-profit, community-based hospitals. Among the most significant factors driving this activity are the needs of organizations to have a predictable cash flow and, even more important, the ability to borrow money to invest in technology, which is critical to an organization’s success in a value-based payment environment.

“Compared to the earlier thinking that ‘bigger is better,’ now we’re seeing a trend toward more strategic alignments,” says Warren. “Changes in the regulatory environment under the Trump administration, for example, including a relaxation of antitrust scrutiny, may also allow for other options.”

Strategic alignments also are being spurred by the continued growth of widespread and accessible freestanding urgent care and emergency centers, ambulatory and post-acute care centers, and centers of excellence. Smaller outpatient and ambulatory care facilities that directly connect to larger health systems offer multiple ways for health systems to respond to the needs of a community. For example, although most communities need and will support emergency care, many may be better served by an emergency management service rather than by an in-hospital emergency department. Similarly, physical therapy and other rehabilitation services may be important assets for a community, but they do not need to be established in the hospital setting, which is more expensive than other locations.

As outpatient services continue to expand—offering tests, treatments, and interventions that keep patients out of the hospital—hospital consolidation can help preserve local access to acute care services. It also can help smaller hospitals remain competitive and participate in bundling programs such as Medicare’s Bundled Payment for Care Improvement program, which requires a minimum number of cases for financial solvency.

“Hospitals today need to think strategically across the continuum of care by partnering with organizations that provide different levels of care,” Warren says. “By evaluating what communities really need, they can define which of their core offerings to focus on, which to outsource through strategic relationships, and how best to deliver those services.”

Joint ventures that are not mergers but that create significant alignments between hospitals are increasingly in “vogue,” according to LeMaster. But these less formal arrangements can present their own challenges when it comes to issues such as accessing capital or aligning long-term strategic goals.

“A significant question is whether these kinds of arrangements provide enough of the stability the organizations need to survive over the long term or whether they are just interim solutions,” he observes.

As hospitals explore their options for selling or divesting properties and assets in their search for ways to create efficiencies, the level of active dialogue regarding mergers and acquisitions continues to be very high, LeMaster says. He also says activity will continue to be driven by large, for-profit health systems facing a growing need to shed various assets or lines of business. LeMaster anticipates that merger transactions will tend to involve predominantly either local organizations consolidating within a single market or regional systems expanding their reach statewide. Looking down the road, he anticipates that activity will widen as health systems search for strength in scale to offset payment cuts and the challenges associated with new payments models.

Healthcare leaders can expect to see four broad trends with respect to merger and acquisition activity continue to unfold in the coming years.
  • Transition to value-based care. This trend will continue to feed mergers and acquisitions as both not-for-profit hospitals and for-profit hospitals seek economies of scale.
  • Primary emphasis on strategic alignments. Mergers and acquisitions will likely be less about “bigger is better” and more about creating strategic alignments designed to meet the healthcare needs of populations.
  • The growth of smaller outpatient, ambulatory care facilities and centers of excellence. Such organizations offer hospitals new opportunities for partnerships that allow the hospitals to focus on more acute care.
  • Interest in strategic partnerships that are less formal than approaches pursued in previous years. Such partnerships offer the benefit of flexibility, but they also could make it more difficult to respond to changing competitive dynamics and cuts in payments or to access capital, among other challenges.

Publication Date: Wednesday, March 08, 2017