More hospital consolidation is expected post-pandemic
- Hospital deal volume is likely to accelerate due to the financial damage inflicted by the coronavirus pandemic.
- The anticipated increase in volume did not show up in the latest quarter, when deals were sharply down.
- The pandemic may have given hospitals leverage in coming policy fights over billing and the creation of “public option” health plans.
Hospital consolidation is likely to increase after the COVID-19 pandemic, say both critics and supporters of the merger-and-acquisition (M&A) trend.
The financial effects of the coronavirus pandemic are expected to drive more consolidation between and among hospitals and physician practices, a group of policy professionals told a recent Washington, D.C.-based web briefing sponsored by the Alliance for Health Policy.
“There is a real danger that this could lead to more consolidation, which if we’re not careful could lead to higher prices,” said Karyn Schwartz, a senior fellow at the Kaiser Family Foundation (KFF).
Schwartz cited a recent KFF analysis of available research that concluded “provider consolidation leads to higher health care prices for private insurance; this is true for both horizontal and vertical consolidation.”
Kenneth Kaufman, managing director and chair of Kaufman Hall, noted that crises tend to push financially struggling organizations “further behind.”
“I wouldn’t be surprised at all if that happens,” Kaufman said. “That will lead to further consolidation in the provider market.”
The initial rounds of federal assistance from the CARES Act, which were based first on Medicare revenue and then on net patient revenue, may fuel consolidation, said Mark Miller, PhD, executive vice president of healthcare for Arnold Ventures. That’s because the funding formulas favored organizations that already had higher revenues, he said, and provided less assistance to low-revenue organizations.
HHS has distributed $116.2 billion from the $175 billion in provider funding available through the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act. The largest distributions used the two revenue formulas cited by Miller.
No surge in M&A yet
The expected burst in hospital M&A activity has yet to occur. Kaufman Hall identified 14 transactions in the second quarter of 2020, far fewer than in the same quarter in any of the four preceding years, when second-quarter transactions totaled between 19 and 31. The latest deals were not focused on small hospitals, with average seller revenue of more than $800 million — far larger than the previous second-quarter high of $409 million in 2018.
Six of the 14 announced transactions were divestitures by major for-profit health systems, including Community Health Systems, Quorum and HCA.
Kaufman Hall’s analysis of the recent deals identified another pandemic-related factor that may fuel hospital M&A: closer ties between hospitals. The analysis cited the example of Lifespan and Care New England, which had suspended merger talks in 2019. More recently, in a joint announcement, the CEOs of the two systems noted that because of the COVID-19 crisis, the two systems “have been working together in unprecedented ways” and “have agreed to enter into an exploration process to understand the pros and cons of what a formal continuation of this collaboration could look like in the future.”
The M&A outlook for rural hospitals
The pandemic has had less of a negative effect on the finances of rural hospitals that previously joined larger health systems, said Suzie Desai, senior director of not-for-profit healthcare for S&P Global.
A CEO of a health system with a large rural network told Kaufman the federal grants that the system received for its rural hospitals were much larger than the grants paid through the general provider fund.
“If that was true across the board, then the federal government recognized that many rural hospitals could be at risk of not being able to make payroll; actually running out of money,” Kaufman said. “And they seem to have bent over backwards to make sure that didn’t happen.”
Other CARES Act funding distributed to providers included:
- $12.8 billion for 959 safety net hospitals
- $11 billion to almost 4,000 rural healthcare providers and hospitals in urban areas that have certain special rural designations in Medicare
Telehealth has helped rural hospitals but has not been sufficient to address the financial losses inflicted by the pandemic, Desai said.
Other coming trends include a sharper cost focus
Desai expects an increasing focus “over the next couple years” on hospital costs because of the rising share of revenue received from Medicare and Medicaid. She expects increased efforts to use technology and data to lower costs.
Billy Wynne, JD, chairman of Wynne Health Group, expects telehealth restrictions to remain relaxed after the pandemic.
Also, the perceptions of the public and politicians about the financial health of hospitals are likely to give those organizations leverage in coming policy fights over changes such as banning surprise billing and creating so-called public-option health plans, Wynne said. As an example, he cited the Colorado legislature’s suspension of the launch of a public option “in part because of sensitivities around hospital finances in the COVID pandemic.”
“Once the dust settles, it’ll be interesting to see if their leverage has increased or decreased due to what we’ve been through,” Wynne said.