Hospital Deals Accelerate in 2018
Payment pressures will lead increasing numbers of smaller hospitals to look to align with other hospitals, according to industry analysts.
April 17—Hospital mergers and acquisitions accelerated during the first part of 2018, according to deal-tracking companies.
Hospitals were involved in 25 transactions in the first quarter of 2018, which would translate to the highest annual rate since 2015, according to Irving Levin Associates.
The Irving Levin numbers represented an acceleration from the previous quarter, when there were 21 deals, and the highest number recorded by the firm since it found 27 deals in the first quarter of 2016.
Similarly, Ponder identified 36 announced transactions in the first quarter, making it the most active first quarter in the past ten years. The total was the second highest of any quarter in the past 10 years, trailing only the fourth quarter of 2012, which had 40, according to data provided to HFMA News.
The volume was driven by for-profit divestitures, which comprised 44 percent of the announced transactions, according to Ponder.
Among for-profit divestitures, publicly traded hospital operators accounted for more than two-thirds of the volume, with Tenet Health, CHS, LifePoint Health and QHC all announcing the divestiture of multiple hospitals during the quarter.
The first-quarter activity as tracked by Ponder also continued the trend of announced mega-mergers worth more than $1 billion. There were three such transactions in the quarter and four in the last quarter of 2017.
“We expect the volume of activity to remain high in the upcoming quarters as many systems are in the beginning stages of discussions,” a Ponder analysis noted.
Announced transactions involving teaching hospitals and academic medical centers (AMCs) increased in the first quarter to account for nearly 31 percent of the announced total. Transactions involving AMCs represented 27 percent of the total in 2017 and 20 percent in 2016, Ponder found.
Consolidation to Continue
Industry pressures will continue to drive consolidation in the hospital industry in the years ahead, according to an April 10 Moody’s Investors Service analysis.
Increasing payment issues, coupled with “ongoing wage and supply cost inflation, will pressure margins for hospitals that are not able to gain operating efficiencies,” Moody’s noted.
Revenue pressures include rising bad debt, as patients face higher out-of-pocket payments, and payers increasingly encourage patients to seek care in lower-cost settings instead of hospitals.
Additionally, state Medicaid programs are expected to seek ways to limit eligibility or reduce payments to providers.
“Over time, many smaller operators will find it difficult to maintain margins in the face of reimbursement pressures and changing payment models designed to slow growth in healthcare costs,” Moody’s wrote. “Additionally, many smaller hospitals lack the capital to invest in new facilities to drive growth or make necessary investments in information technology and clinical systems that are required in order to operate efficiently and effectively in the current environment.”
Those pressures will lead increasing numbers of smaller hospitals to look to larger operators as capital partners or to align with other hospitals.
“They will need to do this in order to leverage purchasing and pricing power in negotiating with commercial payers in local markets,” Moody’s noted.
Among recent trends that were identified by Ponder in a new white paper was a heightened pace of announced mega-mergers between not-for-profit (NFP) health systems. NFP-to-NFP deals are becoming larger, and the credit quality of the targets is trending upward “in a meaningful way.”
Mark Miller, PhD, vice president for the Laura and John Arnold Foundation and former executive director of the Medicare Payment Advisory Commission, said hospital and physician prices are related to increasing market concentration.
At the Lown Institute’s annual conference in Washington, D.C., Miller said well-functioning markets can control costs and lead to improved care quality, but many U.S. markets don’t have that level of functioning after many years of hospital concentration and increasing levels of vertical integration.
He cited MedPAC findings that the average commercial insurance rates charged by hospitals are 50 percent higher than costs.
Hospital advocates have countered that a high level of consolidation is needed to provide the type of coordinated care that is increasingly sought by public and private payers.
For instance, Elizabeth Nabel, MD, president of Brigham Health, noted during a recent discussion that health care is consolidating to provide the scale that allows for improving care at a lower cost.
But such explanations have drawn dubious reactions from Congress. At a February hearing, members discussed possible federal responses to hospital M&A trends, including a reduction in Medicare payments to practices acquired by hospitals, tightened 340B requirements, more telemedicine funding, and increased transparency requirements.
The merger trend also is affecting hospitals’ credit standing, according to a March 5 report by Moody’s.
“With the ongoing pressures the sector is experiencing, M&A activity will continue at a high level in 2018 and have a mixed effect on credit,” Moody’s wrote. “While some of the merger-related upgrades reflected changes in debt security, other mergers and acquisitions drove downgrades for some of the larger systems as they absorbed weaker providers.”
Consolidation strategies may result in immediate improvement—or immediate decline—in credit quality, depending on the terms and materiality of the consolidation, Moody’s wrote.
The credit agency cited the recent example of Baptist Health South Florida, which acquired Bethesda and saw its credit quality negatively affected not only due to the merger but also because of increased expense and revenue pressures and growing competition in the Miami market.
“Acquisition strategies, in particular, can drive downgrades because they involve a purchase price of an asset compared to a merger, which often involves no exchange of cash,” Moody’s wrote.
Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare