January 17th, 2017

Mergers and Acquisitions in the Healthcare Sector

Healthcare merger-and-acquisition (M&A) activity remains steady in terms of completed transactions, while dollar volume is on the upswing. Forty-nine hospital deals were announced in the first half of 2016, which is one more than in the first half of 2015

Hospital Spend Increases

Spending on hospital transactions spiked by 14 percent to $3.3 billion in the first six months of 2016, up from $2.9 billion during the first half of 2015.

Mergers and Acquisitions in the #Healthcare sector: http://ajilon.co/2ixtA1U via @ajilon

What’s behind the consolidation? Hospitals and health systems “need scale to deal with the changes taking place,” observes Lisa Phillips, editor of HealthcareMandA.com, which publishes quarterly M&A data.

Value-Based Care

The most notable adjustment will play out as reimbursement shifts from fee-for-service to value-based care, due to Medicare reform legislation passed in 2015. For the first time in 2017, physicians’ and other providers’ performance will determine their payment rate updates as a result.

The American Hospital Association estimates that hospitals directly employed, or had contractual arrangements with, about 538,000 physicians in 2014. That’s about two-thirds of the clinicians expected to be impacted by the law.

Invest in Healthcare Technology

“To succeed in the value-based environment, health systems need to invest heavily in technology, ranging from electronic health record systems to data-sharing capabilities,” according to the Deloitte Center for Health Solutions. Such investment is more likely to happen through M&A activity rather than through existing hospital cash flow, which can be too volatile to support manageable rates for capital loans.

Looking Ahead

Eb LeMaster, managing director at healthcare financial advisory firm Ponder & Co., adds that emerging deals tend to bring together strong partners. “Building a system with the number of lives they need to be pertinent and to expand their geographic region.”

In the immediate future, LeMaster explains, consolidation will happen within single markets or through regional systems increasing their reach statewide. However, five years out, M&A activity will widen as health systems search to offset payment cuts and ways to leverage new care models.

Mega-Merger on the Horizon

One potential mega-merger to watch in 2017 would align Colorado-based Catholic Health Initiatives with San Francisco-based Dignity Health. Catholic Health operates in 18 states and owns 103 hospitals, while Dignity Health operates facilities in 22 states. Combined revenue for the merged organization would reach nearly $28 billion annually, the Wall Street Journal reports.

Other related industry-wide developments, according to a Modern Healthcare analysis, will likely include:

  • acquisition of primary care practices, particularly those with managed care expertise;
  • purchase of post-acute providers, such as rehabilitation and long-term care facilities, as hospitals take on greater responsibility for outcomes; and
  • partnerships between health systems and payers.

Regulatory Scrutiny

Although the timing seems right for continued healthcare consolidation, the Federal Trade Commission (FTC) will be on the hunt for antitrust issues that could negatively impact the markets in which hospitals operate.

In late October, for example, the FTC was able to appeal an attempt to block a merger between Advocate Health Care and NorthShore University Health System in the Chicago area. This was due to concerns that the resulting 16-hospital system would have monopoly pricing power in negotiations with insurers.

Citing a similar antitrust challenge, the FTC also successfully appealed the proposed merger of Penn State Hershey Medical Center and PinnacleHealth System. In analyzing the cases, law firm Holland & Knight reported that hospitals contemplating a merger should “study whether patients possess local alternatives to their facilities and if insurers can market plans that do not provide access to their hospitals.”

New Approaches

Advisory firm PwC agrees that 2017 will bring additional healthcare consolidation through mergers and acquisitions, but also predicts “an uptick in alternative transactions, such as joint ventures, partnerships, strategic alliances and clinical affiliations.” These types of deals enable hospitals and health systems to “borrow” rather than buy provider capabilities that support value-based care and scale them quickly.

The PwC report cites Select Medical — a provider of rehab, physical therapy, occupational and long-term care services — for its ability to partner with hospitals to help them better manage post-acute care. The company has entered more than six joint ventures over the past two years, with the likes of Ochsner Health System and Cleveland Clinic, enabling the hospitals to “grow their brands and optimize their core capabilities while preserving their not-for-profit identities.”

The outlook for vertical mergers and alternative partnerships will continue to be positive if participating entities can create operational efficiencies and better coordinate care.

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Frank Irving

Frank Irving is a Philadelphia-based writer specializing in business, healthcare and technology topics.