On almost any business day, healthcare industry spectators can expect to read a story about one hospital or health system partnering with another.
The rate of consolidation in the industry has been almost unparalleled during the past several years, and the topic has captured the attention of the masses as providers try to create a more seamless, integrated healthcare delivery system.
In a Feb. 27 webinar hosted by Becker's Hospital Review, Scott Becker, JD, chairman of the McGuireWoods healthcare department and publisher of Becker's Healthcare, discussed 15 of the biggest merger and acquisition trends within the hospital sector.
1. Mid-size health systems are in a good position, but they are still looking to grow. Mr. Becker said "one of the most fascinating" developments involves the mid-size health system, or generally those with annual revenues between $800 million and about $4 billion. Examples include San Diego-based Scripps Health, West Des Moines, Iowa-based UnityPoint Health, Norfolk, Va.-based Sentara Healthcare, Milwaukee-based Aurora Health Care, Evanston, Ill.-based NorthShore University HealthSystem and numerous others. In the past, these types of systems used to be among the largest, but as more systems consolidate with each other, Mr. Becker said it will be interesting to see "where they go next."
2. The market is still active, but there's been a relative decrease in deals. Since 2009, hospital deals have undoubtedly been on the rise, but last year and going into this year, the energy has somewhat hit a plateau, Mr. Becker said. According to a report from Irving Levin Associates, hospital transaction volume in the fourth quarter of 2013 declined 35 percent, from 34 deals in 2012 to 22 last year.
3. Smaller, financially challenged hospitals are having a more difficult time finding a partner. Financial pressures and, in some cases, bankruptcy threaten some small community hospitals. Those have become red flags for potential acquirers, as many do not want to take on the cash risks associated with those types of organizations. "Larger systems are much more cautious in acquisitions today than they were some time ago," Mr. Becker said.
4. Despite big mega-mergers, there is still plenty of room for M&A activity. Large mergers defined last year, such as those between Franklin, Tenn.-based Community Health Systems and Naples, Fla.-based Health Management Associates and Livonia, Mich.-based Trinity Health and Newtown Square, Pa.-based Catholic Health East. However, Mr. Becker said the 10 largest health systems still only account for about 15 to 20 percent of total industry revenue, meaning room for more deals still exists.
5. Physician practice acquisitions have decreased heavily over the past few years. When healthcare reform was first being debated several years ago, there was a dramatic amount of hospitals acquiring physician practices, Mr. Becker said. They realized they needed to build a physician network to align their care delivery system. "That has slowed down in most areas," Mr. Becker said of physician practice acquisitions. "We still see a handful of them, but not at the speed you once saw them."
6. Mergers may lead to increased pricing leverage for health systems. Many studies have concluded large hospitals and health systems often command the highest prices, and those high-price organizations fare no better in quality measures than lower-price counterparts. Mr. Becker said there were a few schools of thought on the issue, but he acknowledged hospitals appear to gain negotiating powers with private payers as systems grow bigger.
7. The Federal Trade Commission rarely gets involved, but when it does, it often wins. Antitrust enforcement has become a hot issue during the past few years. For example, most recently, the FTC ruled Boise, Idaho-based St. Luke's Health System violated antitrust law with its 2012 acquisition of Saltzer Medical Group in Nampa, Idaho. St. Luke's had to divest itself of the group's physicians and assets. The FTC does not get involved in many cases overall, but when it does, it likely prevails, Mr. Becker said. That's something hospitals and health systems should keep in mind as they pursue more transactions. "As people look at [whether] they acquire a second hospital in town, they have to be mindful of the fact where hospitals have tried to acquire different systems," Mr. Becker said.
8. More transactions require Anti-Kickback Statute or Stark Law self-disclosures before completing the deal. Last April, Salt Lake City-based Intermountain Healthcare agreed to pay $25.5 million to resolve allegations it violated the False Claims Act and Stark Law through improper relationships with referring physicians. Mr. Becker said that Stark activity is hard to avoid, as many alleged infractions are more honest mistakes than intentional ploys. Consequently, more hospitals are "going through the self-disclosure process and getting the green light [to show] that everything is all right," he said.
9. The due diligence process is more extensive than ever. Antitrust risk, financial liabilities, accounting issues, review of physician relationships, scrutiny of billing and coding and other items involved in the due diligence process of hospital transactions have become more complex and thus involve larger consulting teams.
10. All state and local regulations need to be reviewed closely. Mr. Becker said depending on which state a transaction occurs, many specific steps may need to be taken. For example, attorney general review, certificate of need laws and other licensure issues should be handled by acquiring organizations earlier rather than later.
11. There have been increased reviews of special donations and other restrictions. Again, Mr. Becker emphasized the need for hospitals to review special circumstances upfront so problems do not arise after the fact.
12. Religious issues are often overcome in deals. Transactions involving religious-affiliated systems have increased during the past several years. While deals that involve ethical and religious directives may complicate matters, there are not "a stopper to transactions," Mr. Becker said, and the issues are often hashed out.
13. Hospitals are increasingly choosing the better strategic partner rather than the highest bidder. Transactions involving many suitors are not as cut-and-dried as they appear. The highest acquisition price is not a lock to win the bid, Mr. Becker said, as more hospitals look for the best strategic fit over the best financial fit. "Less important is cash price, and more important is how this will take care of the community in the long run," he said.
14. Working with the banks is pertinent. Hospitals and systems must work with their banks to ensure all bond and debt instruments are cleared for a transaction. "A lot of time and effort is spent on debt issues, especially with smaller community hospitals," Mr. Becker said.
15. Union and labor issues must be reviewed. Many transactions require stipulations, such as hospitals must stay as acute-care facilities for a certain period of time and jobs must be maintained at a certain level. Layoffs have become a growing trend in the hospital sector, and hospital mergers often bring up connotations of layoffs. Mr. Becker said executives must carefully review these types of labor issues and involve those parties in the process.
Download the webinar presentation by clicking here.
Note: View archived webinars by clicking here.
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