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Consolidation Nation: Where Will the Hospital Industry Stand After the Tenet-Vanguard Merger?

One of the most consistent drumbeats heard in the hospital industry over the past several years has been a crescendo of hospital mergers, acquisitions, affiliations and alignment strategies. Simply put, hospitals and health systems are looking to partner with each other to handle healthcare reform, and it's leading to mass consolidation.

In the first three weeks of July alone, there were roughly two dozen hospital and health system mergers, acquisitions, partnerships, affiliations or transactions announced or completed.

However, no hospital M&A announcement has been bigger this year than when Dallas-based Tenet Healthcare Corp. agreed to buy Nashville, Tenn.-based Vanguard Health System in June. Tenet will acquire Vanguard for $21 per share, resulting in $1.8 billion in cash, and will assume Vanguard's $2.5 billion debt — creating a total transaction valued at $4.3 billion. The deal is expected to close by the end of 2013, and Tenet expects anywhere from $100 million to $200 million annually in savings through the revenue cycle, supply chain and other efficiencies of scale.

TenetlogoThe sheer scale of the deal is what has made the industry take notice. Tenet will own 79 hospitals, potentially 81 if two transactions in Connecticut are finalized, and it will also operate 157 ambulatory surgery centers and outpatient centers. This will make Tenet the second-largest for-profit hospital chain in terms of revenue and the third-largest in number of hospitals owned. Further, Tenet will gain market share in areas it previously had no footprint, such as Chicago, Detroit, San Antonio, Phoenix and New England — giving it the number one or two position in 19 major markets. Finally, Tenet will gain health plans associated with Vanguard, and Tenet's business operations subsidiary, Conifer Health Solutions, will nab just as much market share as Tenet itself.

VanguardHS2013"This unique strategic transaction will bring together organizations that share a common commitment to providing high-quality care and create significant new growth prospects for Tenet," Trevor Fetter, Tenet's president and CEO, said in a call with investors after the deal was announced. "This acquisition will take Tenet into new geographic markets, expand the breadth of our service offerings, diversify our earnings sources and increase the benefits we expect to realize under healthcare reform."

Tenet is not alone

Major for-profit hospital operators have been adding hospitals to their ranks for many years now. However, nonprofit hospitals have been just as active as of late. St. Louis-based Ascension Health, Englewood, Colo.-based Catholic Health Initiatives and many other regional and national nonprofit systems have ramped up efforts to grow their already large organizations.

"I think for-profits are not that different than [nonprofit] hospitals," says Mike Fitzgerald, CFO of Franciscan Health System in Tacoma, Wash. Franciscan, part of CHI, recently acquired Burien, Wash.-based Highline Medical Center and is trying to add Harrison Medical Center in Bremerton, Wash., to its system, as well.

"Everyone is trying to gain advantages through synergies, and the fact Tenet and Vanguard are doing that isn't surprising," Mr. Fitzgerald says. "Many nonprofits are merging and affiliating, too. It's just indicative of the industry in general."

Stephen Zieniewicz, executive director of University of Washington Medical Center in Seattle, agrees. UW Medical Center is one of the academic medical centers within UW Medicine, which recently added Valley Medical Center in Renton, Wash., to its core. He adds these types of deals try to serve more than just a "scale" purpose. They also aim to integrate all clinical facets of a patient's care path.

"The industry is seeking to improve the health of the population by increasing their quality metrics, decreasing costs and reducing variation," says Mr. Zieniewicz, who previously served as COO of Saint Louis University Hospital, a 356-bed academic teaching hospital owned by Tenet. He also points to an example in New York, the Long Island Health Network, that clinically integrated 11 hospitals more than a decade ago "with the purpose of improving public health, decreasing costs and presenting more unified contracting opportunities to insurance companies."

Ramifications of today's M&A market

It remains to be seen what will come from the Tenet-Vanguard deal, but not everyone with a pulse on the industry sees a rosy outlook from it. Moody's Investors Service released a report in July, which said the deal will be a "credit negative" for nonprofit hospitals, especially small standalone hospitals. The reason? Tenet will control "greater market power," which may lead to further consolidation.

"Potential shared savings and combined resources will allow Tenet to engage in new and enhanced competitive endeavors that could threaten [nonprofit] hospitals, especially those with fewer resources," Moody's analysts wrote.

Many have argued a more concentrated hospital market, especially in smaller markets, will lead to local monopolies and consequently higher prices for consumers. Last year, the Robert Wood Johnson Foundation released a study saying exactly that — that when hospitals merge in already concentrated markets, price increases can often exceed 20 percent.

"I think the evidence is fairly overwhelming that concentrated hospital markets lead to much higher prices, and decreased competition leads to poorer quality," says Barak Richman, JD, PhD, a healthcare economics, law and policy professor at the Duke University School of Law in Durham, N.C. Dr. Richman adds that despite the presence of U.S. antitrust enforcement, there has been a "long history of allowing hospital mergers to proceed that should not have been permitted."

However, there may be tangential benefits to large, national mergers, Mr. Zieniewicz of UW Medical Center says. Much like Cleveland Clinic and others have started to create direct relationships with national employers like Wal-Mart and Lowe's, multistate hospital collaborations may appeal to those same employers who want to send their employees to the highest-quality hospitals in their various regions.

"When I think about unique opportunities associated with the Tenet-Vanguard merger, [the new entity] will be in several geographically diverse markets," Mr. Zieniewicz says. "It will bring up opportunities for national employers like Costco and Macy's that they may not have had in the past. If a provider can step forward and say, 'We can create a more unified product for all your employees,' that is attractive to those employers. And that's the piece that I think will be beneficial for everyone."

Dr. Richman cautions, however, that even interregional hospital competition can be stifled from mergers of national chains because they "could set up a system of restrictive networks that would make entry into the interregional market harder."

More Articles on Hospitals and Consolidation:
6 Hospital Mergers Called Off in the Past Year
7 Common Reasons for Hospital Transactions
Trinity Health, Catholic Health East Complete Merger

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