Steve Messinger, managing partner and board member of ECG Management Consultants, identifies healthcare consolidation developments that will take center stage in 2014.
Healthcare consolidation has been on the rise lately with little sign of slowing down. The industry's merger and acquisition activity increased by almost 20 percent in the third quarter of 2013 compared with the same quarter a year ago, with 267 deals announced in the past three months, according to Irving Levin Associates.
Next year, as pressure to cut costs while improving care intensifies, the rate of healthcare provider mergers and acquisitions will inevitably continue to increase, says Steve Messinger, managing partner and board member of ECG Management Consultants, a leading strategic healthcare consulting firm.
Mr. Messinger shared four hospital and health system consolidation patterns to watch in 2014 as healthcare reform and other forces continue to transform the industry.
1. Acquiring organizations getting pickier. Mr. Messigner says he already sees healthcare organizations becoming more selective when it comes to acquiring other hospitals and health systems, and beginning to reject smaller hospitals with weak finances.
"Organizations are taking a much harder look at the financial strength of the organizations they seek to acquire," he says. "The market is getting a little more fickle in terms of the sensitivity around the quality of the assets that are out on the market."
2. More non-ownership collaborative arrangements. Another trend on the rise is hospitals and health systems seeking to realize the benefits of merging without giving up their governance. Mr. Messinger says the market will see more and more providers looking to achieve greater economies of scale and negotiating power through non-ownership collaborative arrangements. He cited the recent formation of AllSpire Health Partners — a clinical quality alliance of 25 hospitals from seven Northeast health systems — as one example.
"We're going to see a lot more activity in that area than we're going to see in classic merger and acquisition activity," he says. "If you think about it, it's very logical. The amount of capital expended for hospitals to acquire each other is incredible. The ability to accomplish critical mass without the use of all that capital is very efficient."
3. Continued hospital acquisition of physicians and medical groups. Hospitals will keep seeking to acquire medical groups and independent physicians, with an emphasis on large medical groups, Mr. Messinger says.
"Compensation arrangements with physicians are becoming untenable and unstable," he says. "We're seeing a lot of organizations rethink how they work with physicians. And the large clinical organizations are starting to look at hospital partnerships in a much more forthright way."
4. Ambiguity surrounding antitrust enforcement. Antitrust enforcement will continue to be a concern for hospitals and health systems looking to join forces next year. Mr. Messigner says providers will struggle to work with others to the degree necessary to coordinate care and meet healthcare reform objectives without committing antitrust violations.
"I think the ambiguity is only going to be increasing over the next couple years," he says. "The market is forcing consolidation…and yet the antitrust enforcement and guidance around fair market value, they have not evolved as quickly."
Overall, healthcare providers have to get comfortable with the uncertainty and keep seeking legal guidance, he says.
"I have been on virtually no calls about acquisition without the lawyers being present guiding the organization," he says. "Lawyers are sitting at the table guiding the organization, making sure they stay within fair territory."
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