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Hospital M&A Outlook 2012: 5 Key Trends

Reprinted with permission from Health Strategies & Solutions.

The number of hospital mergers and acquisitions in 2011 is on track to be the highest in the past decade.  This growth trend is expected to continue in 2012, driven, in large part, by provider responses to the challenges and opportunities created by national and state healthcare reform initiatives.

The consolidation taking place in the healthcare industry is not limited to hospitals.  Transactions include hospitals acquiring physician practices, physician practices merging with larger physician groups, and large insurance companies purchasing smaller plans. In select markets, insurers are also purchasing hospitals and physician practices in an effort to exert more market and cost control in care delivery.

The rate and pace of activity is likely to continue in 2012 as mergers, acquisitions, and affiliations of all types are used by providers to address the industry dynamics now in play. Continued pressure to demonstrate quality outcomes and meaningfully reduce costs, competition for scarce physician resources and meeting market compensation demands, high demand for capital, and the competitive pressures exerted when for-profit healthcare organizations enter markets are just a few of the complex challenges being experienced across the country and fueling the surge of M&A activity.

With these market dynamics in mind, let's look at the five key M&A trends for 2012.



5 Key M&A Trends for 2012
1.  Influx of private equity investment in not-for-profit healthcare
The capital starved not-for-profit health care industry has welcomed the capital infusion and opportunity for growth that private equity investors brought to many hospitals in 2011, and this trend is expected to continue in 2012. Investors see an opportunity to generate shareholder return, and, in some cases, fund future growth through initial public offerings (IPOs) including the third largest worldwide IPO in 2011 ($4.35 billion) raised by hospital chain operator HCA Holdings, Inc. The entrance of for-profit operators into the health care M&A market is likely to have a ripple effect causing further industry consolidation, as Moody's observed in its 2011 industry outlook, with all types of hospitals seeking larger economies of scale and better access to capital.

2.  Continued consolidation of the healthcare insurance providers and market concentration
Many of the major players, such as UnitedHealth Group and WellPoint, Inc., have made a number of acquisitions during the past five years. The industry is expected to continue to consolidate as insurers try to reduce costs and improve profitability. While health insurance exchanges and state review of insurer rate increases may influence insurance market competition, these larger insurance companies will benefit from greater market leverage with physicians and hospitals, creating an incentive for medical providers to consolidate as well to improve their position in rate negotiations.  A new study by the National Institute for Healthcare Management clearly showed that hospitals in concentrated markets, where less competition exists, are able to extract significantly higher payments from private insurers.

3. Accelerated system integration post merger
Shortening the timeline for achievement of quality, growth, cost and other identified benefits from mergers and acquisitions will be imperative as the pressure to remain competitive intensifies. The cost component alone is daunting, with healthcare and industry association executives estimating that the direct cost per case must be reduced by 15 to 30 percent to offset the expected decline in governmental payment rates and limited ability to cost shift to private payors. Historically, health care mergers and acquisitions have typically achieved single-digit expense reductions, which will not be sufficient going forward.

High-performing integrated delivery systems in a value-driven health care environment will be characterized by features that will challenge even the most skilled health care executives including

  • The right mix, continuum and geographic distribution of services
  • Active and engaged physician leadership and medical practice models with aligned goals
  • Care models with population management capabilities
  • An effective electronic network
  • System-level structures, incentives and organizational design to support integration

4. Creativity in structuring affiliations and partnerships
While traditional approaches such as mergers and acquisitions will continue to be used, creative models are being developed to meet the changing care and related payment models. One example is the Adirondack Health Institute (AHI) consortium located in Queensbury, New York. AHI is an outgrowth of an initial collaboration among healthcare providers to address regional physician shortages.  The new organization structure was established early this year to lead and operate a unique and inclusive medical home pilot that includes an incremental per member, per month rate for primary care with the goal of improving quality of care, reducing overall health care costs, and providing incentives for physician recruitment and retention.  The pilot encompasses 35 primary care practices with over 200 providers, five hospitals, seven commercial health plans, and Medicare and Medicaid among other constituents.

5. Proactive, structured, and early identification of consolidation and affiliation opportunities
National and large regional systems are expected to continue proactively planning for market consolidation by pursuing opportunities to monetize underperforming assets, and identifying markets where they can serve in a consolidator role to stabilize fragile health care markets - ensuring continued access to care and quality improvement, while improving their competitive position. Small- and mid-sized independent hospitals are also taking a more proactive approach to seeking a partner as evidenced by increased prevalence in the use of formal requests for proposals to identify potential affiliates and initiating this process while they have the ability to negotiate from a position of strength.  This approach provides a level of transparency to the decision-making process for key local stakeholders and regulatory agencies.

Summary

While consolidation in some markets may have peaked in 2011, the 2012 forecast for continued consolidation across the health care industry will impact providers nationwide as the imperatives for delivering patient care in an era of reform become more tangible, and long-held beliefs about competition, collaboration, and roles within specific markets are challenged.

For more information on the outlook for mergers, acquisitions, and affiliations in 2012, contact Kathleen McCarthy at (518) 877-8009 or kmccarthy@hss-inc.com

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