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Breaking down the 5 most interesting hospital M&A deals of the year

Although full change-of-ownership deals dropped this year, merger and acquisition activity is expected to pick back up in 2015, says Jordan Shields, vice president of Juniper Advisory, an investment bank that works exclusively with hospitals and health systems.

As of Nov. 30, there were 53 hospital mergers and acquisitions, representing $1.7 billion in transactions, according to data from Irving Levin Associates' Health Care M&A Information Source.

When looking at year by year deal totals since 2005, mergers and acquisitions dipped back to a low in 2009, with 50 deals totaling $2.1 billion. (There were also 50 deals in 2005 totaling $2.9 billion.)

On the high end, there were 107 deals in 2012, representing $2.3 billion in transactions, according to the data.

The price tag assigned doesn't reflect all hospital mergers and acquisitions, as money does not change hands when it's two nonprofit organizations.

Mr. Shields attributed this year's slowdown, in part, to the time spent making such deals.

"These strong organizations just take longer. It's harder for them to pull the trigger," he says.

He says the organizations also have the resources to be more patient and deliberate as far as how they approach partnerships.

Instead of full change of ownership mergers and acquisitions, there are more no-change-of-ownership deals, such as affiliations and joint operating agreements, he says.

For instance, he cited three North Carolina health systems — Vidant Health, Wake Forest Baptist Medical Center and WakeMed Health & Hospitals — that are forming a shared services operating company.

There was no change of ownership or governance, but they did form a shared cooperative, Mr. Shields says. Still, he says those deals are likely to be short to medium-term solutions rather than long-term.

Mr. Shields says some hospitals place a high premium on current governance structures and are looking for ways to improve efficiencies and quality without giving up governance and control, so they are pursuing these kinds of deals.

Mr. Shields gave his opinion on mergers and acquisitions within the hospital industry.

Here are his choices for the most interesting deals, in no particular order:

1. Advocate, NorthShore

Downers Grove, Ill.-based Advocate Health Care and Evanston, Ill.-based NorthShore University Health System this year unveiled plans to combine and create a 16-hospital system, the largest in Illinois. The newly created Advocate NorthShore Health Partners would sit as the 11th largest nonprofit health system in the country, and it would employ more than 45,000 and include nearly 4,500 hospital beds. The deal is not merely an affiliation, but will consolidate the systems' balance sheets, create a single board of directors and demand a unified mission, vision and strategy. The merger, which still needs regulatory approval, is expected to close early next year.

Mr. Shields said this merger fits the trend he's noticed of well-capitalized systems coming together because of the move away from fee-for-service to population health.

2. AtlantiCare, Geisinger

AtlantiCare in Atlantic City, N.J., signed a definitive agreement to become a member of Geisinger Health System in Danville, Pa. Under the agreement, AtlantiCare will retain its brand name and local autonomy, according to a news release. The partnership will focus on the implementation of evidence-based medicine, enhancing clinical services, optimizing the use of electronic health records and clinical informatics, implementing population health management and moving toward value-based payment models. Mr. Shields said this deal deserves mention because he believes there will be more similar deals in the future. "I think we're going to see the strong regional systems go kind of super regional," he says. "I see Geisinger wanting to drive quality, reduce costs. Geisinger is a great example of jumping geography."

3. Northwestern, Cadence

Chicago, Ill.-based Northwestern Memorial Healthcare and Winfield, Ill.-based Cadence Health this year completed the agreement that expands Northwestern Medicine, a fully integrated health system. Northwestern Medicine now includes four hospitals: Northwestern Memorial Hospital in Chicago; Northwestern Lake Forest (Ill.) Hospital; Central DuPage Hospital in Winfield; and Delnor Hospital in Geneva, Ill.

In this case, he says both are giving up governance with a new parent board. They are two well-positioned systems "that are willing to give up governance to better position themselves for population management and the consolidating market," he says.

4. Duke LifePoint Healthcare, Conemaugh Health System

Brentwood, Tenn.-based Duke LifePoint Healthcare this year completed its acquisition of Conemaugh Health System in Johnstown, Pa. Under the agreement, Duke LifePoint — a joint venture between nonprofit Duke University Health System in Durham, N.C., and for-profit LifePoint Hospitals — will invest $425 million in Conemaugh's facilities during the next decade. Duke also offered employment to all Conemaugh employees and will establish a local board of trustees consisting of local community members, physicians and a Duke representative. Duke will also maintain all of Conemaugh's core services and provide resources to expand and enhance those services, according to the two systems.

Of this acquisition, Mr. Shields said, "It really supports the continued success of for profit [and] not-for-profit joint ventures. I think we're seeing the intersection in how not-for-profits and investor-owned systems approach M&A." He says it's "increasingly about driving population health and quality."

5. Daughters of Charity Health System, Prime Healthcare Services

The board of directors of Daughters of Charity Health System — a six-hospital network based in Los Altos Hills, Calif. — earlier this year agreed to sell its hospitals to Ontario, Calif.-based Prime Healthcare Services. Under the pending agreement, DCHS will sell the following California hospitals to Prime: Seton Medical Center in Daly City; Seton Coastside in Moss Beach; O'Conner Hospital in San Jose; Saint Louise Regional Hospital in Gilroy; St. Vincent Medical Center in Los Angeles; and St. Francis Medical Center in Lynwood. The deal still requires approval from California Attorney General Kamala Harris, and the Vatican, as DCHS is a Catholic system. Immediately after DCHS announced the sale of the six hospitals, SEIU-United Healthcare Workers West announced thousands of employees of the hospitals will fight to stop the sale, as the employees believe Prime puts profits before patients. They also believe Prime does not share the same mission as DCHS.

Mr. Shields said Prime has been very successful in going after a market segment. "Prime is out there taking on hospitals that might otherwise close, and they're successfully operating those hospitals," he says. "This is by far [its] largest acquisition to date."

Mr. Shields says overall he believes that mergers and acquisitions will pick up in 2015.

 

Hospital Mergers & Acquisitions, 2005-2014* (YTD thru 11.30)

Year

# Deals

$$ in millions

2014 (through 11.30.14)

53

$1,728

2013

84

$18,657

2012

107

$2,328

2011

93

$8,305

2010

76

$10,515

2009

50

$2,088

2008

60

$2,580

2007

60

$9,257

2006

54

$35,533

2005

50

$2,905

Source: The Health Care M&A Information Source, Dec. 2014

 

 

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