Impact of health reform on transactions
From their discussions with hospital CEOs, Mr. O’Sullivan and Mr. Murski said health reform is significantly affecting strategic planning for transactions. They outlined several concerns hospital CEOs have about the future of their organizations, which include:
- More patients and fewer physicians. Mr. O’Sullivan and Mr. Murski said hospital CEOs are concerned about the influx of the 32 million Americans who will have health insurance for the first time and the predicted shortage of 125,000 physicians by 2025. With more patients and fewer providers, hospital CEOs are unsure how they will care for the additional Medicare and Medicaid enrollees.
- The impact of accountable care organizations. “Every hospital believes they need to have an ACO, but very few of them know what it means,” said Mr. O’Sullivan.
- Improving quality while lowering costs. Mr. O’Sullivan and Mr. Murski said hospital CEOs are determining how to measure quality — in terms of reducing hospital readmissions, mortality rates and infection rates — in a way that will keep physicians happy and meet government regulations.
- Reversing the outflow of ancillary service lines. Over the last 15 years, hospitals have seen an outflow of ancillary services to physician providers or third party providers. Now, they said, based on current industry trends, hospitals have the opportunity to acquire these ancillary services businesses and integrate them back into the hospital.
Mr. O’Sullivan and Mr. Murski also said that with a projected 25 percent of the GDP being spent on healthcare by 2025, current spending trends are unsustainable. In order to make healthcare sustainable in this economy, providers will experience significant fee cuts and physicians may struggle financially. They also predicted 20-25 percent of hospitals will fail under health reform and will be acquired by a larger system or, in some cases, funded directly by the government.
Because current spending trends are unsustainable, Mr. O’Sullivan and Mr. Murski said they expect to possibly see changes to the Medicare benefit structure in terms of eligibility, such as a change in enrollment age, income and assets tests to determine eligibility, or limited access to certain components of care based on acuity and morbidity.
Physician practice acquisition and valuations
Mr. O’Sullivan and Mr. Murski reported a greater desire and need for physicians to become employed by hospitals. In a 2003 study by Merritt Hawkins and Associates of fourth-year residents, only four percent of residents said they would prefer a hospital employee role. In the same study in 2008, that number had risen to 23 percent, a fairly significant increase over a five-year period.
In addition, physicians are anxious about the future of private practice and are unsure how health reform will affect reimbursements. Already, cardiologists have seen significant reimbursement cuts which have resulted in hospital acquisitions of cardiology practices and employment of cardiologists. In general, physicians in private practice don’t know how they fit into accountable care organizations, or a bundled payment or episode-based payment structure.
While private practices consider transactions to avoid fiscal failure and the uncertainty of healthcare reform, hospitals are looking to acquire physician practices to pre-empt the shortage of physicians by 2025. “Hospital CEOs are looking at [the prediction that there will be a shortage of specialists] and saying, ‘We need to make sure we have access to medical specialists and get them to work with us to position our organization for changes under healthcare reform,” Mr. O’Sullivan said.
Ancillary service acquisitions
Hospital CEOs currently have the opportunity to reverse the outflow of ancillary services and move these services back into the hospital system. Mr. O’Sullivan and Mr. Murski said this trend has been driven by continued reimbursement cuts and legislative actions, including the Patient Protection and Affordable Care Act.
Due to this legislation and stricter rules concerning accreditation, many practices and are looking to reduce ancillary services and letting hospitals buy them out. Freestanding ancillary businesses that have been impacted by continued industry headwinds have few options to remain profitable. Since the valuation of struggling ancillary businesses are relatively low, hospitals can reacquire ancillary services to expand their market presence.
Physician service agreements
According to Mr. O’Sullivan and Mr. Murski, hospitals are looking for ways to partner with physicians in a way that doesn’t take business from the hospitals. Since outpatient joint ventures take business directly from hospitals and often negatively impact hospital revenue, hospitals are talking to physicians about a co-management relationship that aligns hospitals and physicians on inpatient and outpatient services and provides a mechanism to improve quality and decrease cost.
This kind of contractual relationship would compensate a physician in two parts: a base management fee on an hourly rate and a quality incentive bonus. The latter is based on how the physician improves quality based on predetermined benchmarks. This could include reducing infection rates and improving patient satisfaction instead of benchmarks like average length of stay and revenue generation, which might discourage quality care.
Hospital transactions
Mr. O’Sullivan and Mr. Murski predicted that because 20 percent of hospitals will fail under health reform, huge numbers of transactions will occur. Every hospital VMG Health has worked with has expressed interest in buying other hospitals. These transactions usually fall into two categories: healthy and troubled.
Hospitals who pursue a merger or acquisition because they need to be closely aligned to a system to participate in an ACO or to have better contracting and reimbursement management will be in a good position to negotiate a sale, he said. Troubled hospitals will pursue transactions based on changes in reimbursement and failing relationships with physicians.
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