Ready for a resur­gence

While hospi­tal merg­ers and ac­qui­si­tions have tailed off in re­cent years, most signs point to busier times in 2010 and be­yond

Modern Healthcare - - Special Feature -

In 2009, for the sec­ond straight year, there were slim pick­ings in hospi­tal merg­ers and ac­qui­si­tions. 2010, how­ever, looks likely to pro­duce a bumper crop, hospi­tal ex­ec­u­tives and deal ad­vis­ers say. Grap­pling with the re­ces­sion, providers spent the first half of 2009 looking to sur­vive, rather than make deals, say Thomas Barry and Carsten Beith, who are both manag­ing direc­tors at the in­vest­ment bank­ing firm Cain Bros. Most of the deals that were pur­sued had a com­pelling strate­gic ra­tio­nale, such as in­mar­ket con­sol­i­da­tion, Beith says.

Some of those deals prompted an­titrust con­cerns, with fed­eral reg­u­la­tors em­bold­ened by their suc­cess in the Evanston (Ill.) North­west­ern Health­care case, a le­gal ex­pert says (ENH is now known as NorthShore Uni­ver­sity Health­Sys­tem). A deal in Maine un­rav­eled as a re­sult of the Fed­eral Trade Com­mis­sion’s sec­ond re­quest for in­for­ma­tion, while a Texas deal even­tu­ally made it through af­ter much scru­tiny.

An­other limit on deal­mak­ing is the sub­stan­tial in­crease in fi­nan­cial and le­gal due dili­gence that occurred in 2009, Barry says.

Mod­ern Health­care’s 16th an­nual merg­ers and ac­qui­si­tions re­port re­flects those fac­tors. The re­port found 85 deals that were an­nounced or com­pleted within 2009, down by six from 2008 and by 22 deals from the decade’s peak year, 2006. That year also was the peak for the num­ber of hos­pi­tals in­volved in the deals—331. The deals in 2009 in­cluded 131 hos­pi­tals, down eight from 2008. The to­tal for 2006 was in­flated by HCA’s lever­aged buy­out, which ac­counted for more than half of the to­tal hos­pi­tals in­volved in deals that year. In 2007, the to­tal was boosted by Com­mu­nity Health Sys­tems’ ac­qui­si­tion of Triad Hos­pi­tals (See chart, this page).

The re­port cov­ers deals in­volv­ing acute­care, be­hav­ioral-health, long-term acute­care and re­ha­bil­i­ta­tion hos­pi­tals that were sold or leased. Man­age­ment agree­ments and af­fil­i­a­tions that do not in­volve a change in con­trol are not in­cluded.

The turn­around?

One fac­tor that hin­dered deal­mak­ing in 2009—tighter avail­abil­ity of cap­i­tal—is poised to have the op­po­site ef­fect in 2010, Beith and Barry say. Bond mar­kets be­gan thaw­ing for fi­nan­cially strong hospi­tal com­pa­nies and sys­tems last sum­mer, pro­vid­ing them the means and the con­fi­dence to pur­sue ac­qui­si­tions, they say. Those with weaker credit rat­ings, on the other hand, con­tinue to find lit­tle credit avail­able to them, push­ing them to­ward a sale.

Add in the chal­lenges of health­care re­form, says Ed Kaze­mek, chair­man and CEO of con­sult­ing firm Ac­cord Lim­ited, and there will be a wave of not-for-profit deals in the next sev­eral years. Kaze­mek says th­ese fi­nan­cial chal­lenges are fi­nally start­ing to over­come some of the his­tor­i­cal re­luc­tance among many not­for-profit hos­pi­tals to merge. “There’s a lot of pride to be­ing a stand-alone com­mu­nity hospi­tal ded­i­cated to help­ing the lo­cal com­mu­nity. And gov­ern­ing bodies have a fierce pro­tec­tion of that in­de­pen­dence,” Kaze­mek says.

Kaze­mek, Barry and Beith all agree that it’s not just the des­per­ate who are con­sid­er­ing merg­ers. Re­ces­sion and re­form are caus­ing gov­ern­ing boards at sta­ble, medium-size not­for-prof­its to ask whether they have a fidu­ciary duty to ex­am­ine ways to grow the scale of

their op­er­a­tions, Kaze­mek says—whether that means find­ing new part­ners, ac­quir­ing more hos­pi­tals or join­ing a larger sys­tem. “Even very so­phis­ti­cated or­ga­ni­za­tions that are do­ing well now are looking at this in their strate­gic plan­ning,” he says.

An­other al­ter­na­tive might be con­ver­sions of not-for-prof­its into for-prof­its, mod­eled on the con­ver­sions of state Blue Cross and Blue Shield plans, Beith says. Cain Bros. has been re­tained by two not-for-profit sys­tems to study this, as they ques­tion the value of re­main­ing not-for-profit, Beith says. Sys­tems that are do­ing well on op­er­a­tions but have a weak bal­ance sheet and don’t rely heav­ily on phi­lan­thropy would be good candidates, Barry says.

Ag­gres­sive in­vestors

In­vestor-owned hospi­tal com­pa­nies have been sig­nal­ing since the sum­mer that they will be ag­gres­sive ac­quir­ers. Be­sides their pub­lic com­ments (Aug. 3, 2009, p. 14), com­pa­nies such as HCA and Van­guard Health Sys­tems have made per­son­nel changes that re­flect a bullish out­look for ac­qui­si­tions (Nov. 23, 2009, p. 14). LifePoint Hos­pi­tals made its own per­son­nel move in this area late last year, al­ter­ing Jone Ko­ford’s ti­tle to pres­i­dent of strate­gic growth and de­vel­op­ment.

Ko­ford says LifePoint is ex­pect­ing to ac­quire one to three hos­pi­tals in 2010. The com­pany would like to do more deals like its ac­qui­si­tion of 154-bed Rock­dale Med­i­cal Cen­ter in Cony­ers, Ga., last year—a fa­cil­ity that is big­ger and of­fers more ser­vices than most of the com­pany’s hos­pi­tals, al­beit in a more com­pet­i­tive mar­ket, Ko­ford says. LifePoint is will­ing to con­sider mov­ing into new states, she adds.

LifePoint also is looking to find ter­tiary hos­pi­tals to part­ner with its nonur­ban fa­cil­i­ties as a way of boost­ing clin­i­cal qual­ity and out­comes re­port­ing, Ko­ford says. Th­ese deals might be loose af­fil­i­a­tions or they could

Barry: Due-dili­gence re­quire­ments helped limit deals in 2009.

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