First consolidation, then coordination
LTAC operators using acquisitions to expand their care continuums
For the long-term acute-care hospital segment, the days of consolidation may be nearing an end as post-acute providers take on the ambitious—and uncertain—task of adopting the new, favored model of delivery: coordinated care.
Proof of this came in May when Louisville, Ky.-based Kindred Healthcare shareholders agreed to buy RehabCare Group for $1.3 billion in a deal that not only added to Kindred’s LTAC hospital business, but also expanded the company’s reach in the full post-acute continuum through added rehabilitative services.
“The combination of Kindred and RehabCare will provide more opportunities for our patients, employees and other stakeholders,” Kindred President and CEO Paul Diaz said in a statement to Modern Healthcare last week.
“Together, we will continue to deliver superior clinical outcomes and expand our service offerings to better transition patients home with a full and efficient recovery,” he said. “The expansion of our size and scale and the opportunities to integrate RehabCare’s LTAC hospitals, IRFs (inpatient rehabilitation facilities) and rehabilitation therapy contract business with our operations will create a stronger company that is better positioned to compete in an evolving and more integrated healthcare environment.”
Select Medical Holdings Corp., which purchased LTAC hospital provider Regency Hospital Co. in 2010, has since concentrated on grow- ing its hospital business through partnerships with Baylor Health Care System in Dallas as well as the Penn State Hershey (Pa.) health system.
“The wave of mergers is less about market leverage and much more about regulatory uncertainty and the lack of other options to pursue growth,” says William Walters, CEO of the Acute Long Term Care Hospital Association. “Post-acute providers are really trying to position themselves for the future: whether it’s ACOs (accountable care organizations), bundled payments or site-neutral payments, all of those scenarios envision post-acute providers performing a wider range of services than the current silos they may be in.”
Walters’ comment about a lack of other options for growth refers primarily to a federal moratorium on new LTAC hospitals that will expire next year. Any new LTAC hospitals during this time must have been planned for operation before the moratorium kicked in.
“I think what has accelerated the consolidation is the moratorium,” says Jason Healy, an attorney in private practice who serves as ALTHA’s general counsel. “We’re in a five-year moratorium since 2007. Because of that, we only have a set number of LTACs currently out there,” he says. “And because the sector isn’t able to grow through new building, the only way to grow is through acquisitions.”
Healy cited LifeCare Hospitals’ purchase of six LTACs from Birmingham, Ala.-based rehab provider HealthSouth Corp. as another example in addition to acquisitions by Kindred and Select Medical.
Meanwhile, the Medicare Payment Advisory Commission’s March 2011 report found that the number of LTAC hospitals has grown even with the moratorium in place.
“We examined Medicare cost report data to assess the number of (LTACs) and found that, in spite of the moratorium, the number of (LTACs) filing Medicare cost reports increased 6.6% between 2008 and 2009, the largest growth seen since the period between 2004 and 2005,” according to the report.
Most LTAC hospitals were able to enter the Medicare program because they met exceptions to the moratorium, the report stated. Most had begun their qualifying period showing an average Medicare length of stay greater than 25 days before Dec. 30, 2007; had binding agreements for the construction, renovation or lease of a new LTAC hospital; or had received a certificate of need on or before Dec. 29, 2007.
“A majority of the new (LTACs) filing cost reports were for-profit facilities, and almost all of them were free-standing facilities. Preliminary analysis of Medicare’s Provider of Service data indicates that far fewer (LTACs) opened in 2010,” according to the report.
Looking ahead, Healy says he thinks that while most of the consolidation is over, the lifting of the moratorium could lead to new LTAC hospital construction.
“When it comes off, I think there will be interest in more LTACs,” Healy says of the moratorium, adding later, “Without any building in five years, I think that’s a reasonable assumption that there will be more growth.”
Dr. William Kapp is an orthopedic surgeon who serves as chairman of Landmark Hospitals, an LTAC company that began in 2006 and has one facility in Athens, Ga., and three in Missouri. Kapp cites a confluence of factors leading to the consolidation in the LTAC segment.
First, he says, some companies were in a weakened position that was driven largely by cuts in federal reimbursement in the past three to five years. Another reason is some privateequity firms that invested in this segment in 2002 and 2003 were looking to exit. And he also echoed Walters’ comment about the segment’s future.
“I think there has also been some consolidation particularly trying to meld LTAC and rehab hospitals in certain markets so they can offer the full post-acute continuum,” Kapp says.
As post-acute providers move toward the