Deal­ing them in

An­nual M&A re­port shows in­dus­try changes drive an­other year of growth

Modern Healthcare - - SPECIAL FEATURE - Read full story and down­load the charts at mod­ern­health­

As the health­care in­dus­try un­der­goes struc­tural changes, hospi­tal and sys­tem ex­ec­u­tives are find­ing the most ef­fi­cient way to change with it is to join with a larger or bet­ter-funded part­ner through a sale, re­align­ment or joint ven­ture.

Con­se­quently, merger-and-ac­qui­si­tion ac­tiv­ity among hos­pi­tals and sys­tems con­tin­ued its up­swing in 2011, with the num­ber of deals an­nounced or com­pleted ris­ing 3.4% to 92 trans­ac­tions from 89 in the 2010 tally, ac­cord­ing to Mod­ern Health­care’s 18th an­nual M&A re­port. The num­ber of hos­pi­tals in­volved in M&A deals fell 6.6% to 212 hos­pi­tals in 2011 from 227 in the pre­vi­ous year’s tally, in part be­cause of fewer large mul­ti­state deals.

The rise in the num­ber of deals in 2011 was driven by the evo­lu­tion of the coun­try’s health­care model, in­dus­try ex­perts say. Ex­pec- tations are that health­care re­im­burse­ment from public and pri­vate pay­ers is go­ing to ei­ther fall or rise less quickly than it has in the past, cre­at­ing rev­enue pres­sures for providers.

At the same time, gov­ern­men­tal agen­cies and pay­ers are push­ing for im­prove­ments in care through such things as value-based pur­chas­ing pro­grams, med­i­cal homes and ac­count­able care or­ga­ni­za­tions, rais­ing hos­pi­tals’ costs. And the im­ple­men­ta­tion and mean­ing­ful use of elec­tronic health-record sys­tems cost money that can be borne more eas­ily by larger or­ga­ni­za­tions un­til an­tic­i­pated ben­e­fits kick in.

“Peo­ple are say­ing, ‘We just can’t do this alone any more,’ ” says Dave Frank, a part­ner and head of the health­care as­sur­ances ser­vices group for ac­count­ing and con­sult­ing firm Crowe Hor­wath. There are com­pelling rea­sons for hos­pi­tals to com­bine with oth­ers—rea­sons not likely to go away any­time soon, he says.

Com­mu­nity and re­gional hos­pi­tals might de­cide that they want to af­fil­i­ate with a larger sys­tem that has an ex­ist­ing strat­egy for deal­ing with the changes en­velop­ing the in­dus­try and a brand to sell it, he says. With the hospi­tal in­dus­try start­ing to tran­si­tion out of a fee-forser­vice model, hospi­tal ex­ec­u­tives are ask­ing if they have the peo­ple and re­sources to man­age that change. “You can’t re­ally do that as a stand-alone hospi­tal,” Frank says.

In­deed, data from the Amer­i­can Hospi­tal As­so­ci­a­tion shows the num­ber of hos­pi­tals that are not part of a sys­tem fall­ing about 5.7% dur­ing the three years ended 2010. The num­ber of com­mu­nity hos­pi­tals not in a sys­tem stood at 2,167 in 2007 and had fallen to 2,044 by 2010, ac­cord­ing to the AHA’S 2012 Sta­tis­ti­cal Guide.

A va­ri­ety of deals took place in 2011, in­clud­ing one in which a not-for-profit payer pro­posed to buy a not-for-profit sys­tem—pitts­burgh-based Highmark’s pro­posal to buy five­hos­pi­tal West Penn Al­legheny Health Sys­tem, Pitts­burgh—and pur­chases by a joint ven­ture be­tween an aca­demic med­i­cal cen­ter part­nered with a for-profit chain, Duke Univer­sity Health Sys­tem, Durham, N.C., and Lifepoint Hos­pi­tals, Brent­wood, Tenn.

The list was com­piled based on avail­able in­for­ma­tion col­lected by Mod­ern Health­care re­gard­ing hospi­tal M&A agree­ments for the cal­en­dar year. If a deal was agreed to and closed dur­ing the year it was counted once, and if a deal agreed to in 2011 was known to have closed in 2012, it was listed as closed. The list in­cludes acute-care, long-term acute-care, free-stand­ing re­ha­bil­i­ta­tion and psy­chi­atric hos­pi­tals.

In­dus­try ex­perts say that in­no­va­tion in deal struc­tur­ing will con­tinue in 2012, in­clud­ing more of a pres­ence from pay­ers, which will re­main as po­ten­tial buy­ers of hos­pi­tals and other providers.

Much of the re­cent ac­tiv­ity also is be­ing driven by the re­al­iza­tion by hospi­tal and sys­tem ex­ec­u­tives that the cur­rent model for pro­vid­ing acute care is chang­ing dras­ti­cally. Most of our coun­try has been based on the not-for­profit hospi­tal model, in which care is cen­tered around a big box, the hospi­tal, says Deryck Palmer, part­ner at law firm Pills­bury Winthrop Shaw Pittman.

“Only now are we see­ing that model be­ing ques­tioned,” Palmer says.

Among last year’s deals was a 14-hospi­tal merger be­tween Provena Health and Res­ur­rec­tion Health Care in Illi­nois.

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