Dealing them in
Annual M&A report shows industry changes drive another year of growth
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.