‘Larger is better’
Flurry of deals tied to strategy
The U.S. Supreme Court’s ruling in favor of the healthcare reform law at the end of June was a big deal for the industry, but not big enough to be driving the flurry of merger-and-acquisition activity taking place at that time, experts say. Transactions such as Dignity Health’s agreement to purchase U.S. Health works were driven by the fundamental forces taking place in healthcare that reward size, experts say, and likely would have occurred with or without the high court’s upholding of the Patient Protection and Affordable Care Act.
Other deals that were announced or closed in late June and early
July—about the time of the June 28 ruling—include: for-profit Duke LifePoint Healthcare’s definitive agreement to acquire not-for-profit 275-bed Marquette (Mich.) General Health System; the announcement that three-hospital Care New England Health System, based in Providence, R.I., and 159-bed Memorial Hospital of (Pawtucket) Rhode Island had entered into partnership discussions; and Community Health Systems’ announcement that it had closed on a deal to acquire Memorial Health Systems, York, Pa., and its 100-bed Memorial Hospital. The values of those deals were not yet determined or not disclosed. The activity in late June and early July was a result of a broader change in perspective taking place among healthcare executives. “The healthcare industry is migrating toward larger is better,” said Marc Cabrera, managing director and head of the healthcare investment banking group at Morgan Joseph TriArtisan. Larger organizations are in a better position to withstand some of the looming reimbursement cuts that are expected from Medicare and also respond to the industry’s shift to using value-based reimbursement and accountable care models.
And those types of changes are taking place already among private insurers and in Medicaid programs, driving much of the increased amount of deal-making this year. “Commercial and Medicaid market healthcare reform is well under way. They’re way ahead of Medicare,” said Craig Holm, senior vice president of Health Strategies & Solutions. Commercial insurers, for example, have been using medical homes for years, and the success they’ve had in producing healthier patients and reduced costs are staggering, Holm said.
Looking ahead to the balance of 2012, financial executives expect heightened M&A activity to continue with deals coming from both private equity buyers and strategic deals between industry players. “I think there will be a fair amount of activity through 2014,” when many of the ACA’S biggest provisions kick in, Cabrera said.
Greg Wappett, an associate with investment banker Provident Healthcare Partners, said that M&A activity could be slowed if Mitt Romney wins the presidency and the GOP wins enough seats in Congress to repeal the ACA. That could result in some downward pressure in M&A activity, Wappett said.
Memorial Hospital of Rhode Island entered into partnership discussions with Care New England in June.