HEALTH SYSTEM COMBINATIONS

The number of hospital transactions has steadily declined over the last four years. But merger activity is poised to rebound as health systems look to spread rising labor and supply costs over larger organizations, improve their standing in the bond market and boost their bargaining leverage with commercial insurers to mitigate Medicare reimbursement decreases, market watchers said.

Smaller organizations may seek to maximize their resources by teaming up with larger systems with greater access to capital.

“There is going to be some organizational soul-searching for some health systems that might force them to affiliate, even though they prefer not to,” said Patrick Cross, a partner at law firm Faegre Drinker Biddle & Reath. “Health systems are soliciting partners, not because they are on the verge of bankruptcy, but because they are looking at their crystal ball and not seeing an easy road ahead.”

Financial pressures will push physician practices to join health systems, private equity-backed groups, larger practices and insurance companies, said Joshua Kaye, chair of the U.S. healthcare practice at the law firm DLA Piper.

“Many independent physicians are really struggling with their ability to maintain their independence,” Kaye said, noting that their practices’ valuations have dropped as it has become more expensive to borrow money. “There will be a fair amount of deal activity. The question will be more about the size and specialty of the practices that will be part of

n the next consolidation wave.”

A possible recession—and the job cuts that typically accompany one—would limit health insurance companies’ prospects for commercial enrollment.

Recessions tend to shrink insurers’ commercial business, which is their most profitable line of product, said Brad Ellis, senior director at Fitch Ratings.

Individuals who lose their jobs will probably will sign up for Medicaid plans, which is the least profitable arm for insurers, he said.

Members’ moves to Medicaid would come as insurers prepare for redeterminations, potentially within the next few months. States paused eligibility checks for the program during the COVID-19 public health emergency.

After states review patient qualifications for the public health program, an estimated 18 million people will no longer be eligible, according to the Robert Wood Johnson Foundation.

Insurance companies will look to offset any losses by continuing to expand into the Medicare Advantage program, in the hopes the nation’s aging population will make demand for the product recession-proof, Ellis predicted.

Given increased labor, supply and infrastructure costs, providers could pressure insurance companies to increase the amount they pay for services, he said— with insurers that agree to higher reimbursement passing increased costs on to their member premiums.

Insurance companies will be watching how legislators finalize rules for the No Surprises Act’s independent dispute resolution process, he said. Payers expect regulators to begin issuing fines to enforce the price transparency requirement, with companies facing fines of up to $100 per affected individual per day if they fail to publicly post the rates paid to providers. ■