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Not-For-Profit Health System Purchases May Signal New Changes in Market

Janice Simmons, for HealthLeaders Media, May 4, 2010

Two recent purchases of sizable, not-for-profit health systems by for-profit entities may be signaling a shift toward increased consolidation within the healthcare industry, according to a new analysis by Moody's Investors Service.

If this becomes a trend it could place additional pressure on the remaining not-for-profit healthcare organizations in the same markets to not only operate more efficiently, but also offer a potential new source of capital for not-for-profits considering a merger or sale, Moody's said in its analysis on for-profit investment in not-for profit hospitals.

In March, Detroit Medical Center, which owns 10 hospitals or specialty centers and a laboratory in Michigan, signed a letter of intent to be purchased by Nashville based Vanguard Health Systems, a for profit company that owns 15 hospitals in Arizona, Illinois, Massachusetts, and Texas. The price tag includes $417 million to retire DMC's bonds. Vanguard also will invest $850 million over five years in major capital projects.

And several days later, New York private equity firm Cerberus Capital Management, announced plans to acquire Caritas Christi Health Care in Massachusetts. Caritas runs six Catholic hospitals in the Boston area. Under the terms of the agreement, Cerberus will assume CCH's debt and invest $400 million in future projects.

From the perspective of not for profit hospitals, these types of alignments could create "conflicting possibilities," according to Moody's. Those not-for-profit organizations initially capable of attracting for profit partners will benefit. But this could mean that the remaining independent not for profits--including small independent hospitals and lower-rated health systems--may face "operating challenges and increased competition" from their newly capitalized competitors.

The overall effect could be an increased rate of mergers of not for profits with both other not for profits and for profit firms, the Moody's analysis said.

The Massachusetts and Michigan healthcare markets have historically been dominated by not for profit operators. While the two transactions are subject to many approvals and further negotiation, they will "materially alter the competitive landscape of these markets," Moody's said.

As one example, disclosure practices of hospitals under the ownership of large for profit entities could become less detailed--providing their not for profit competitors with a disadvantage with respect to access to information.

Several other factors that may make consolidation more likely are:

  • Increases in reimbursement pressures across all payers
  • Greater needs for cost controls and access to economies of scale
  • Increases in competition for physicians, suppliers, and patients
  • Increases in unfunded pension liability

Janice Simmons is a senior editor and Washington, DC, correspondent for HealthLeaders Media Online. She can be reached at jsimmons@healthleadersmedia.com.

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