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2015 M&A Forecast 'Cloudy'

 |  By John Commins  
   December 29, 2014

As provider affiliations have become more nuanced than simple bricks-and-mortar acquisitions they are thus harder to track, quantify, and predict.

Consolidation in the hospital sector is a trend that most observers believe will continue as providers adapt to value-based care, population health and capitated payments.

What's not so clear is what form this consolidation will take and how fast the hospital sector will move in that direction in the coming year.

Brett Hickman, a partner and healthcare deals leader with PwC, notes that mergers and acquisition volume for U.S. hospitals declined by 58% in the first three quarters of 2014, when compared with the same period in 2013.

However, Hickman says, that decline comes with caveats because provider affiliations have become more nuanced than simple bricks-and-mortar acquisitions and are thus harder to track and quantify.

"What is happening now is a lot of what I call convergence deals, things that may not show up on publicly reported data, and what I will call private industry deals, a lot of stuff in the physician space," Hickman says.


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These affiliations are being led largely by management service organization models, clinical integrations, and joint ventures.

 "We are seeing a lot of deals by payers getting into not pure acquisitions, but MSO [management services organization] models, affiliations like clinically integrated networks, things that qualify under the regulations for them to be able to negotiate together and partner and get their clinical activities integrated, but not have to do a full merger. The deal is still a deal or a transaction, but not an M&A. We can't keep up with that."

These looser affiliations have key advantages over traditional acquisitions, in that they are not subject to the same regulatory scrutiny, they allow the smaller partner to keep a measure of autonomy, and the deals are more easily unwound if they don't work.

Hickman says one trend below the radar has "healthcare systems buying up mom-and-pop [skilled nursing facilities] and trying to get control of their post-acute costs. [There is] lots of activity in the SNF space now, none of which is going to hit in anything publicly reported."

Adam Powell, a healthcare economist with Payer + Provider Syndicate, a Boston-based consulting firm, says there is more interest in creating narrow network products for oncology, cardiology, and other lucrative subspecialties that include hospitals from multiple health systems.

"An insurer can build a narrow network that is a collaboration of several hospitals without actually merging them," Powell says. "It's easier to unwind something if you don't go in whole hog. In the event that it doesn't work out, it leaves the organization with more dynamism to react to changing market conditions."

"That being said, going in whole hog does allow for tighter integration. It's more feasible for merged hospitals to share a common infrastructure to reduce costs."

2014 a 'Surprising Year'
Powell called 2014 "a surprising year."

"At the beginning of the year people were speculating that there would be a lot of M&A activity in the hospital sector, but that hasn't panned out," he says. "There may have been a lot of the low-hanging fruit deals that happened earlier. The ACA was passed in 2010 and there was a spike in M&A's in 2011 and 2012 and 2013. In 2014 there was a bit of a decline and a lot of the deals that needed to happen may have happened already."

In Boston, for example, Powell says the trend now is not necessarily finding more hospitals to acquire, but to integrate and coordinate care among the hospitals that have already consolidated.

"Whether it is getting together on the same EMR, or synchronizing disparate care processes, there are a lot of internal resources locally that have been devoted to getting acquired hospitals all in sync and acting as a system," Powell says.

"So there may be a tension between 'how much do we expand?' versus 'how much do we assimilate?' Given all of these recent expansions some of these systems might be in an assimilation phase right now." 

Breaking Market Boundaries
Allan Baumgarten, a healthcare sector analyst based in Minnesota, says we can expect to see more mergers and acquisitions that transcend geographic boundaries and business models.

"We are seeing more examples of mergers that go outside of traditional market boundaries and mergers that blur traditional distinctions between investor-owned hospital systems and community owned nonprofit systems," he says.


Hospital Consolidation Explained in One M&A Deal


 

 

A prime example, Baumgarten says, is the Duke-LifePoint joint venture. A Tennessee-based for-profit hospital chain and a North Carolina-based academic medical center have teamed up to operate hospitals in four states, including the Upper Peninsula of Michigan.

"Those are examples of crossing traditional geographic boundaries and some are examples of blurring the lines between for-profit and not-for-profit," Baumgarten says.

Strategic alliances are also becoming more popular as health systems look for clinical expertise and expanded referral regions.

"The Cleveland Clinic has one venture with Community Health Systems, and then a broader venture with suburban community hospitals in places like Chicago where they are basically selling their cardiology expertise," Baumgarten says.

"Mayo is expanding its Mayo Clinic Care Network and they are up to about 25 hospitals now, mostly in mid-sized markets like Lansing, MI, and Grand Forks, ND, where they are sharing a broader range of specialty expertise and more generalized expertise," he says.

"If you are a hospital that is getting dinged by Medicare for too many readmissions, Mayo Clinic is happy to consult with you on strategies for reducing readmissions."

In return, Mayo enlarges its referral base.

"So, at a certain point the hospital in Grand Forks is going to say, 'This patient requires very specialized care so we are going to refer him to Rochester,' or the hospital in Lansing is going to refer them to Rochester," Baumgarten says.

"A secondary goal of the Mayo strategy is to block out local competitors, either who might want to take those same referrals of high-end cases, or who might want to make acquisitions of those hospitals in order to cement their referral base and broaden their geographic reach."

"So Mayo Clinic, without spending much of its own capital, is blocking out local competitors and generating additional referrals to come to Rochester."

In the coming years, Baumgarten says he expects to see continued consolidation in the healthcare sector, with many sorts of nuanced variations.

"I see traditional M&A continuing. I see these variations on traditional M&A's going beyond traditional boundaries, the blending of for-profit and nonprofit, and I see a lot of strategic affiliation activity going on. People are looking for ways that they can stay on their own."

Powell agrees, but says he's not sure if the move towards consolidations hasn't slowed of late.

"The outlook for 2015 is cloudy," Powell says. "In 2014 there was a forecast of a lot of M&A activity associated with the ACA. Those factors persist, but there wasn't that most M&A activities. There were other partnerships that are not M&As. In 2015 many of the factors that drove M&A's in 2013 still exist. In light of what happened in 2014 my forecast for 2015 is uncertain."

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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