CFO Alert: Hospital Mergers and Acquisitions Just Ahead

Karen Minich-Pourshadi, May 10, 2010

Several months back I spoke to Steve Filton, the CFO at for-profit hospital company Universal Health Services in King of Prussia, PA, about the likelihood of seeing more mergers and acquisitions (M&As) of hospitals in the coming year. At the time, he said that since summer 2008 UHS speculated that there would be a shakeout among the nonprofit providers and that many of them may look to merge or sell.

At the same time I was doing research for an article in the May edition of HealthLeaders magazine, there was some discussion around the halls at HealthLeaders Media about the speed with which these M&As would take place and whether, until the recession lifted more, there would be much activity at all.

I'm no prognosticator, but I do spend a lot of time speaking to CFOs and the impression I was getting was one of openness toward the idea of consolidation. Thus, I made the case with my colleagues that there would be a lot of consolidation in the next two years—and the for-profits would be the ones to watch as they would use this financial maelstrom as an opportunity to expand. Not everyone agreed with me, which is to be expected in a room filled with educated healthcare writers, but it looks like Moody's Investors Service may be siding with me on this one.

Last week Moody's released a special comment, "For-profit investment in not-for-profit hospitals signals more consolidation ahead". In it they note, "The for-profits represent potential new partners capable of injecting much-needed capital for modernization and expansion. However, only those capable of attracting for-profit partners will benefit—the remaining independent not-for-profits may face operating challenges and increased competition from their newly capitalized competitors. The net effect is likely to be an increased rate of mergers of not-for-profits with both other not-for-profits as well as for-profit firms."

The comment goes on to say that the possible purchases by for-profit entities of two sizable nonprofit healthcare systems in separate deals may signal a significant shift in the hospital industry toward increased competition and consolidation, placing downward credit pressure on less-competitive systems.

"If finalized, the sale of Detroit Medical Center and Boston's Caritas Christi may be the start of a new wave of acquisitions by for-profits," said Moody's Vice President and Senior Analyst Brad E. Spielman in the release. "They would also place additional stress on the remaining not-for-profits, creating an even greater need for sound management and capital strategies to compete in markets favoring larger hospital systems and chains."

Why merge?
What I find fascinating is the rationale for why hospitals want to consolidate. In the past, the main reason was generally to gain market share or to expand their offering. Now the main reason is just as likely to be economies of scale and better access to capital or out-and-out survival.

Moody's says that two of the reasons for consolidation stem from the reduced access to capital markets and deferral of needed investment. Over the last couple of years, few facilities ventured into construction projects to grow their facilities, and the cost of medical devices and mandated, costly information technology systems continues to increase the hospitals' demand for new capital investment within the industry.

"Hospitals with a strong balance sheet may consider consolidating with other facilities. There are plenty of benefits to doing so," says Mark Reiboldt, vice president of Coker Capital Advisors in Alpharetta, GA. Coker Capital is affiliated with Coker Group, a national healthcare consulting firm—and they felt so strongly that the M&A situation was about to expand that they launched a division in the midst of a recession to address the potential.

Reiboldt says if a facility was able to make it through the roughest part of this recession and they came out looking "relatively good" to investors—after all nearly every hospital took a hit to their credit rating, lost some money in the bond market, and had a few scary days where days cash on hand got a bit too low—they look pretty good from a financial standpoint.

Karen Minich-Pourshadi Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media. Twitter
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