Hospital Deals are Part of Growing Consolidation Trend, Say Analysts

Cheryl Clark, March 26, 2010

It's unclear whether the two deals in the past week in which for-profit entities purchased nonprofit hospitals are a direct reaction to health reform that was passed this week.

But several analysts say they expect similar deals in coming months as hospitals try to position themselves better to negotiate for insurance contracts and attract physicians in a difficult economic climate.

To succeed in a health reform world, hospitals will need to make investments in quality, safety, and electronic records, and work harder for effective and lucrative partnerships with their physicians.

"There has been more consolidation of managed care and commercial health insurers, thereby giving insurers that much more leverage in the industry," says Mark Pascaris, an assistant vice president for Moody's in Chicago. "That is a reason that may contribute to consolidation among hospitals."

Last week, Detroit Medical Center, which owns 10 hospitals or specialty centers and a laboratory in Michigan, announced it has signed a letter of intent to pave the way for its purchase 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 bonds.

The deal is contingent on approval, but the hospitals would be owned by Vanguard subsidiary, VHS Michigan.

And Thursday, New York private equity firm Cerberus Capital Management, which has no hospital experience, announced plans to acquire Caritas Christi Health Care in Massachusetts for $830 million. Caritas runs six Catholic hospitals in the Boston area.

"This would be the largest switch of hospital assets from nonprofit to for-profit status that the state has seen," noted Paul Levy, CEO of Beth Israel Deaconess Medical Center in Boston in his blog "Running A Hospital."

Pascaris expects consolidation trends to continue. "There are a lot of capital needs out there. A lot of smaller community hospitals have aging plants that need significant rehab or new tower."

Moody's Weekly Credit Outlook Monday said the pressure is on some nonprofit hospitals.

"Among not-for-profit hospitals and health systems, many stand-alone community hospitals will have difficulties dealing with future constraints on reimbursement from payers and demands to operate more efficiently," the Outlook said. "Consequently, we expect healthcare reform to contribute to additional consolidation in the industry as many not-for-profit hospitals will struggle with these challenges."

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