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Hospital Survival May Depend on Mergers

 |  By kminich-pourshadi@healthleadersmedia.com  
   October 11, 2010

Christopher Columbus was more than an explorer, he was a savvy financier (and to some a conquistador). He knew that his exploits required more funds than he could come up with on his own, so he had no choice but to negotiate the financial backing of Spanish Queen Isabella I. Three ships and a long journey across the ocean later, Columbus reached America.

Columbus’ willingness to partner for financial gain is a fascinating example which, perhaps, more hospitals should consider mirroring for their own success. That’s an idea I’ve been pondering since reading two recent reports by Standard and Poor’s and watching more than a few hospital mergers. Before the great recession and the enactment of the Patient Protection Act none of this would probably have crossed my mind, nor the minds of most CFOs, however these days, partnerships and mergers for future growth and survival just seem to make sense.

Here’s what got me thinking that perhaps it’s time for more hospitals to merge, or at least partner with others. First, there’s Michigan. The crash of the auto industry put a lot of folks in Detroit out of work; however the fallout was further reaching than one city, sister cities in Michigan also struggled. Financial strain took a toll on business and towns across the state and more than a few hospitals found themselves cutting to keep the bottom line in the black. When there was no more low hanging fruit (a.k.a., quick-fix cuts) it was time to look for another pathway to bolster the financials.

Lo and behold, in September, Central Michigan Community Hospital announced it will be merging with McLaren Health Care. The McLaren system consists of eight regional hospitals across the state and serves 29 counties. The merger gives CMCH access to more than 10,000 associated physicians, technological and medical advancements, and increased capital for investments. Sounds like a smart way to grow and gain financial stability.

Interestingly that same month, Traverse City, Mich.-based Munson Healthcare announced it would not move forward with a merger with Grand Rapids, Mich.-based Spectrum Health, noting that they preferred to pursue an affiliation with another health system. Apparently the University of Michigan Health Systems approached Munson Healthcare about a possible affiliation as an alternative to a merger. Yet another smart path for a financial boost.

Then at the onset of October, Saint Joseph Mercy Health System in Ann Arbor, Mich., and IHA, one of the largest physician group practices in the Ann Arbor area, announced a merger. The intent of the merger is to create an integrated health network and help both providers prepare for changes in healthcare delivery brought on by national health reform. Looks to be a good way to expand the physician network and ensure more stability for both the hospital and the group practice.

Michigan is a good example of what many hospitals and health systems are starting to do across the country—hey are coupling in order to deal with uncertainty. But there was more to my ponderings on whether hospitals should pursue a pairing.

While following a spate of hospital and health system mergers, last week I read two S&P reports that piqued my interest. The first was Volatile Times Continue for Speculative-Grade Health Care Providers. In it, the ratings service looked at how nonprofit hospitals and health systems on the lower end of the rating spectrum are doing. Their analysis of the current healthcare situation is that these lower-rated hospitals and health systems face a multitude of challenges that are resulting in a ”disproportionately larger percentage of downward rating actions within the speculative-grade category and a greater number of providers joining the speculative-grade ranks.”

While overall S&P believes that there is a return to stability for the healthcare sector, the report notes that the downward pull on the speculative-grade rating trend will likely continue, at least in the immediate future. Some of the challenges dogging these lower-rated providers include

  • operating losses
  • weak demographics
  • limited business position
  • balance sheet metrics characterized by high debt and low liquidity
  • aging facilities requiring high capital spending to fix (which some providers can’t afford)

“Industrywide, we believe that financial and operational difficulties tend to be more problematic for lower-rated providers because those providers are more likely to lack the operational flexibility and balance sheet cushion needed to withstand additional strain,” the report states.

Moreover the S&P report notes that the instability will likely prevail with this group as they contend with softer volumes, potential state Medicaid funding and eligibility changes, high debt and charity care, technology investment and facility upkeep. 

S&P believes that the Medicare rates will likely cause lower total inpatient payments for acute care hospitals in 2011—which is a fair assumption. Moreover, the uncertainty surrounding the Patient Protection and Affordable Care Act’s as yet unwritten rules are giving them cause for pause. “We believe lower-rated providers may face greater rating volatility because, in our experience, they generally have thinner margins and weaker balance sheets and as such are less capable of absorbing additional strain,” they note in the report.

Sounds like S&P thinks it will be a tough time to be a lower-rated hospital, many of which are small, stand alone hospitals.

In the second S&P report, U.S. Not-For-Profit Small Hospitals Move Toward Stability, the rating service reviewed how the operating and balance sheet metrics for U.S. not-for-profit small hospitals showed signs of improvement in fiscal 2009. “We believe that the sector's response to the recession, which focused on tightening expenses and strengthening service lines, have helped small hospitals improve operating margins,” the report notes.

It’s potentially promising that the smaller hospitals are managing to find the kinds of savings and efficiencies needed to pull themselves up, but it’s also what makes this a great time for many of these smaller hospitals to join together—either partner or merge—with other hospitals or systems. It’s a great time to build upon the strength that’s blossoming at some facilities.

Generally, I’m not an advocate for giving up independence, but this recession has made one thing clear to me—the expression there’s safety in numbers is true. When Columbus sailed the ocean, he didn’t do it alone, he partnered with a strong backer and then took multiple ships with him. In doing so, he was able to achieve his goals.

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