Pace of Hospital M&As Likely to Accelerate

Expect the wave of hospital mergers and acquisitions to grow, says the author of a new report from Moody's Investor Service.

The only thing that might slow the accelerating pace of M&As of not-for-profit hospitals and health systems would be if the U.S. Supreme Court overturns the individual mandate in the Affordable Care Act.

And even if the mandate is scuttled, Lisa Goldstein, associate managing director at Moody's, says that will create only a temporary "stumbling block" in the consolidations, because other financial pressures will remain in play regardless of the high court's ruling.

"If the Supreme Court rules that the individual mandate is indeed unconstitutional, then some hospitals or health systems may take a pause and ask, 'Do we need to grow? Do we need to join a system?'" Goldstein tells HealthLeaders Media. "But we believe that would be a brief pause because the main driver of the consolidation wave is overall payment reform, revenue reductions, and reimbursement pressures. Whether or not the mandate stands, the reimbursement pressure is going to continue."

Goldstein, the author of a new Moody's report—New Forces Driving Rise in Not-for-Profit Hospital Consolidation—says many of the market forces that were in play in the not-for-profit consolidation boom of 12 years ago are still in play now. Those forces include improving market share to better leverage payers, risk sharing, economy of scale, access to capital and technology, expansion of service lines, and improved recruiting.

However, Goldstein says, unlike 12 years ago the current push is fueled by new variables that include the stagnant economy, spiraling healthcare costs, and unfunded pensions. What's more, this latest wave of consolidations is being initiated by a new group of investors that mostly weren't in the picture a dozen years ago, including insurance companies, for-profit hospital companies, and private equity firms.

"This country was founded on not-for-profit healthcare. Historically hospitals have been roughly 85% not-for-profit or government owned, and 15% for-profit," Goldstein says. "It is not balanced at all, but we may see some movement in those numbers. The for-profits are aggressive. Their strategies are all about growth and returning shareholder value, and you do that through growth."

After bunkering for years in a stagnant economy, Goldstein says for-profit entities are looking for investments. "They have resources," she says. "Many of the for-profits held their cash on the sidelines during the recession and the credit crisis, and now they are ready to put it to work. We could see some increased for-profit activity."

Goldstein says private equity firms such as Cerberus Capital Management have acquired hospitals because they see the successes of for-profit systems such as HCA, Vanguard Health Systems, and Tenet Healthcare Corp. "They see the margins the for-profits produce, which are very strong, and they say, 'We need to put our money to work. If these guys are getting a good return, we're going to do it too,'" she says. "Typically, the for-profits run very lean operations."

Goldstein says these for-profit players do not appear to be overly concerned with expected thinning reimbursements from government and private payers, in part because the for-profits can better control their patient mix.

"As a for-profit, they don't necessarily need to treat all comers unless it's through the emergency room," she says. "So they may be more selective about taking the private-pay commercially insured folks, and maybe less the Medicaid and Medicare folks. So their payer mixes differ widely from the not-for-profits. Whether or not a hospital is better managed by a for-profit or a not-for-profit, we cannot say. It's a different mission and different strategies."

Another factor fueling the consolidations is the expected diminishing reimbursement from private payers. A dozen years ago, providers could cost-shift low Medicare and Medicaid reimbursements to the private plans. Not anymore.

Rather than relying on pure market share, she says, providers will increasingly have to demonstrate to private payers and government programs that they can provide high-quality care at a lower cost. The move toward outcomes and evidence-based medicine has also been a key driver in physician alignment and employment models for many health systems.

"Size and scale remain important drivers to today's consolidation strategies, but the opportunities to gain leverage and higher rates from commercial payers are quickly dissipating," she says. "Size and scale are now an important means to gaining greater efficiencies and driving waste and costs out of the delivery system."

With the continued consolidation, hospitals that are left behind to stand alone will face significant challenges, Goldstein says. "Hospitals close every year, and we would expect closures to continue," she says. "Our thinking is that there will still be independent hospitals, but the smaller of those hospitals may evaluate their service offerings, may downsize their footprints. So instead of operating a 100-bed hospital, maybe they go to, say, 60 beds and more toward ambulatory services. So the service line and the modality, more on the outpatient, may change."