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Unlikely Pairings Ahead for 2012 Healthcare M&A

 |  By kminich-pourshadi@healthleadersmedia.com  
   January 30, 2012

When lanky Stan Laurel joined with pudgy Oliver Hardy, the pairing was visually odd but they fit together flawlessly. With nearly 80% of healthcare leaders pursuing or planning a merger or acquisition within the next year, according to a recent HealthLeaders Media survey, some of the outcomes will be as unlikely as Laurel and Hardy. But health leaders hope their combinations will work as well.

In our survey, which measures M&A interest among C-suite executives, 59% of respondents say they have a high interest in acquiring physician practices, but after that, the level of interest runs the gamut from acute care to hospice and rehabilitation centers.

M&A Drivers
It appears healthcare reform has tipped off more than the need for innovative, patient-centric, high-quality care; it has also sparked the torrent of M&A. Organizations are frenetically trying to develop fully integrated healthcare delivery networks in a very short period of time. And it's the need to integrate swiftly, along with the desire to shore up bottom lines drained by a slow economic recovery and reimbursement reductions, that will continue to drive the trend toward more industry consolidation, say industry experts.

Chicago-based Jones Lang LaSalle, a financial firm specializing in real estate, said in a statement that the growing sense of uncertainty from healthcare reform will only build in 2012, which will have an "increasingly significant impact on strategic business plans for healthcare systems, which will spill over into portfolio and cost rationalization activities and the allocation of capital at hospitals across the country."

Moreover, the uncertainty may encourage healthcare leaders to plan medical office and outpatient facilities that will help foster better physician alignment, the group says. "Health systems with the capacity and resources see this [expansion into outpatient] not only as a necessary action to adapt to healthcare reform but as a competitive advantage acting as a first mover," wrote the organization in a 2012 real estate assessment statement.

Mark Reiboldt, director of financial advisory services for Coker Capital Advisors, the investment banking arm of Alpharetta, GA-based Coker Group, agrees that healthcare industry M&A will continue in 2012, but he says the targets may be changing.

"[Healthcare leaders] realize the options: they can buy a competing hospital, but that requires hundreds of millions and has to be financed. … So, a lot of [leaders] are going back and looking at their strategic plans and realizing that buying a hospital isn't what's needed. Instead it's, 'How can we shore up our physician alignment and physician relations and fill the gaps and spend just a few million?'," he says.

So the hunt is on to find the right partners to create an integrated network without spending ungodly amounts of capital. This course of action actually began to take flight in 2011. There was a slew of merger and acquisition activity in rehabilitation facilities, laboratories, and managed care, according to Irving Levin Associates, which reported an 11% increase in the dollar value of M&A deals of this type.

"It's a lot more complex, more capital-intensive, and riskier to buy a big hospital," adds Reiboldt. "You run into more FTC ruling with anti-trust concerns. Conversely [organizations] can look at a smaller opportunity, like shoring up outpatient, and it undergoes less scrutiny and can be a significant, positive financial hit for them."

Where and Who to Watch
Although mergers and acquisitions have taken place nationwide over the last three years, the geography may narrow in 2012. Organizations in and around urban and metropolitan areas will most likely see the majority of activity, says Reiboldt. Deals will be concentrated in the Southeast, Northeast, Pacific Northwest, and parts of the Midwest.

"There are not a whole lot of incentives to do a deal in California, for instance, because it's so highly regulated versus in the Southeast," he says.

The relationship between physicians and hospitals is changing. "The burden of providing primary care has become so high on the physician practice … that it's limited physicians' alternatives. In order to survive [the practices] either close or work for the hospital," says Reiboldt.

On the part of hospitals and health systems, "There have been a lot of different [employment] models, but more and more we are seeing professional service agreements and less-restrictive joint ventures. I think we'll see even more of that as hospitals evolve away from the thinking that they have to be 'in charge' of everything," he says.

A Laurel and Hardy–type merger that healthcare leaders might see in 2012 is not-for-profits pairing with for-profits. For instance, a not-for-profit health system could join with a for-profit surgery center. "We're seeing a trend where for-profits are trying to get smarter and more targeted on where they are spending capital," Reiboldt says.

The for-profit giants are assessing whether they are spending resources in the right markets. "Organizations like HCA and HMA are stepping back and re-evaluating," says Reiboldt. "They are assessing where they need to be long-term and if there's anything they can do to enhance margin. Volume is critical but there's also only so much volume that [these pairings] can achieve. You still have to be efficient with the capital. So they'll do smarter deals in 2012, but there will still be a few high-profile ones."

M&A in 2012 will depend not only on the need to integrate but also access to capital, which remains challenging for some facilities. Which prompts the question: could healthcare see further investment by private equity firms? Reiboldt thinks it's unlikely.

Private equity investment was a trend in several merger and acquisition surveys in 2009 and 2010. Since then, Reiboldt says he's heard of numerous private equity sponsors interested in healthcare—but once these firms explore the landscape, they find "there's a significant amount of work, resources, expertise and focus involved." He adds that private equity firms that have pursued healthcare opportunities have opted to back experienced, innovative management teams rather than take control of the operation.

"[In 2012] everyone involved in these transactions will need to look at the synergistic value of these ventures. You may not make money on a [medical practice's] volume, for instance, but the more aligned the organizations are, the more likely the volume is to get pushed [to the other organization]," explains Reiboldt.

As you consider your partnership needs and M&A plans in 2012, don't shy away from unlikely pairings. They could be surprisingly complementary.

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