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Hospital M&As Continue Apace in 2011

 |  By John Commins  
   December 14, 2011

Hospital mergers and acquisitions continued at a robust pace in 2011 as providers used consolidation and market share to elbow out competitors, improve economies of scale, and leverage better prices with vendors and insurers.

The top 10 hospital mergers and acquisitions in 2011 were valued at $5.6 billion, up from $3.8 billion in 2010, according to Sanford Steever, editor of The Health Care M&A Information Source, published by Norwalk, CT-based Irving Levin Associates. Hospital M&A carried a total value of about $7.3 billion in 2011.

In all of healthcare, including hospitals, drug and device makers, distributors, and health insurance companies, mergers and acquisitions were valued at about $236 billion in 2011, one of the busiest years in a decade, and up from $206 billion in 2010, Steever says.

"Activity is up over the previous year, although there haven't been any huge portfolio deals," Steever told HealthLeaders Media. "There has been a lot of activity in the middle market."

The year's two biggest hospital deals—each valued at more than $1.4 billion—include Highmark's acquisition of the five-hospital West Penn Allegheny Health System, and HCA's purchase from the Colorado Health Foundation of its 40% interest in the seven-hospital HealthONE system.

Most of the structural factors that drove M&As in 2010 were still in play this year. "The healthcare delivery system…remains fragmented. Hospitals will combine to create economies of scale, perhaps create some synergies by combining operations, and increase their patient base," Steever says. "The countervailing force is that the delivery of healthcare is local. So, you want to focus on the local but provide as broad a network as you can. If you're a member of a multi-hospital system, you probably have a better bond rating and more clout with vendors and insurers."

Steever says the passage of the Patient Protection and Affordable Care Act continues to play a big role in accelerating hospital M&As. "Before the Affordable Care Act was passed, the rate of hospital deals was very low because people didn't know what the outcome was going to be and they didn't know what the reimbursement protocol was going to be," he says. "Because of that they couldn't accurately calculate revenue and cash flow, and that made it hard to place valuations on businesses they wanted to buy."

"Once ACA passed activity took off, although a lot of it is vertical. You have hospitals buying physician groups and IT businesses to put together the elements of an affordable care organization," he says.

Steever says he expects that hospital M&As will continue at a healthy clip in 2012. "The only thing that could slow it down is dithering over the election and the direction that healthcare might take depending upon who wins the White House," he says.

"If healthcare becomes a big issue in the campaign, it will slow down the deal-making," he says. "The partners will take longer in their due diligence because they will want try to accurately value the deal, so they will have to compare a scenario where the Affordable Care Act continues to kick in versus one where it gets stripped out. They will have to produce valuations that take both scenarios into account. That just slows down deal-making but it is not going to stop it, because the underlying structural reasons exist regardless of what happens with the government."

Steever does not believe that access to capital will be a problem for the larger, stronger providers that are in a position to gobble up smaller competitors. "The capital is there and it is going to be there for those hospitals because they are fairly large. The smaller entities are still going to experience difficulty accessing capital," he says.

"Private companies are sitting on a huge wad of cash. There are some publicly traded companies have great cash flow, and some of the Catholic not-for-profits have great bond ratings and great tradition of fiscal responsibility and uncanny management," he says. "Access to capital is not a brake on this activity."

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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