Hospital Consolidations at the Tipping Point

"The 'A' in M&A no longer stands for 'acquisition,'" says PwC's US health industry deals leader. "It stands for affiliations, associations, ACOs, [and] all sorts of complex types of partnerships."

Deal activity around mergers, acquisitions, and other consolidation in the healthcare sector increased 18.4% in 2014 when compared with the previous year, and totaled $61 billion, according to a report from PwC.

Brett Hickman, PwC's US health industry deals leader, says the long-term care/post-acute space led the way with a record 288 deals worth $29.2 billion in 2014. Hickman says grabbing a piece of the post-acute market makes sense for providers shifting towards value-based care, continuity of care, and population health.

"About 40% of the premium is spent on post-acute—everything from skilled nursing facilities to long-term and palliative care and to some extent, the medical homes," Hickman says. "You have this huge piece of business that nobody is managing and in many markets it is still a mom-and-pop industry. The consolidation of that subsector is happening."

"More importantly, the traditional provider community is saying, 'if we are going to be at risk we have to align or integrate post-acute into our continuum of care and control that 40% of the spend."

Hickman says long-term care facilities have become "the last bastion" in healthcare consolidation, and acquiring SNFs and other post-acute facilities provides hospitals with the means to better control and monitor patients once they are discharged from an acute setting.

"The biggest issue with post-acute is the lack of communication and coordination of those clinicians with the caregivers who are managing the overall premium dollar risk—the primary care physician, the specialists who are managing the disease," Hickman says. "Historically it's been a passing of the baton, and when the patient shows up back at the hospital or the ER we don't know about that. That is not population health. That has to be fixed."

"Hospitals are asking, 'how do we get them from a traditional inpatient setting into a SNF at the appropriate time because we are fully at risk now? We want to do it based on clinical decisions and manage the best outcome with a high quality organization that we have integrated outcomes and medical management with."

Behavioral Health
Behavioral health acquisitions and consolidations are also on the rise. The sector saw a 24% increase in deal volume in 2014. Hickman says that also meshes with the population health, value-driven model.

"If you think about certain diseases, diabetes for example, one of the big factors in patients becoming insulin-depending is depression," he says. "They don't take their medications or take care of themselves, so they end up becoming insulin-dependent. Clinicians have to treat the mental and emotional side as well as the physical side to ensure that the patient doesn't become insulin-dependent."

In the overall healthcare sector, Hickman says the consolidation trends with hospitals, health systems, physician groups, and even payers will continue, although they will morph into new and more complex configurations than traditional M&As.

"The 'A' in M&A no longer stands for 'acquisition,'" Hickman says. "It stands for affiliations, associations, ACOs, [and] all sorts of complex types of partnerships."

With hospital consolidation, Hickman says "we are at the tilting point."

"Over the past decade hospitals have built up an efficient delivery system and they have started to build capabilities around taking risk," he says. "The inflection point is around two things: One is truly moving into population health, from loosely managed sections of the population that could be by geography and disease, to wellness management. We are in the loosely managed environment now and moving into a more well-managed space, and how we control utilization as the right point of service. Hospitals are recognizing that they cannot measure average daily census or heads in beds."

"The other inflection point is that they are making the tough decisions around rationalizing the infrastructure," Hickman says.

Divestures, Regional Consolidations
"We are now finally seeing management in some of the consolidation, instead of us doing a normal synergy analysis where we looked at shared services, like back office, and billing and collection and certain service lines, people are now saying 'look at the market and show me where to put every program. And if we need to shut down places or beds or reconvert them, we are willing to do it.'"

Consolidation is expected to continue in the near term, but Hickman says there may come a time in the next five years or so when the movement will be toward divestiture.

"A lot of people have done deals for the wrong reasons or structured them inappropriately," he says. "You are going to see lots of divestitures of certain assets that may not be good core fits or [are] underperforming. We are going to see a lot of pickup in divestitures."

Once that is sorted out, Hickman says the healthcare sector could gravitate toward "massive regional consolidations."

"Right now we are seeing health systems becoming truly regional. We will see multistate large systems start moving into more regional hubs where quaternary care and community-based care is more appropriately coordinated, managed, and steered into much smaller narrow networks."