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Looking at Hospital M&A Activity in the Value-Based Care World

November 11, 2016
by Heather Landi
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According to the latest analysis by the Skokie, Ill.-based advisory company Kaufman, Hall and Associates, hospital and health system mergers and acquisitions in 2016 are on pace to match the large-scale level of M&A activity in 2015.

Kaufman Hall identified 77 transactions announced in the first three quarters of 2016, compared with 78 transactions announced in the same period in 2015. Hospital and health system transactions have been on the rise in recent years as organizations have attempted to enhance market presence, achieve economies of scale, and attain capabilities for value-based healthcare.

“It is not surprising that hospital transactions are continuing at this volume,” Kit Kamholz, managing director, Kaufman Hall, said. “Payers and purchasers are intensifying their demands across multiple dimensions of value, and few organizations can rely solely on internal resources to meet those demands.”

According to Kaufman Hall’s analysis, two of the announced transactions involved organizations with more than $1 billion in revenue—a $1.25 billion real estate transaction with a minority investment in Steward Health Care System by Medical Properties Trust, Inc., and NYU Langone Medical Center’s proposed partnership with Winthrop-University Hospital.

Kaufman Hall’s analysis also found that Texas was the most active state with three announced transactions (New York, Wisconsin, Georgia, and New Jersey all had two transactions). Additionally, 10 of the transactions (40 percent) involved for-profit acquirers. In eight of the announced transactions, an academic health system was the acquiring organization; in six of those transactions, the organization to be acquired was a non-academic institution. And, eight additional transactions involved less than fully integrated partnerships: six management services agreements and two real estate transactions.

Recently, Healthcare Informatics Assistant Editor Heather Landi spoke with Kamholz to discuss the broader implications of hospital and health system consolidation. Below are excerpts from that interview.

What are some of the overall trends and factors that continue to drive hospital merger and acquisition activity?

We’ve seen a heightened level of M&A activity between hospitals and health systems over the last five or six years. And in the last two years, we anticipate topping over 100 transactions in each of those years. I think the current run rate has just over 100 transactions in 2016. There are a variety of factors that are leading that. I would break it into four categories of things that are driving the amount of M&A activity. The first I’ll start with is there are organizations that are experiencing some level of distress, whether that be financial distress, or clinical distress, or some other level of distress, and those tend to be smaller facilities and those facilities continue to seek out potential partners as a backstop for their level of distress, so that is one piece of the market. The second pieced of the market is strong community-based hospitals that are seeking a partner for two reasons—one is they are looking at the transition from fee-for-service to value-based healthcare and the requirements to be successful under a value-based environment and realizing that they just do not have the intellectual or financial capacity to ultimately get there and be successful in the marketplace. And, then we combine that the idea that the underlying cost structure of a hospital is becoming an incredibly important element in long-term success under the value-based environment, being the low-cost provider. And certain strong players have felt that they’ve done as much as they could on their own relative to their cost structure and they are looking at potential partnerships as a way to further reduce their cost structure, so those two categories I’d put into play that are relevant for strong organizations.

Kit Kamholz

And then the final category is we have a whole host of large, multi-hospital health systems that are rationalizing their portfolio of hospitals, so Community Health Systems, Quorum, the Catholic providers, where they are deciding which markets they can be successful in in the long-term and which ones they cannot be and divesting the ones that they cannot be. So that’s the final piece that is driving the overall amount of volume in M&A transactions.

Drilling down into the ongoing movement toward value-based care and value-based payment models, how do you see that specifically impacting the merger and acquisition activity?

As we think about the characteristics that are necessary for a healthcare organization to be successful in a value-based environment, we think that there is probably eight or nine things that are going to be critically important—clinical and physician alignment; quality and safety; care management capability; clinical and business intelligence; networked development configuration; financial strength; purchaser relationships; customer service and engagement; leadership and governance.

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