In the decade since the zenith of massive hospital acquisitions such as Columbia/HCA and Tenet Health, the hospital world has changed; and indeed, the atmosphere around mergers and acquisitions has changed significantly, say hospital executives and industry experts. As a result, the hospital M&A landscape has shifted, with most M&A activity moving back towards the regional and local levels.
These days, the typical hospital merger is of the one-on-one variety, driven by local considerations and satisfying local needs. That's exactly the case with St. Vincent's Hospital in Birmingham, Ala. The 360-bed Catholic community hospital merged with Eastern Health System, another Birmingham health system, with its one mid-sized community hospital and two small rural hospitals, creating the 700-bed St. Vincent's Health System on July 1 of this year.
St. Vincent's Hospital executives had already been overseeing Eastern's finances in the 17 months before the formal merger, helping to reduce that health system's debt load, and making it a more financially viable partner organization prior to the merger itself. What's more, in essentially acquiring Eastern Health System, St. Vincent's executives brought the three hospitals under the umbrella of St. Vincent's strong parent health system, the St. Louis-based Ascension Health, the country's largest Catholic health system, with over 67 hospitals (prior to this merger) in 20 states.
"Mergers nowadays are definitely local market-driven, not even regional market-driven; and for not-for-profit hospitals, they're mission-driven," confirms Jeff Rooney, executive vice president and CFO of St. Vincent's Health System. "We view our hospitals as a ministry, and we view the merger as expanding our ministry in the market."
One point on which Rooney and numerous other healthcare executives and industry experts agree is that the old days of vast national ambitions and massive acquisitions are over.
"I think that by and large, hospital mergers still have a black eye in the healthcare community, because of the mergers that took place and cost money and were later unwound, with resulting enmity and waste," says Jeffrey Bauer, Ph.D., a healthcare economist and futurist at Dallas-based ACS Healthcare Services. "In fact," says the Chicago-based Bauer, "There have been some phenomenally disastrous hospital mergers in the past decade."
Bauer also says increased antitrust scrutiny by the federal government has given many hospital executives pause.
A different operation
Another element is the recent change in operating environment for small, rural hospitals.
Joseph Corfits, senior vice president and CFO of Iowa Health-Des Moines, the largest component of the Iowa Health System, predicts that there should in fact be fewer acquisitions of small hospitals, "in part due to the success of the (federal) Critical Access Hospital (CAH) program," created in 1997 as part of the Balanced Budget Act, and which was intended to help create incentives to develop local integrated healthcare delivery systems. "In fact, he notes, "many of our critical access hospitals are expanding their own operations due to the infusion of capital" made possible by the CAH program.
Nonetheless, some of the same classic reasons for mergers and acquisitions continue to fuel a stable level of activity, says Joshua Nemzoff, CEO of Nemzoff & Company, LLC, a New Hope, Pa.-based consulting firm specializing in mergers and acquisitions in the not-for-profit hospital industry.
"You continue to see a lot of hospitals that are getting into financial difficulties; and depending on where they are, they start to call consultants about staffing and other issues." Ultimately, some of these hospitals will find themselves on the verge of failing, Nemzoff says. "And the only time hospitals sell is when they get into enormous trouble and they're looking at failing. When a hospital's debt service margin falls below about 1.5, and when cash in hand drops below 60 days, and their EBDIT margin drops below 5 percent, it may be time," he says.
Of course, Nemzoff notes, such hospitals are really positioning themselves to be acquired, not to merge in the sense of two equal parties. But acquisitions of struggling hospitals, he adds, continue to be a staple of M&A activity in the hospital sector.
Another factor that will continue to prompt local-market merger activity, says Iowa Health's Corfits, is that, "As payers combine in fragmented provider markets, providers may combine to improve negotiation with payers" in terms of managed care contracting. What's more, he says, "As payers become more national in scope, the provider view of what constitutes a 'region' may become larger."
According to Sanford Stever — editor of Health Care M&A Monthly, a publication of Irving Levin Associates, Inc., the Norwalk, Conn.-based firm that tracks M&A across healthcare and other industries — other motivations include the fact that, "The delivery system is still fragmented; there's a need to spread managed care risk over a larger base; there's a need to acquire capital, especially for information technology; and you can get better deals for group purchasing" through aggregation.
What's it worth?
In the current landscape, what should CFOs look for in terms of criteria to guide them as they contemplate a possible merger or acquisition?