Several deal-tracking companies reported an increase in hospital transactions in the first quarter of 2018—from 25 to 36 transactions depending on the tracking company. All noted it’s the second highest number of quarterly transactions in the last 10 years.
- For-profit divestures
- Mega mergers worth more than $1 billion
- Announced transactions involving teaching hospitals and academic medical centers
Moody’s Investors Service noted that industry pressures will continue to drive consolidation in the hospital industry. Increasing payment issues and “ongoing wage and supply cost inflation will pressure margins for hospitals that are not able to gain operating efficiencies,” Moody’s analysts’ wrote in an April 10 report.
Revenue pressures include rising bad debt, as patients face higher out-of-pocket payments, and payers increasingly encourage patients to seek care in lower-cost settings instead of hospitals. Additionally, state Medicaid programs are expected to seek ways to limit eligibility or reduce payments to providers. (“Hospital Deals Accelerate in 2018,” HFMA Weekly, April 20, 2018)
“Many smaller hospitals lack the capital to invest in new facilities to drive growth or make necessary investments in information technology and clinical systems that are required in order to operate efficiently and effectively in the current environment,” Moody’s wrote.
Smaller hospitals necessarily will look to larger organizations as capital partners, or they may choose to align with other hospitals. “They will need to do this in order to leverage purchasing and pricing power in negotiating with commercial payers in local markets,” Moody’s noted.
Experts Weigh In
A former director of the Medicare Payment Advisory Commission said recently at a conference that hospital and physician prices are related to increasing market concentration. He noted that while well-functioning markets can control costs and potentially improve quality, many U.S. markets don’t have that level of functioning even after many years of hospital concentration and increasing levels of vertical integration.
Hospital advocates have countered that a high level of consolidation is needed to provide the type of coordinated care that is increasingly sought by public and private payers. One healthcare executive noted that health care is consolidating to provide the scale that allows for improving care at a lower cost.
Congress has discussed possible federal responses to hospital merger and acquisition trends, including a reduction in Medicare payments to practices acquired by hospitals.
The merger trend also is affecting hospitals’ credit standing, according to a March 5 report by Moody’s. “Consolidation strategies may result in immediate improvement—or immediate decline—in credit quality, depending on the terms and materiality of the consolidation,” Moody’s wrote.
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