Two major M&A reports last week showed similar results in terms of numbers, and have sparked considerable commentary from industry experts on what to expect going forward.
Kaufman Hall released the results of its First Quarter 2015 Hospital Merger & Acquisitions analysis. PricewaterhouseCoopers (PwC) also released its Q1 Health Services Deals Insights report. Both the Kaufman Hall analysis and the PwC report identified 23 Q1 hospital transactions in the first quarter of 2015. According to Kaufman Hall, there were 27 transactions recorded in the first quarter of 2014. The PwC report says there were 25.
What were the big take-aways from these two reports—and what do analysts have to say?
What to know from the Kaufman analysis
- There was continued variety in form and structure of this year's transactions.
- The transactions occurred across a broad spectrum of acute-care settings, including not-for-profit, for-profit, rural, urban and academic health centers.
- Eight of the 23 transactions (35%) involved acquisitions by for-profits; this percentage is somewhat higher than in recent quarters.
- The total operating revenue of the acquired organizations was more than $4.8 billion.
- The largest deal announced was the Emory Healthcare/WellStar Health System merger.
What to know from the PwC report
"The shift from traditional mergers and acquisitions to affiliations, joint ventures and partnerships continues," the report says. "There has also been a recent trend of for-profits and not-for-profits coming together as certain for-profits evaluate their current portfolios and determine the markets in which they want to devote resources."
So, what's next?
"We expect that healthcare provider organizations will continue to consolidate as they seek the size, scale, quality and efficiencies needed to meet evolving payer and purchaser demands and to manage patients under risk-bearing and other value-based arrangements," said Kit Kamholz, Managing Director, Kaufman Hall. "We also expect to see more transactions in which successful and financially-strong organizations combine with one another to create new entities designed to have the multiple capabilities required by the emerging value-based healthcare system."
"The deals within the health services sector will continue to become larger and more complex," Brett Hickman, partner and U.S. healthcare deals leader at PwC said. "We will see more 'convergence' deals between providers-payers, payers-pharma and pharma-providers, in addition to the disruptive deals new entrants will be making with traditional healthcare services and product companies."
What other industry leaders are saying:
Rob Fuller, attorney at Nelson Hardiman and former hospital COO who advises healthcare clients on hospital management: "We are seeing a noticeable uptick in both horizontal and vertical deals, and there is little doubt the ACA is the driving force. Hospitals are under pressure to meet population health goals and to better control out-of-hospital care, and there is economic pressure to spread the massive IT investment requirements over more beds and more levels of care."
Joe Lupica, Chairman at Newpoint Healthcare Advisors: "I think we'll see a big change with respect to rural hospitals. Mergers and acquisitions will no longer be driven by a search for rescue. Instead, they'll be driven by the search for a combination that will achieve excellence and allow a network to expand its portfolio of covered lives, and therefore spread risks and perform better."
Roger Strode, partner and health care business lawyer at Foley & Lardner LLP: "Larger, for-profit operators like HCA, Tenet Health and Community Health Systems are likely to continue looking for targets that fill out existing markets or provide opportunities to enter new ones. For example, CHS just announced the acquisition of a controlling interest in IU Health LaPorte, in Northern Indiana. Tenet announced a joint venture with Dignity which will, in turn, acquire Carondelet's assets in Tucson and Nogales, Arizona."
"Expect antitrust enforcement agencies to continue scrutinizing transactions between hospitals and healthcare systems, as well as those involving physicians," Strode said. "The Federal Trade Commission and the Department of Justice have had significant success thwarting mergers in places like Boise Idaho, Toledo Ohio, Rockford Illinois and Albany Georgia. So long as they continue to have this success they will continue to attack transactions they believe are anti-competitive."