Hospital mergers, acquisitions expected to maintain quick pace

The activity is being fueled in part by nontraditional buyers entering the scene.

By — Posted April 2, 2012

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When a physician sells a practice to a hospital or becomes employed, he or she stands a good chance of getting a new boss.

Hospitals are merging or being bought and sold at an increasing rate, according to recent reports. Data released Feb. 28 by Irving Levin Associates indicated that 86 hospital merger or acquisition deals were done in 2011, the highest number in the past decade. Seventy-five happened in 2010 and 51 occurred in 2009. A report issued March 8 by Moody’s Investors Service said these trends will continue but did not predict how many mergers would take place.

Consultants said doctors should think about the possibility of a hospital merger or acquisition before they sign on with one.

“Physicians need to be looking with a critical eye,” said Lisa Bielamowicz, MD, managing director and national physician practice leader with the Advisory Board Co., a health care consultancy based in Washington. “Is the health system that I am aligning with going to be able to ensure my safety and my security across the next decade?”

The Moody’s report said these trends are driven by decreases in reimbursement, leading hospitals to seek economies of scale. Credit is still tight because of the ongoing effects of the 2007-09 recession, and hospitals are looking for added leverage in contract negotiations.

Health system reform has various incentives, such as those related to reducing readmission rates and establishing an accountable care organization, but qualifying for them requires closer links to other parts of the medical care chain.

Hospitals also may be looking for ways to deal with the burden of defined benefit pension plans. Moody’s has put out a series of reports noting that nonprofit hospitals are at risk of having their debt downgraded because of financial problems.

“Falling discount rates, lackluster long-term investment returns and federal requirements to be 80% funded have created overwhelming pension obligations,” the Moody’s report said.

In addition, hospitals are attracting money from health insurers and private equity firms that have not recently owned these facilities. “Everybody in the health care field is thinking how they can position themselves and who they want to be aligned with,” said Melinda Hatton, general counsel with the American Hospital Assn.

Highmark, a health insurer based in Pittsburgh, bought West Penn Allegheny Health System in June 2011 and said it is likely to buy more hospitals and practices in the area. Private-equity firm Cerberus Capital Management, which once owned Chrysler, bought the six-hospital Caritas Christi Health Care System, of Boston, in 2010, renamed it Steward Health Care System and turned it into a for-profit operation. Ascension Health, the nation’s largest hospital system affiliated with the Roman Catholic Church, struck up a partnership with private-equity firm Oak Hill Ventures to acquire distressed Catholic hospitals so they could stay open and keep their religious affiliation.

“I think private equity sees a market that is undergoing huge amounts of change and disruption and will very likely look very different than it does today,” Dr. Bielamowicz said. “The investment is high-risk but potentially high-reward as well.”

The activity could mean that when a physician’s employment contract is up in two or three years, he or she may be negotiating with a different company than the one they did when they first signed on. Experts say there most likely will be enough time to consider options.

“Most hospital mergers are slow-moving deals,” Dr. Bielamowicz said. “The physician contract should continue to be honored, and the physician can decide whether to stay or go.”

Experts say the merger-and-acquisition trends among hospitals are unlikely to dampen the enthusiasm most have for buying medical practices and employing physicians.

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