Tenet says Vanguard purchase will lead to more hospital deals

The hospital and outpatient center company says consolidation is needed to thrive under changes coming from the Affordable Care Act.

By — Posted July 9, 2013

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Tenet Healthcare Corp. is acquiring another for-profit hospital operator, Vanguard Health Systems, in a $4.3 billion deal that Tenet says signals a much more aggressive buying strategy, necessitated by a need to “compete effectively in a rapidly changing environment,” company CEO and President Trevor Fetter said in announcing the deal.

The combined company would own, or operate in joint ventures with nonprofit hospitals, 79 hospitals and 157 outpatient centers in 16 states, with 30 hospitals and 31 outpatient centers coming from Vanguard. In discussing the deal with stock analysts, Fetter also noted that Vanguard’s “expertise in developing its [accountable care organization] models and its successful clinical integration experience will also be important for our new and broader physician network.” The purchase, Fetter said, allows Tenet “to be in a better position to recruit, retain and align our physicians.”

More consolidations were predicted

The acquisition, which Fetter said had been in the works for months, was announced June 24. A few weeks earlier, PwC issued a report predicting that the Affordable Care Act, which goes into full effect on Jan. 1, 2014, would drive consolidation among hospitals. PwC based its prediction on the fact that in Massachusetts, whose health reform plan helped provide the basis for the ACA, one-third of the state’s 70 acute-care hospitals have merged, been acquired or partnered with another system since that plan went into effect in 2007. Among the agreements was Vanguard setting up joint-venture agreements with three hospitals in suburban Boston.

PwC said the deals in Massachusetts were driven by declining hospital margins and a shift in care models that put more emphasis on primary care. In discussing the Vanguard acquisition with stock analysts, Tenet executives cited similar conditions in the national marketplace brought by health reform.

Recently, most for-profit hospital acquisition activity has involved companies buying one nonprofit hospital or system at a time, and either converting it to a for-profit facility or setting up a joint venture to allow it to remain a nonprofit. Tenet said that although that’s a worthwhile strategy, it is slow going. Separate from Vanguard, Tenet is acquiring a California hospital, and the pace of the agreement means “it would take us until 2043 to acquire 30 additional hospitals.”

Fetter said the Vanguard deal “is signaling a new appetite for growth through acquisition,” but he did not identify any future targets.

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