Hospitals

Why to expect more hospital M&A

A couple weeks ago, Mayo Clinic was doing it while Cleveland Clinic was talking about it, but both top-tier hospital systems were focused on the same thing: acquisitions. Hospital mergers and acquisitions activity figures should pick up in the coming years for a variety of factors, but the trend is primarily driven by a singular […]

A couple weeks ago, Mayo Clinic was doing it while Cleveland Clinic was talking about it, but both top-tier hospital systems were focused on the same thing: acquisitions.

Hospital mergers and acquisitions activity figures should pick up in the coming years for a variety of factors, but the trend is primarily driven by a singular reality: it generally makes financial sense for all parties involved. And with $500 billion in Medicare reimbursement cuts from federal health reform hanging over hospitals’ heads, the wave of hospital M&A deals should only continue.

“M&A is fairly robust for hospitals and has been since the passage of [health reform],” said Sanford Steever, editor with health research company Irving Levin Associates.

For acquiring hospitals, M&A deals can expand geographic reach, add new service lines and recruit new talent. Plus, acquisitions can help big hospitals become bigger, and boost market share and provide more clout when negotiating prices with private insurers.

For hospitals or physician practices that get acquired, the deals can bring financial stability, greater operating efficiency and a little insulation against escalating costs and reimbursement pressures.

M&A deals are generally good for financial backers of acquired hospitals, too. Being acquired can reduce financial risk for a smaller hospital and lead to stronger and more stable bond ratings, according to Moodys Investors Service.

Already, the hospital M&A market is heating up. Last year brought 86 hospital M&A deals, the most in at least a decade, according to Levin Associates. The largest deal of the year happened in Pittsburgh, with Highmark’s nearly $1.5 billion acquisition of West Penn Allegheny Health System.

And elite health systems like Cleveland Clinic may help push those M&A numbers higher in the coming years. In his annual “State of the Clinic” address, CEO Toby Cosgrove stressed the importance of acquisitions to the health system’s future.

“We’ve had a number of people from around the country approach us about some sort of merger and acquisition,” Cosgrove said. “We are carefully looking at each one of those and will continue to do so going into the future.”

For hospitals, the future could hold a threat of “merge or die.” Some have predicted that by 2020, one-third of the hospitals that stand today will either be closed or reorganized into different types of health providers.

So, is hospital M&A a great deal for everyone? Not exactly. Evidence suggests that consumers often suffer from higher prices after hospitals consolidate and use their market power to play hard ball when negotiating rates with insurers. (Insurers and employers then pass off those higher rates to consumers, of course.)

The Federal Trade Commission has in recent years sought to block several mergers that it said would harm competition, and federal regulators figure to stay busy. “If you want to do something about controlling costs in healthcare, you have to challenge anticompetitive hospital mergers,” FTC Chairman Jon Liebowitz recently told The Wall Street Journal.

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