Bigger Hospitals Eye Acquisitions of Weakened Competitors

(MoneyWatch)  While the HCA hospital chain is rolling in clover, many other hospitals-especially not-for-profits-are having a hard time in this recession. Moody's Investors Service is maintaining its negative outlook for the not-for-profit sector, because of the weak economy, state and federal budget deficits, the decline in employer-sponsored insurance, and the high rate of unemployment. Medicare cuts are likely in the long run, according to the Moody's report, and increased federal funding of Medicaid is scheduled to end in December. Ailing hospitals that cut costs and laid off staff in 2009 will be hard-put to go further in that direction, Moody's points out.

Some observers say these hospitals may encounter even greater difficulties in making ends meet or borrowing money if health care reform fails. That's because they cannot count on the infusion of newly insured patients that would occur if the reforms went into effect. While that would not happen before 2013 or 2014 under the proposed legislation, the expectation of an increase in revenues probably could help these institutions garner much-needed financial aid.

Scenting blood, some larger, better capitalized healthcare systems are looking to fold in troubled competitors. Community Health Systems, Health Management Associates, and LifePoint Hospitals are all said to be interested in acquiring financially weakened medical centers. The market price of these hospitals has plummeted by up to 50 percent in the past three years. The most vulnerable facilities are not-for-profit rural and urban facilities with high percentages of Medicare, Medicaid, and uninsured patients.

Other healthcare systems are also taking over competitors. Northwestern Memorial Healthcare, the parent of Chicago-based Northwestern Memorial Hospital, has acquired the 215-bed Lake Forest (Ill.) Hospital. Shriners Hospital and Louisiana State University Health Sciences Center-Shreveport have agreed on terms for a merger, and SUNY Downstate Medical Center in New York plans to acquire Long Island College Hospital from current operator Continuum Health Partners. Meanwhile, a new Nashville-based company, RegionalCare Hospital Partners, is using capital from Warburg Pincus to shop for rural facilities.

The health reform factor is a double-edged sword for hospitals. While reform would mean more paying patients, it also involves cuts in Medicare payments that would hit hospitals especially hard. (In fact, it looks like planned Medicare cuts to physicians will be reversed, at least for the next few years.) In addition, provisions related to payment bundling and accountable care organizations will step up pressure on healthcare systems to grow bigger and to partner with physicians. Even if reform fails, these cost control concepts are unlikely to disappear. In fact, they will probably return with a vengeance in the next few years. So perhaps the days of the independent hospital, like those of the small, independent physician practice, are numbered.