As Community Health Systems (CYH), the largest publicly traded for-profit hospital chain, angles to buy smaller rival Tenet Healthcare (THC), it's worth considering why hospitals are consolidating now.
The conventional wisdom is that health care reform is propelling these mergers. According to this thinking, reform promises hospitals a big flood of new patients in 2014, when 32 million more people will gain coverage. In addition, the government incentives for hospitals to form accountable care organizations (ACOs) are said to be behind the urge to merge. But neither of these explanations really stands up to scrutiny, so perhaps other factors are driving the current merger wave.
Hospitals will benefit from the expansion of insurance coverage, because it will reduce the amount of charity care they have to provide. But in Massachusetts, as I pointed out a few weeks ago, near-universal coverage didn't lead to a big increase in admissions. The main reason: the newly insured got better primary care, reducing the number of avoidable hospitalizations and ER visits.
As for the ACO trend, some community hospitals will probably merge with larger institutions to build the necessary infrastructure. But healthcare systems that want to form ACOs have higher priorities than merging with other hospitals: They have to find a way to partner with their physicians, either by employing them or by helping them form clinically integrated networks. They also have to invest in health IT systems to make ACOs work.
If investors believed that healthcare reform was going to boost hospitals' bottom lines, Tenet share prices wouldn't have fallen more than 20 percent this year. Community Health stock has also dropped, by 11 percent. The stock prices of the three other major publicly traded hospital chains have also been ailing, and HCA hasn't been able to drum up enough interest among investors to go public.
Community Health, a fast-growing chain of 120 smaller community hospitals, plainly sees strategic value in Tenet, which has 50 large hospitals, mainly in metropolitan areas. In addition, Tenet's admissions are growing faster than those of Community Health. While Community's offer of $7.3 billion in cash, stock and assumed debt depressed its stock price slightly, the suitor must believe that in the long run, its shares will gain value if it acquires Tenet.
That's still an iffy proposition. Tenet's board flatly rejected Community's offer, saying it didn't represent Tenet's market value and that Community wasn't up to the job of managing its hospitals. But some observers believe that Tenet might accept a sweetened offer from Community.
Meanwhile, other hospital acquisitions appear to have their own logic, apart from any calculus involving healthcare reform. For example, the Steward Health Care System, the company formed by Cerberus Capital Management to run the recently acquired, Boston-based Caritas Christi chain, has agreed to buy two more community hospitals in eastern Massachusetts, Merrimack Valley and Nashoba Valley. The main impetus for the deal was to build the Steward contracting network so that it can compete with Partners and other integrated delivery systems.
In Washington State, meanwhile, the PeaceHealth system finalized its merger with Southwest Washington Medical Center. The combined organization will include eight hospitals and generate about $2 billion in annual revenues. Southwest agreed to the merger, said president and CEO Joe Kortum, because it would bring in more capital investment and possibly allow the hospital to expand its service lines. Long-term, he added, it also made sense to be part of a larger organization to cope with the rapid changes in the healthcare industry.
Nowhere in that statement was reform mentioned.
The bottom line is that health care is changing, and some mergers will occur because of that. But the reasons will vary from market to market, and from one organization to another.
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