Anticipating the Purchase or Sale

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After a period of hypergrowth from 1994 to 1996, hospital mergers and acquisitions declined from a height of more than 450 transactions in 1996 to a mere 50 in 2009. John Reiboldt, managing director of Coker Capital Advisors (Alpharetta, Georgia), says that the merger/acquisition market is heating up once again with the return of many of the factors that drove the action in the early 1990s: pressure from payors, the threat of managed care, greater regulatory burdens and government intervention, physician employment, physician integration, and economic uncertainty.

In Orlando, Florida, on February 22, 2011, Reiboldt presented “Mergers and Acquisitions in the Hospital Market” at the annual meeting of the Health Information and Management Systems Society. He says that he did not expect to see the number of deals experienced in 1996, but that hospitals will increasingly engage in merger/acquisition activity as a strategic alternative. The total number of hospital transactions in 2010 was 77, with a total value of $12.7 billion—a dramatic increase over the total values of $2.6 billion for 2008 and $1.7 billion for 2009. Reiboldt refers to these as the lost years.

Deal Characteristics

An interesting wrinkle in the latest go-round is the widely dispersed types of transactions (see table) that occurred in 2010, with not-for-profit entities buying for-profit organizations (and vice versa), and with new participants and deal structures.

“What really surprised us was the acquisition of Caritas Christi Health Care System (Boston, Massachusetts), an $830 million acquisition by a private-equity company, Cerberus Capital Management LP (New York, New York),” Reiboldt says, noting the 2006 investment that the company made in the GMAC division of General Motors.

Table. Selected 2010 Hospital Transactions

Reiboldt believes that, based on demographics, the for-profit providers are gearing up for volume-based medicine—rather than the accountable-care organization (ACO) concept—with dispersion of costs, economies of scale, and economies of scope as the strategic objectives.

On the other hand, in-market consolidation has been an earmark of not-for-profit acquisitions, supporting the ACO concept of delivery of care on multiple levels. Both for-profit and not-for-profit providers, however, are thinking about the impending demographic surge as more of the baby-boom generation reaches retirement age; the percentage of people in the United States who are over 65 years old is set to soar from 13% in 2009 to 19% in 2030. “The number of people who are entering our health-care system, who are asserted to be high utilizers, is absolutely staggering,” Reiboldt states. “Right now, hospitals are not prepared for that.”

Care for most of these patients will be paid for under Medicare rates, which is why Reiboldt believes that the ACO concept is not coming into play in a big way in the current round of acquisitions. “What you see is people preparing for volume-based medicine instead of value-based medicine,” he says.

Reiboldt also notes a good balance between buyers and sellers, which has sent valuation multiples slightly higher. Sellers are selling because the financial crisis has sent many community and government owners running for the exit. Preparing and paying for stages 1, 2, and 3 of meaningful use under the Health Information Technology for Economic and Clinical Health Act have been factors, Reiboldt believes.

“You go to some of these hospitals, and you have unfunded pension liabilities and significant financial risk, so they are going to people with deeper pockets, both on the for-profit and nonprofit sides,” he says. “I’m a big believer that the days of the single hospital are over.”

All of this has made executives and boards more amenable to these transactions. “They are finding that it is a good way to maintain quality health care in their communities,” Reiboldt says. “Merger and acquisition are no longer dirty words.” In addition, many hospitals have no choice but to consider selling. Reiboldt recommends that you avoid finding yourself backed into a corner with no options.

Buyers, on the other hand, are acquiring entities to build economies of scale, to enter new geographic markets, to add new services, to attract and retain physicians (probably among the biggest drivers), and to diversify patient and payor mixes, as well as because they have the financial backing to do so.

Preparing for a Transaction

Whether you are