Merger means pressure's on for struggling stand-alone facilities

Watch out, community hospitals. The proposed merger between Tenet Healthcare Corp. and Vanguard Health Systems is expected to increase pressure on already-struggling stand-alone facilities in the markets where the two chains operate.

While the deal is largely expected to sail through an antitrust review because the chains operate in different markets and regions, Moody's Investors Service says the combination of two “large and powerful systems” will be a force to be reckoned with. In particular, Tenet will have more leverage to lure physicians away from smaller hospitals and will be able to take advantage of back-office economies of scale that will help reduce costs at a time of shrinking reimbursement and increased pressure on volumes.

The deal is also significant because it extends Tenet's operating prowess into markets such as Michigan, Illinois, Arizona and Massachusetts where several not-for-profit, stand-alone hospitals could be at risk.

“As has occurred in Boston and elsewhere, stronger for-profit operators disrupt longstanding market dynamics and physician allegiances,” Moody's analysts write.

The Moody's report suggests that one good thing that could come out of the Tenet-Vanguard deal—at least from the perspective of municipal bondholders—would be a buying spree where Tenet would scoop up smaller institutions.

In recent months, the hospital industry has become somewhat defensive about mergers, which have been blamed as an important factor driving up healthcare costs.

The American Hospital Association released a study last month of 316 transactions between 2007 and 2012 to argue that 90% of those tie-ups occurred in markets where there were at least five competitors. And when they occurred in smaller markets, the deals usually involved a smaller community hospital on the financial brink.

While the FTC might not have grounds to challenge the Tenet-Vanguard merger, there's no sign the agency will take its eye off the healthcare space—and, by extension, rising healthcare prices—any time soon.

Follow Beth Kutscher on Twitter: @MHbkutscher