The continuing hospital merger boom could grow louder in the next three months because of a new federal law ending certain Medicare payments to hospitals that change hands.
For many hospitals, completing transactions became a more urgent matter when President Clinton earlier this month signed the federal balanced-budget law. A provision of the law ends Medicare payments to adjust for depreciation when hospitals are acquired by or merge with another hospital. The payments are scheduled to end 90 days after the Aug. 5 signing of the budget law.
That means hospitals must complete deals by early November to enjoy potentially millions of dollars in Medicare depreciation payments.
"There's got to be dozens upon dozens of transactions that could be affected," said Stephen Monroe, a partner at Irving Levin Associates, a New Canaan, Conn.-based firm that tracks healthcare merger and acquisition activity. "Some of these deals take months, if not years, to close."
The Congressional Budget Office said ending the Medicare adjustments will save $600 million over five years. The adjustments already cost Medicare more than $500 million from 1990 to 1996.
Currently Medicare reimburses hospitals a share of losses stemming from a sale or merger. Such losses occur if the terms of the transaction are less than the book value of a hospital's assets. In turn, Medicare also shares in any gain from a sale or merger.
HHS' inspector general's office recently accused hospitals of artificially suppressing sale prices below book value to squeeze Medicare for depreciation payments (June 30, p. 12). For every $1 Medicare shared in gains, it paid out $8 in depreciation adjustments, the inspector general's office said in a June report.
Congress agreed that providers might be gaming the system for profit.
One set of providers hoping to beat the deadline with a merger is 655-bed Hermann Hospital and six-hospital Memorial Healthcare System, both in Houston.
If they don't complete their merger on time, they risk losing out on all or a portion of $25 million that includes anticipated Medicare depreciation payments, hospital executives said. Citing a gag clause in their letter of intent, Hermann and Memorial officals declined to comment further on the deal or their potential losses.
The providers signed a letter of intent in June and plan to complete the deal in fall.
But hospitals just starting their deals probably won't make the deadline.
"It's not enough time for systems just getting going to complete their deals in three months," said Josh Nemzoff, a Nashville-based healthcare consultant.
Nearly 800 hospitals were involved in mergers or acquisitions last year, according to MODERN HEALTHCARE's annual tally of hospital transactions (Dec. 23-30, 1996, p. 37). According to the latest figures from Irving Levin, at least 100 hospital merger or acquisition transactions have been announced to date this year.