Healthcare organizations spent a good deal of 2001 taking apart what they had previously pieced together. Many health systems, especially not-for-profits, that acquired physician practices and HMOs retreated from those businesses as costs rose and income fell. In that atmosphere of divestiture, the number of mergers and acquisitions among healthcare companies declined for the third straight year, according to Modern Healthcare's eighth annual tally of hospital consolidation activity.
Last year, a total of 272 hospitals were involved in mergers or acquisitions, down 14% from 2000 when 318 hospitals combined operations with other healthcare organizations. The total number of transactions also fell last year, to a total of 95, down 26% from 2000 when 129 deals were completed.
The annual tally includes mergers, acquisitions, joint ventures and other partnerships involving a change in control of the hospital. To be included, a deal had to have been announced, pending or completed in 2001. Management contracts and other types of simple affiliations are not on the list.
The deals included involve healthcare systems and acute-care, psychiatric and long-term acute-care hospitals. Corporate transactions were deals between for-profit organizations.
"2001 was more about disaffiliation than substantial merger-and-acquisition activity," says Michael Peregrine, a healthcare lawyer with Gardner, Carton & Douglas in Chicago. Many organizations, he says, are "licking their wounds from bad financial performance or digesting a prior merger" and are not now in a position to consider linking with other organizations.
In last year's biggest hospital deal, Dallas-based Triad Hospitals acquired Quorum Health Group, Brentwood, Tenn., for $2.4 billion. That deal, completed in April, was the only transaction with a price tag in the billions. The acquisition also appeared on Modern Healthcare's 2000 list because the deal was announced that year. Such duplication occurs when a transaction is announced one year and officially closes the next.
That could be the last corporate megadeal for some time, says George Bishop, a healthcare transactions lawyer with Waller Lansden Dortch & Davis in Nashville, because investor-owned hospitals were busy in 2001 with a new strategy: buying financially troubled not-for-profit hospitals for a song.
Investor-owned chains such as Community Health Systems, LifePoint Hospitals and Province Healthcare Co., all based in Brentwood, Tenn., have been bargain-hunting for capital-starved rural hospitals, including many in bankruptcy, says Bishop, whose firm represents LifePoint and Province.
"(The chains) have the capital resources to upgrade those facilities, to keep patients from going to bigger hospitals in bigger cities," Bishop says.
Investor-owned chains also employ that strategy when distressed urban not-for-profits could bolster their local networks. For example, Santa Barbara, Calif.-based Tenet Healthcare Corp. paid $57 million to buy the money-losing Daniel Freeman hospitals, a pair of facilities in the southwest Los Angeles area, from Carondelet Health System, a Roman Catholic organization based in St. Louis.
In a more high-profile Tenet transaction, the company acquired 341-bed Good Samaritan Medical Center and 460-bed St. Mary's Medical Center, both in West Palm Beach, Fla., from not-for-profit Intracoastal Health Systems for $244 million. Intracoastal had drawn fire from the state attorney general over the company's controversial plans to consolidate the two not-for-profit hospitals. A lawsuit by the state eventually forced the sale of the hospitals.
Lawyers and analysts contacted by Modern Healthcare expressed mixed opinions about whether 2002 will involve an overall uptick or a decline in the number of transactions.
"I would guess that you'll see even less (merger-and-acquisition activity) in 2002 than in 2001," says Bruce Gordon, senior vice president with Moody's Investors Service, a New York-based credit-rating agency. If the recession lasts longer than economists expect-most anticipate relief by the second quarter of this year-that could change as hospitals seek financially stable partners to bolster their own performance, Gordon says.
Waller Lansden's Bishop says the current economic climate-good managed-care pricing, rising stock prices and low interest rates-is superb for investor-owned chains to acquire more hospitals. "You will see a lot of for-profit deals," he says. "You will see a lot of not-for-profit systems either sell all their assets or sell some hospitals that they saw as feeder hospitals."