Merger and acquisition activity among hospitals is booming, but boards and executives should be wary about the deals they're making, according to a panel at the American Health Lawyers Association's 2011 annual meeting.
Hospitals should be cautious amid boom in deals, lawyers say
Hospital deals were up 40% in 2010, according to data from Irving Levin Associates. "I think this is the biggest boom we've ever seen," said James Owens, a partner in the law firm Paul, Hastings, Janofsky and Walker who specializes in healthcare transactions. The deals, the panel members said, are driven by the demand for capital under tight capital markets and the expectation that hospitals will benefit from being part of larger systems with declining reimbursement and increasing demands for them to deliver integrated care. They also noted that plenty of buyers are driving the market, citing as examples Vanguard Health Systems' acquisition of Detroit Medical Center and Cerberus Capital Management's deal to buy Caritas Christi Health Care System in Boston.
Paul Neumann, senior vice president and general counsel of Trinity Health, said he's getting at least one call a month from suitors asking whether the Novi, Mich.-based Roman Catholic health system would like to sell a hospital or merge one with another organization. "It may come on your plate without you even thinking about it," Neumann said.
A member of the audience asked why those buyers—in particular, private-equity investors expecting big returns—think they can make money on the facilities whose previous owners were struggling. Edward Fishman, a managing director at investment banking firm Cain Bros., responded that for-profit buyers probably see large populations of uninsured patients as likely to switch from "no pay" to "some pay" under the healthcare reform law, as well as an opportunity to leverage the deal and then accomplish some growth and operational improvement. The panel warned, however, that federal antitrust enforcers are scrutinizing hospital mergers more closely, as evidenced by recent challenges the Federal Trade Commission brought against deals in Toledo, Ohio, and Albany, Ga. They also highlighted a few red flags for parties negotiating an acquisition or merger. The most important, Neumann said, is that core needs on both sides are met before there's a letter of intent. "If you can't agree on the major deal points early, then it's going to fail," Neumann said. "You're going to waste time spinning your wheels."
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