Chains have best effect on acquired hospitals, survey says

Multistate chains do a better job at improving the financial performance of acquired hospitals than local or regional systems, according to a Deloitte analysis.

The survey—which included 77% of hospital deals forged in 2007 and 2008—looked at the financial performance of acquired hospitals through 2010. It found that national chains take better advantage of workforce, supply chain and payer synergies, and they're also more effective at increasing volume.

“Size and scale are more important than they ever have been in the past,” said Simon Gisby, who leads the U.S. healthcare practice at Deloitte.

Yet the results weren't necessarily consistent across the board. For instance, hospitals acquired by regional systems in 2008 had the fastest rate of change, improving their median margins (before interest, taxes, depreciation and amortization, or EBITDA) by 388% in the first two years after the takeover—from -1.8% to 5.2%.

For that reason, Gisby noted, it's not as easy as saying that national systems are better acquirers than regional ones.

“There are a lot of local factors that go into it as well,” he said, citing the partner's ability to expand and differentiate services, attract physicians and be a cultural fit. “That's not any different than any other industry looking at the same metrics.”

However, targets of national buyers still outperformed those acquired by regional ones in 2008, with their EBITDA margins improving from 3.9% to 10.3%. Volume during that time period also increased 51.4% for national targets compared with 5.3% for regional ones.

The survey looked at a total of 101 hospital acquisitions, about half of which (50) were a not-for-profit system acquiring a not-for-profit facility. The remainder was evenly split (with 17 each) between a for-profit acquiring a not-for-profit hospital, a for-profit acquiring a for-profit and a not-for-profit acquiring a for-profit entity.

As a group, the acquired hospitals were performing below their peers during the year they were bought out—and while they did catch up, they were still languishing below the comparison group even two to three years after the acquisition.

In 2007, when their peer group had a median EBITDA margin of 10.3%, targets acquired by a national chain had a median EBITDA margin of just 4.5%. By 2010, the nationally acquired hospitals had improved to 7.7%, but their peers still had margins of 10.4%. Regional targets improved from 6.3% to 7% over the same time period.

In addition, national chains saw the largest increases in volume between 2007 and 2010, increasing their median number of adjusted discharges—which reflect both inpatient and outpatient volume—by 57.6%. In contrast, the median adjusted discharges at regional targets increased 15% during that time.

Follow Beth Kutscher on Twitter: @MHbkutscher