Coming on the heels of the recent Tenet-Vanguard merger, last week's proposed $3.9 billion tie-up between Community Health Systems and Health Management Associates demonstrates the rise of the hospital mega-system as a response to declining inpatient volumes and payment rates. It would create the largest hospital chain in the country by hospital count.
The deals, if consummated, would reduce the number of large, publicly traded hospital companies from seven to five. They also come as not-for-profit systems—such as Catholic Health East and Trinity Health, whose May deal creates a system with $12.8 billion in operating revenue—are similarly consolidating and rolling up independent hospitals across the country.
As the big get very big in the investor-owned and not-for-profit hospital worlds, the stakes are being raised across the country for smaller, independent, not-for-profit facilities that increasingly are being driven toward alliances, formal and informal, to achieve the same purchasing and hiring power and economies of scale.
A report last month from Moody's Investors Service—issued in response to Tenet Healthcare Corp.'s acquisition of Vanguard Health Systems—said blockbuster tie-ups among for-profit providers put pressure on smaller, stand-alone facilities. For instance, a large hospital system is in a better position to recruit physicians, giving it more leverage with payers and offering a diversity of services that draw patients into its network. Smaller hospitals, particularly in rural areas and smaller cities such as those owned by Community and HMA, often have a hard time recruiting top-notch physician groups.
“We're seeing an increased awareness and even a sense of urgency from not-for-profit systems to band together to match the for-profits,” said David Cyganowski, managing director at consulting firm Kaufman Hall. “These two deals are leading indicators that size and scale matter.”
In an interview, Community Chairman, President and CEO Wayne Smith said the proposed deal allows his Franklin, Tenn.-based system to develop its physician and outpatient-care networks, adding not only 71 hospitals, but 472 clinics and 1,000 physician offices. Building those networks increases the entry points through which patients access the system—a key benefit at a time of falling patient volumes, particularly on the inpatient side.
Community and HMA operate primarily in nonurban areas, and both systems have reported declining admissions numbers in their past two quarterly earnings reports.