Reform Update: ACA will accelerate hospital mergers, Moody's says

The pace of healthcare mergers and acquisitions will pick up as the healthcare reform law gives for-profit hospitals and health systems greater incentive to grow and diversify, analysts at Moody's Investors Service said this week.

“As hospital operators prepare for the implementation of the broader reaching aspects of healthcare reform, acquisition activity is likely to continue, in some cases driving up leverage and requiring considerable integration efforts,” said Moody's analysts who follow the nation's for-profit hospital operators in a report released this week.

Leverage may increase as hospital operators borrow against expected future revenue from patients newly insured under the Patient Protection and Affordable Care Act, analysts said. More attractive margins as a result of fewer unpaid bills because of fewer uninsured patients could “prompt them to lever up in the near term to complete acquisitions,” the Moody's report said.

Deals may deliver scale that could lower administrative and other costs. The $4.3 billion acquisition earlier this month of Vanguard Health Systems by Tenet Healthcare Corp. combined two of the for-profit sector's largest hospital systems. And Community Health Systems would become the largest for-profit system, by number of hospitals, if it successfully acquires Health Management Associates for $7.6 billion, the report said.

Transactions also help diversify hospital revenue as the ACA and the budget sequester continue to squeeze Medicare reimbursement to hospitals, and as the sluggish economy and market pressures put downward pressure on admissions and private payment rates.

The appetite for deals is not limited to for-profit hospital chains. Not-for-profit health systems have also been busy striking deals. A recent joint venture between Dignity Health and a subsidiary of UnitedHealth Group will create a revenue-cycle management company.

But the strategy is not without risk, said Dean Diaz, a Moody's senior vice president who co-authored the report.

Systems that diversify may buy businesses with historically lower margins or struggle to learn an entirely new business, such as insurance. Insurance is also more volatile as premiums, utilization and enrollment fluctuate each year. “I don't think every operator will have the capabilities to do that,” he said.

Any deal also faces risks as two formerly separate companies seek to integrate.

Diaz said analysts will watch hospital operators' degree of leverage and how quickly recent borrowing can be reduced after the ACA coverage expansion takes effect in January. Divestitures may also follow the recent buying spree as health systems shed assets that don't deliver market clout or scale, he said.

The mid-February ACA deadline to buy health insurance or face a tax penalty may be moved back a little by the White House to avoid consumer confusion, LexisNexis' Law360 reported.

The report cited an anonymous HHS official who said the Obama administration “will issue guidance soon” to address a “disconnect” between a deadline to avoid the tax penalty under the ACA's individual mandate and the later open enrollment deadline in the new insurance exchanges. Consumers can buy private coverage in the exchanges through March 31, the end of the six-month open enrollment period. But they must sign up for a health plan by Feb. 15 to avoid the law's first-year penalty for going uninsured, which is $95 or 1% of income, whichever is greater. The markets opened for business on Oct. 1 but website and technical flaws have made it difficult for consumers to actually enroll, particularly in the federal online marketplace serving 36 states. No one is sure when those problems will be ironed out but it could take weeks. Sen. Marco Rubio (R-Fla.) said individuals should not be penalized because of the technical problems and that he would introduce a bill to delay the fine.

Rubio, during an interview on “The O'Reilly Factor,” said, “So what the bill would basically say is that the Obamacare website has to be up and functioning for six consecutive months before they can begin to enforce this individual mandate on people,” according to a transcript on the senator's website.

Democratic Sen. Jeanne Shaheen of New Hampshire, a strong ACA supporter, also has asked the White House to extend the deadline for enrollment beyond March 31, 2014 and not penalize people who are uninsured because they were unable to enroll due to problems with the federal online marketplace.

"Allowing extra time for consumers is critically important so they have the opportunity to become familiar with the website, survey their options and enroll," Shaheen wrote.

The federal government will save an additional $190 billion over the next decade thanks to health insurance premiums that cost less than previously projected, according to a new estimate. Federal spending on premium tax credits received by low- and moderate-income individuals and families under the ACA will be 21% lower than projected by the Congressional Budget Office because premiums are roughly 16% lower than the CBO estimated when drafting its estimates, said Topher Spiro, the Center for American Progress' vice president for health policy, and Jonathan Gruber, an economist at the Massachusetts Institute of Technology. The two published their estimate in a paper released by the Center for American Progress.

Follow Melanie Evans on Twitter: @MHmevans