Mergers can sometimes lead to downgrades when a stronger organization acquires a weaker one that needs significant capital; that happened in two cases during the first eight months of the year. However, even a struggling provider can offer benefits to a buyer, such as higher patient volume, new service lines or a larger geographic footprint that makes the acquiring system a more attractive partner to employers and insurers.
As a result, S&P said it expects the active dealmaking environment to remain robust—though the pace of acquisitions may slow as larger systems work on integrating their current deals. In addition, it pointed to the greater interest in nontraditional alliances, such as non-ownership agreements where systems retain their independence but share back-office functions such as billing, purchasing, laboratory services and information technology.
As healthcare providers seek to gain expertise in managing population health, they're also buying insurance assets, the report said, citing Catholic Health Partners' acquisition of the Kaiser Foundation Health Plan of Ohio and the Ohio Permanente Medical Group.
Provider M&A in the first three quarters of the year is up 13.4% over the same period last year, according to Modern Healthcare's M&A Watch report.
Credit-rating agencies are driving some of that activity by setting a higher bar for stand-alone hospitals to achieve the same rating as multihospital systems, said Cliff Stromberg, a Washington-based healthcare transactions lawyer at Hogan Lovells. Systems can take advantage of economies of scale and are less exposed to what happens in a single market.
“We have not seen the end of it,” Stromberg said about the M&A wave, “and the proof of it is if you look at the ratings agencies, many hospitals still have marginal ratings.”
Follow Beth Kutscher on Twitter: @MHbkutscher
