It has taken Rockford (Ill.) Memorial Hospital more than three years and three attempts to find a partner, but its latest deal with Janesville, Wis.-based Mercy Health System may be its strongest yet.
The 297-bed hospital had two failed deals before it found Mercy, a three-hospital system that also operates MercyCare Health Plans. But in that time, Rockford has improved its financial performance. In its most recent earnings report for the third quarter of 2014, its operating surplus had more than doubled compared with the same period in the previous year. Revenue also increased 10%.
Gregory Hagood, president of Solic Capital, which served as Rockford's adviser in the transaction, said the Mercy deal gave Rockford Memorial the opportunity to be part of a large system, with access to health-plan assets, a large physician network, better patient demographics and a strong balance sheet. “This is probably even better” than previous offers, he said.
Hospitals across the country have been rapidly consolidating for some time, but more of them are doing so now from a position of financial strength as they see increased volume and an improved payer mix under the Patient Protection and Affordable Care Act. “They're getting an opportunity to be a little bit choosier about who they choose,” Hagood said. Even in a not-for-profit deal where no money is changing hands, the seller can ask for more capital or clinical commitments from the buyer, he added.
The Rockford deal, which closed this month, was one of 35 transactions among acute-care hospitals announced in the fourth quarter. That was the highest number since the second quarter of 2013, according to Modern Healthcare's quarterly M&A Watch report.
Yet Hagood suggested that M&A activity is poised to ramp up in 2015, as continued payment cuts reverse some of those financial gains and drive more alliances.
In total, healthcare providers inked 105 transactions in the fourth quarter of 2014, with a publicly disclosed value of $7.8 billion, according to the M&A Watch report. The numbers were well above the same period in 2013, when acquirers spent only $3.6 billion and forged 85 deals. The fourth-quarter figures, however, represented a modest pullback from the third quarter's peak of $13.9 billion in value and 110 transactions.