Dealmaking will “remain brisk” among health systems next year thanks to the continued financial pressure on hospitals from penalties and cuts under Medicare, “meager” private insurance rate increases and patients who are more willing to shop retail for healthcare, Fitch Ratings analysts said in a new report (PDF).
But that squeeze on hospital revenue is also the reason for analysts' continued negative outlook for the not-for-profit hospital sector, Fitch said.
Consolidation and deals among hospitals are remaking markets across several states, with transactions announced this year that will create Georgia's largest health system, Ohio's biggest clinically integrated network and new regional giants in Illinois, Michigan and elsewhere.
Mergers, acquisitions and other transactions are an increasingly popular strategy for hospitals that seek the edge that size may bring to operations and negotiations with suppliers and insurers. Large systems can wring lower prices from suppliers and may have more leverage to raise prices with health plans.
“The ultimate goal for most providers remains joining a network that can leverage its collective size to achieve financial benefits,” analysts wrote. "Focus is on cost efficiencies via contract negotiations, the supply chain, clinical programs and data mining, as well as building a network to prepare for population health management.”
Major activity this year has not been limited to the hospital sector. Pending deals would consolidate four of the largest U.S. health insurers into two behemoths. But steady movement among hospitals and medical groups is rapidly changing markets.
WellStar Health System in Marietta, Ga., this week announced a $660 million deal to acquire five Tenet Healthcare Corp. hospitals in and around Atlanta. Mercy Health, based in Cincinnati, announced a clinically integrated network in Ohio with Summa Health, the Akron-based health system in which Mercy is a minority owner.
New contracts that tie hospital payment to quality performance and slower spending also create new challenges for hospitals, but have little impact on hospital finances, Fitch Ratings said. Such contracts are known as risk-based contracts, because hospital revenue is at risk based on performance.
“While a growing percentage of provider revenues from Medicare, Medicaid and commercial payers have a risk-based component, the potential gain or loss under those contracts has been and is expected to remain relatively limited in 2016 and 2017,” the report said.
However, the challenges will not drag down the credit rating for most hospitals followed by Fitch analysts, the report said. Credit ratings for hospitals are similar to consumer credit scores and can influence the cost of borrowing.
Hospitals did well with similar pressures in 2015. Hospitals have seen the volume of patients stabilize after the economic downturn. Gradual recovery reduced demand for care. Hospitals have slashed operating costs and made fewer massive capital investments, which led to operating profits and less strain on hospitals' balance sheet.
Fitch has upgraded 30 hospital borrowers this year, as of Nov. 25, compared with nine downgrades.