Healthcare deals dip with hospitals bucking the trend
Mergers and acquisitions throughout the healthcare sector slowed their furious pace in the second quarter with an exception being hospital dealmaking, according to a new study.
Meanwhile, the value of the deals significantly increased for both the broader healthcare segment and among hospitals, analysis from PricewaterhouseCoopers found.
There were 219 deals made in the second quarter, which marks a 15% decrease from the second quarter of last year, but those transactions amounted to nearly $50 billion—a 201% increase. Ten "megadeals" were reached in the second quarter, up from the average of four, accounting for more than $43 billion.
The number of hospital transactions increased by 15% year over year and deal value increased by 12%—it was the only sector that saw positive volume growth both on a quarterly and yearly basis. Hospital deals were valued at $2.2 billion in the period.
Long-term care organizations recorded the largest number of mergers and deals at 75 while the labs, MRI and dialysis sector experienced the greatest value growth at 1,428%, research shows. Pharmaceutical deals rose 4% year over year, and were valued at $35.2 billion, which represented the largest share of healthcare dealmaking.
Uncertainty surrounding the nation's capital hasn't slowed merger and acquisition activity, said Thad Kresho, U.S. health services deals leader for PwC. In fact, scaling up may be seen as a way to insulate against any major policy changes, he said.
"Providers have continued to align operations with new reimbursement models and have sought ways to be more efficient operators, with a focus on increased quality of care," Kresho said. "The drivers of consolidation vary slightly by sector but all are seeking the strength of scale."
Hospitals may be looking to realize cost synergies and relieve margin pressure, exercise greater leverage in their payer negotiations or better prepare for of value-based contracting, he added.
An organization that has the scale to build infrastructure and spread the cost over a wide patient base can generate significant return on investment. Margin pressure and demands for economies of scale in risk-based contracting will likely drive independent facilities to join larger systems, PwC researchers said.
Others echoed that view. "Health plans are looking to move to more risk but they want to work with providers that have a sufficient number of patients so they are credible from a data perspective," said Jeremy Earl, a partner at McDermott Will & Emery. "They are also looking for economies of scale from whatever successful results you generate from risk-based contracting."
Yet, consolidation throughout the healthcare market will continue to drive up healthcare costs and reduce care quality, research shows. Without effective competition, hospitals can secure higher price concessions in their negotiations with insurers, health experts said. Providers and insurers argue that they need scale to create balance and offset other players with dominant market power.
"These arguments make me sick," David Dranove, Northwestern University professor and co-director of Health Enterprise Management at the university's Kellogg School of Management, said at the university's healthcare symposium in May. "What I am hearing is that we are not going to win by creating value. It's too hard to create value so we'll win by eliminating our competitors. I find the countervailing argument to be really bad for the future of healthcare."
Moody's 2017 outlook report on not-for profit and public hospitals also noted an increase in merger and acquisition activity, particularly regarding health systems buying physician groups. Acquisition of physician practices has shrunk providers' margins as employing more physicians typically leads to lower profitability, the report said.
"Taking on the financial burden of physician groups may not be sustainable," said Dr. Jeffrey Le Benger, chairman of the board and CEO of practice management company Summit Health Management.
Physician practices purchased by hospitals can get higher payment rates from payers and patients, both from the facility fees and from the greater leverage that hospitals have with private payers in negotiating payment rates for the employed physicians, Martin Gaynor, professor of economics and health policy at Carnegie Mellon University, noted in a recent study.
"For hospital acquisitions of physician practices, all evidence points to higher prices," said Gaynor, adding that more patients are referred to hospitals, which would increase costs without guarantees of higher quality. "There is no clear systematic evidence that these mergers lead to enhanced efficiency, the evidence at best is mixed."
Systems that went on buying sprees like Community Health Systems and have taken on major debt loads with underperforming assets will continue to divest properties, PwC researchers said.
Researchers expect deal activity to remain strong across most sectors, particularly among physician practices that seek scale and protection from payment reform. Although physician group deals were down in terms of volume and value in the second quarter, affiliations, clinical collaborations and other strategic partnerships will be useful in health systems' vertical integration strategies, Kresho said.
"We expect to see vertical integration as a continued strategy for health systems that are seeking to dilute their exposure to acute care reimbursement as well as bolster their population health and at-risk contracting offerings," he said.
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