Mergers and acquisitions on track to best 2016's deals

Consolidation among hospitals and health systems in 2017 will likely outpace 2016's mark and continue at that same pace through next year, experts said.

So far, there have been 87 provider deals made as of the end of the third quarter, putting those mergers and acquisitions on track to overtake 2016's 102 tally, according to analysis from consulting firm Kaufman Hall. Mega-mergers involving systems with at least $1 billion in annual revenue have already doubled from four last year to eight this year.

Scale can insulate providers from looming policy changes, prepare them for expected reimbursement cuts, accommodate rising labor, technology and pharmaceutical costs, allow them to take on more risk and help tackle new payment models in an evolving value-based industry. Health systems can spread costs over a wider patient base and gain leverage in negotiations with payers.

But the strategic goals outweigh financial drivers as systems look to build out regional hubs and specializations through both acquisitions and affiliations, said Anu Singh, a managing director at Kaufman Hall.

"Organizations are pursuing partnerships and collaborations in order to remain competitive and strengthen their market offerings, so that they can continue serving the healthcare needs of their communities," he said. "We're also seeing an uptick in creative affiliations, with partnerships using nontraditional models to achieve their strategic goals in response to a new set of market factors that were not present a decade ago."

Some of those creative affiliations involve academic medical centers. RWJBarnabas Health recently partnered with Rutgers and its health group to boost recruiting of academic, research and clinical practitioners, and strengthen certain specialties, among other benefits. Carolinas HealthCare System and UNC Health Care will combine North Carolina's renowned academic health system with the state's largest hospital chain through a joint venture to bring more convenient care to residents of rural North Carolina, executives said.

These types of partnerships and acquisitions will continue at a fast pace, said Ken Marlow, chair of the healthcare department at the law firm Waller Lansden Dortch & Davis.

"The factors driving it are only becoming more acute," he said. "As a result, they are forcing providers to look at those partnerships and grow their networks in a way that moves toward value-based medicine and is economically viable. That is the trick: Can they change the model quick enough to show they're not only providing the best quality, but at the lowest cost?"

Eight of the transactions announced in the third quarter involved acquisitions by for-profit organizations, and 19 by not-for-profits, according to Kaufman Hall. Two deals included not-for-profit and for-profit mergers.

One of the year's biggest deals included Catholic not-for-profit hospital giant Ascension's proposed acquisition of 12-hospital Presence Health. The acquisition, which is structured like a hospital joint venture, could help grow Ascension's reach in the Chicago area through expanded ambulatory facilities.

"Large strategic buyers will likely continue to vertically integrate to better control and manage the full continuum of care to improve quality and patient outcomes, avoid readmission penalties, and to optimize reimbursement via a more comprehensive care system," said Justin McCarty, managing director and Chicago's transaction services leader at consulting firm Conway MacKenzie.

If certain stand-alone and small-market providers don't form partnerships quick enough, they will likely close, Marlow said.

"They will find themselves unable to adapt quick enough," he said.