Modern Healthcare operations reporter Alex Kacik and finance reporter Tara Bannow discuss how a string of hospital transactions have reshaped the Atlanta-area healthcare market.
Beyond the Byline: Flurry of hospital deals reshape Atlanta healthcare market
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Alex Kacik: Hello, and welcome back to Modern Healthcare's Beyond the Byline, where we offer a behind the scenes look into our reporting. I'm your host, Alex Kacik. I write about hospital operations for Modern Healthcare. Today I'm talking with Tara Bannow, our finance reporter, to talk about hospital mergers and acquisitions. Thanks for joining me, Tara.
Tara Bannow: Thanks for having me.
Alex Kacik: Tara, we wrote about a trio of deals that happened over the last month, shuffling some Atlanta area hospitals around. Could you take me through some of them?
Tara Bannow: Yeah, a lot of Atlanta news. First there was the announcement at the beginning of May, that Piedmont was buying four hospitals from HCA, all within about 90 miles of Atlanta, where Piedmont's based. They expect to close that deal by the end of July, I think they expect to have a pretty easy time with it. Then about a week later, Piedmont announced it plans to buy University Health, which is a three-hospital system in Augusta. Augusta's about 150 miles Southeast of Atlanta.
Piedmont CEO told me, by the way, that the timing of those announcements was just coincidental. University had gone through a long process of choosing a partner and then it landed on Piedmont. That deal, they expect to close at the end of the year. The very next day, after that Piedmont and University Health announcement, HCA announced it was selling a hospital in Rome, Georgia, which is about 70 miles Northwest of Atlanta, to Advent Health. That is part of HCA's strategy to get out of the greater Atlanta area and concentrate on its five hospitals in Southeast Georgia, where it recently bought another hospital.
Alex Kacik: For Piedmont, they're getting what? Seven hospitals in a short span. It doesn't sound like that was planned, and like you said, HCA had this philosophy that it operates in markets where it wants to lead, and then it has a bundle of services across acute and outpatient care and home care. I don't think it saw a way forward on the acute side to compete with the likes of Piedmont, Emory and the other big players. We decided to look into this to understand, is this a coincidence just in terms of all this activity in this market, is there something unique about this? Why are these systems deciding to offload some of their hospitals to these other players?
We were looking at the financial data to figure out about the hospitals. Tara, if you want to take me through what you found when you were looking at the financial data. We looked at these hospitals and a lot of times we'll see distressed hospital sales, ones that aren't financially performing well, but that wasn't the case here. You had pretty profitable hospitals and it seemed like the buyers were interested in and saw an opportunity here to take on this market share, and then take on hospitals that were doing pretty well.
Tara Bannow: Yeah. This is a great deal for Piedmont actually, this is not the typical distressed hospital sale at all. As you said, the four HCA hospitals that Piedmont is going to buy are very profitable. Modern Healthcare uses Medicare cost reports, which are annual reports that are at the facility level that hospitals file with CMS. It's not going to include income expenses that are centralized at the health system level. In other words, you couldn't add up all of HCA's hospitals in the database to arrive at HCA's total revenue and expenses.
It's a little different in that way than looking at an audited financial statement or even a quarterly financial report. But that said, it's really interesting data to look at if you want to get information on a specific hospital. Anyway, these HCA hospitals, there's this Cartersville Medical Center, it's a 119-bed hospital, they posted a remarkably high, almost 33% operating margin, in 2020. That is unheard of, I feel like, for a small hospital like that. Cartersville is about 40 miles from Piedmont's Atlanta hospital, so that's probably going to be a really good referral source for Piedmont.
The deal also expands Piedmont into Macon, Georgia, less than 90 miles from Atlanta. HCA is larger. It's got a larger 300-bed hospital in Macon that had about a 12% operating margin in 2020, which is very good. The smaller hospital there that Piedmont's going to buy from HCA has a 4% operating margin. There's another HCA hospital in Snellville, which is about 30 miles from Atlanta. They had almost a 5% operating margin in 2020. That's also a very good get for Piedmont because it's going to be a really good referral source.
All four of these hospitals that HCA is buying averaged 13.4% operating margins in their latest cost reports, which is much better than the 6.7% across Piedmont's 11 hospitals in the latest cost reports. So yeah, these are very profitable hospitals. I would expect for-profit hospitals to just typically be a little bit more profitable than not-for-profits, but this was way above my expectations. Piedmont's hospitals, I think it's important to note, are pretty profitable in their own right.
Piedmont's hospital in Stockbridge, Georgia posted almost a 17% operating margin in 2020, which is huge. Piedmont has two hospitals in Columbus that are pretty profitable as well, 13% and almost 16% operating margins. Four of Piedmont's hospitals actually lost money in 2020. They're not all doing great.
Alex Kacik: Piedmont is one of the few big players in the acute care space there, so it's interesting to see from University's standpoint and HCA, if they had a pass to try to compete on that level. It sounds like they said that, "We'll look to sell some of these assets because we don't see a way forward where we could potentially be top two in the market." Just another note, when we look at Medicare cost reports, they're self-audited so it can be a little tricky typically. An accounting firm audits these quarterly reports, but those aren't as granular when it comes to the data. You'll have certain metrics in the Medicare cost reports like supply costs, per adjustment patient day, and full time employees, the average occupied bed.
It's interesting, but at the same time these are self-reported by the hospitals and they don't include things like physician groups, they don't look at it like a holistic picture across the system. We were looking at some Health Care Cost Institute data, and that ranked Atlanta as one of the most competitive acute care markets in the country. They were ranking 108th least concentrated out of 124 markets. They use this HHI index to try to figure out if there's adequate competition.
I reached out to the Attorney General last week and they said that they will not be reviewing HCA's sale of the four hospitals to Piedmont. They only look at deals that are changing hands from a not-for-profit to another not-for-profit or do it for a for-profit entity. I thought that was interesting just in terms of the regulatory aspect. It sounds like potentially since it wasn't already a highly concentrated market, I'm not sure this will raise the flag of any maybe federal regulators.
Tara Bannow: Yeah, that's right. I don't foresee Piedmont or HCA running into any issues here with closing these deals. This is a really concentrated market. Not only is there Piedmont, Emory, WellStar, competing in the market, there's Northside Hospital system, which is a five hospital system also based in Atlanta. They acquired Gwinnett Health System in 2019. Emory Healthcare has 11 hospitals, so they're just as big as Piedmont. They acquired DeKalb Medical, which has three hospitals, in 2018. On the anti-trust front, I talked to a lawyer who used to work for the FTC about the Atlanta market. One thing he said was that urban and suburban areas like this are pretty difficult for the agency to challenge.
He pointed to the fact that the agency lost its initial challenge of the proposed Advocate Health, NorthShore University merger. They later won on appeal, but then the FTC recently lost the Jefferson Einstein case involving hospitals around Philadelphia. So yeah, it sounds like on the federal level, there might not be too much and obviously on the state level, the University Health deal is the only one that Georgia's Attorney General will review because it involves the sale of not-for-profit facilities. As you said, the AG's office is not ... they don't have purview over the sale of for-profit facilities, so these HCA sales won't get state review.
Alex Kacik: Just trying to gauge too on M$A expectations, we've seen it fall off during 2020 and we're hearing that there's some pent-up demand for some deals, particularly the smaller hospitals that haven't fared as well through the pandemic. At the same time, we're seeing bills move through Congress that are trying to bolster the budgets of the FTC and DOJ when it comes to their oversight. Also, there's some state bills like one in California that changes the threshold that would trigger an investigation and also just generally tightens up some of that regulatory scrutiny.
It's interesting to see these competing factors here and what will play out for the hospital space when it comes to mergers and acquisitions. I'm wondering what you've been hearing in terms of the expected activity going forward.
Tara Bannow: Some of the M&A trackers have shown that healthcare deals went down at the beginning of 2021 just as they were in 2020, but it seems like most of the expectations is that these deals will accelerate through the rest of 2021 and into 2022. Hospitals as we know, they talk a lot about efficiencies and lowering costs. The evidence there is pretty limited, but the motivation really behind these mergers seems to be more about getting bigger, gaining leverage over health insurers, and then demanding higher rates. You can see why that's an attractive thing for health systems to try to do this year.
Alex Kacik: Sure. To that point too, I've been looking at ... working on a story, looking at deals that have been formerly unwound, so mergers that have been consummated and then they've either filed a lawsuit to separate from their parent or figured out something out of court. We've been looking at four or five different deals where they're unwinding their mergers and we've noted that revenues had gone up at a pretty consistent pace post-merger but expenses had usually outpaced that revenue growth. When you're looking at these, quote unquote, "efficiencies," sometimes if they don't do the proper integration process you still have multiple executives and managers overseeing certain departments. You don't renegotiate some of these supply contracts, maybe the market share is spread out so you're not getting that leverage with the insurers that you expected, which could also dampen those potential revenue gains.
It's interesting to see why ... in the outset, why these deals are consummated and then what can go wrong, and why some of these formerly unwind. You also have executive bonuses that come into play I know you've looked at, but what are you noticing in terms of some of the incentives that are driving consolidation and whether or not those efficiencies have been met?
Tara Bannow: I think that's all very true, but I think the incentives for getting into these deals are going to be intensified right now, following the pandemic because these stressors that hospitals are under are just really accelerated right now.
Alex Kacik: To your point, scale helped a lot of systems during this time when they had to shuffle PPE, and physicians, and other labor back and forth between hospitals to adjust to demand. I'll be interested to see how much of a strategy from a defensive standpoint, they'll take up some of these M&A deals to try to insulate themselves from future pandemics or other emergency scenarios. But at the same time, we might see more scrutiny from the state and federal lines.
Tara Bannow: Yeah, and there's still a lot of CARES Act grants floating around and extra liquidity from the Medicare accelerated payments. I think that's giving a lot of, especially the for-profits a boost and they might be looking to do some more acquisitions right now, especially of these weaker systems that have gotten even more so during the pandemic.
Alex Kacik: Great. Tara, thank you so much for taking the time. I appreciate your sharing your time and insight with us.
Tara Bannow: Thank you. It's been fun.
Alex Kacik: All right. Thank you all for listening. If you'd like to subscribe and support our work, there's a link in the show notes. You can subscribe to Beyond the Byline wherever you listen to your podcasts, and you can stay connected with our work by following Tara and I and Modern Healthcare on Twitter and LinkedIn. We appreciate your support.
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