The not-for-profit hospital market is facing the biggest wave of consolidation in over a decade as hospitals deal with the effects of the recession and changes in both public and private reimbursement, according to a new report from Moody’s Investor Services.
Lisa Goldstein, associate managing director at Moody’s, noted in the report that “driven by healthcare reform and an unsustainable payment system, the deep and impactful financial changes that are undoubtedly coming have led many hospitals to seek long-term partnerships. The current consolidation participants vary greatly and consolidation models are different, each with unique credit risks.”
In the wake of the recession and slower economy in recent years, the report notes that inpatient volumes are down for many hospitals, while uncompensated care has increased. Hospital admissions declined 0.4% in 2009, the first time that Moody’s has ever recorded a decline in admissions during a recession.
The last big consolidation in the not-for-profit market happened in the late 1990’s and early 2000’s after the Balanced Budget Amendment of 1997 instituted a wave of Medicare reimbursement cuts. Hospitals were able to offset these federal cuts, however, with “favorable annual increases from commercial payers,” according to Moody’s.
In the wake of the Patient Protection and Affordable Care Act, “hospitals are also facing lower Medicare reimbursement related to bundled payment programs, readmissions, and continued recovery audit contractor (RAC) reviews that seek to recoup overpayments made to hospitals,” according to the report. And, this time, hospitals will not be able to look to insurance companies to make up any shortfalls. “Some large hospital systems have proactively negotiated global cost and quality contracts that include a reduction in reimbursement rates and shifts much of the financial risk to the hospital,” according to the report.
One option for hospitals is to consolidate. The report notes, however, that it isn’t just other hospitals that are looking to consolidate – nonhospital entities such as health insurance companies and private equity firms also have become players in this market.
Examples of health insurers becoming more involved in the hospital market include a proposed affiliation between Highmark, Inc. in western Pennsylvania and West Penn Allegheny Health System; Humana’s December 2010 acquisition of Concentra, which provides physical therapy, urgent care and occupational medicine; and WellPoint’s August 2011 acquisition of CareMore Health Plan, a Medicare Advantage plan and clinic network.
Two new private equity firms have entered into ownership relationships or joint ventures with hospitals. In 2010, Cerberus acquired six-hospital system Caritas Christi Health System in Boston, now called Steward Health Care. This system is already expanding through the purchase of other not-for-profit hospitals. In 2011, Oak Hill Capital Partners established a joint venture with Ascension Health, the largest faith-based hospital system in the country, to acquire distressed Catholic hospitals.
Joint ventures between not-for-profit and for-profit healthcare systems—especially involving rural community hospitals—also are becoming more common.
Management teams for these new consolidated health care providers will be better able to utilize more sophisticated software tools to assess costs and clinical outcomes than in the past, which will lead to better financial planning.