Frothy was the buzzword used at a recent conference in Nashville to describe the climate of healthcare mergers and acquisitions in 2014 a fitting description of an industry that continues to bubble with consolidation activity. However, experts who spoke at the iiBig (International Institute for Business Information & Growth) event believe that health systems will begin placing a greater emphasis on quality acquisitions as opposed to the quantity purchases we've seen of late that alter market dynamics.

In 2013, the industry saw headline-making deals that changed the U.S. competitive landscape and positioning of health systems as they clamored to adjust to the post-healthcare reform environment. Tenet Healthcare's $4.3 billion purchase of Vanguard Health Systems closed in October, and Community Health Systems completed its $3.6 billion acquisition of Health Management Associates last week (in a deal pending since July), making it the largest system in the country based on number of hospitals and surpassing the size of HCA.

Looking further into 2014 and beyond, panelists agreed that health systems and IDNs will be enhancing services in an effort to adopt new models of care as employers, payers, and consumers look for value. As the industry continues to consolidate, new sectors will emerge as targets, providing opportunities for IDNs to expand geographically and offer a wider breadth of services. These unique acquisitions will present health systems with opportunities for new revenue streams and entrance into new markets as they seek to better compete in the healthcare industry's new paradigm.

Urgent care is poised to see tremendous growth in M&A activity. As the healthcare model transitions away from emergency-department use and toward lower-cost, higher-quality care, there has been a flood of urgent-care centers opening throughout the country. While some have thrived, other urgent-care groups have struggled to attract sufficient patient volume and attain financial stability in the crowded marketplace. IDNs that acquire these urgent-care facilities will be able to drive patients who otherwise might seek care in EDs to these facilities, saving their system money and potentially reducing Medicare's readmissions penalties.

Home-health agencies and long-term care facilities are also primed for acquisition. These organizations have struggled to remain financially solvent as reimbursement rates have declined. As the nation's baby boomers age into Medicare, home health and long-term care will become increasingly critical as this population becomes older and sicker. IDNs that invest in these struggling facilities can extend their services throughout the continuum of care, creating a built-in referral system. Providers from both entities can monitor at-risk patients to determine the best care-delivery sites for seniors, reducing unnecessary hospitalizations and service duplication.

It won't just be provider entities being courted in 2014; health systems will also explore acquisitions of small to midsize health insurers. Through these acquisitions, IDNs can essentially form narrow networks, adding and retaining member lives as patients in their facilities. To improve patient health and reduce costs, these IDNs will be able to offer new and comprehensive care-coordination services that work with the patient through all aspects of the healthcare system. These purchases may work best in smaller markets that have a limited number of competing systems and carriers.

IDNs will continue to look to financially distressed nonprofit hospital systems as acquisition targets, mutually benefitting both entities. Struggling hospitals will benefit from larger systems. increased capital and stability, while also borrowing from best practices to adapt to the post-Affordable Care Act environment. Delivery networks will have access to additional patient volume, as well as any specialties or best practices offered through the newly acquired hospitals. These buyers may also expand their footprints into new markets, leading to a greater presence and market share.

But as panelists discussed, purchasers must not only consider the value added to the delivery network that M&A targets provide. Given increased scrutiny from the Federal Trade Commission, as well as from state and local regulatory bodies, due diligence is more important than ever. This can be true for both pre-deal and post-closing due diligence. Health systems must ensure their acquisitions will not increase costs or significantly reduce competition in any given market.

As we saw in the landmark case of St. Luke's Health System Saltzer Medical Group in Idaho, a federal judge sided with the FTC and ordered the deal to be unwound. While the intentions of the deal were to improve patients health and access to care, a consequence of the acquisition was higher prices and better ability to negotiate with health insurers. Conference panelists warned that FTC's antitrust reviews will continue to be stringent, possibly deflating some of the bubbly nature of future healthcare M&A opportunities.

For the latest news on healthcare M&A, follow Sarah Wilson on Twitter: @SarahWilsonHLI.

 

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