Mergers, acquisitions and other types of partnerships remain critical as hospitals and health systems face extraordinary pressure to reduce costs, manage care more effectively and improve patient engagement and experience.
Healthcare M&A activity grew by 14 percent last year, to 1,498 transactions, setting a new record for industry deal volume, according to Irving Levin Associates. That compares to 2014, when 1,318 deals were announced across 13 healthcare sectors.
In 2015, 356 deals involved long-term care entities, 102 for hospitals and 88 for physician medical groups. The year prior, it was 302, 99 and 60, respectively.
What does the pace of healthcare M&A look like for 2016? Here, Roger Strode, a Partner and healthcare business attorney with Foley & Lardner in Chicago, shared his thoughts and forecasts.
Mr. Strode's practice focuses on healthcare business transactions, including mergers, acquisitions, corporate restructurings and joint ventures, general corporate matters and healthcare regulation. He has represented institutional healthcare providers (hospitals, health systems and integrated delivery systems), large physician groups, specialty providers (ASC development organizations), healthcare private equity firms and industry consultants.
Volume of healthcare M&A
1. Hospital expansion. Mr. Strode expects large insurance deals —Aetna's proposed acquisition of Humana and Anthem's proposed acquisition of Cigna — to prompt more hospitals to consider expansion to counter the payers' greater bargaining power. He says payers will increasingly pressure hospitals and health systems to trim prices, thereby requiring them to become more efficient and cost effective. Additionally, more hospitals and health systems will increasingly shift toward population health management, placing a premium on size and scale. "There are markets where significant fragmentation among providers remains and numerous hospitals and health systems remain unaffiliated. We expect to see consolidation in those markets, especially those that include large providers with excess capital to deploy," Mr. Strode says.
2. Physician group consolidation. Large physician groups also appear interested in consolidation. For instance, Downers Grove, Ill.-based DuPage Medical Group recently entered into a strategic partnership with Summit Partners, a global growth equity firm. Through the partnership, Summit made a reported $250 million investment, through a combination of equity and debt, in DMG. Proceeds will be used to support growth initiatives at DMG's practice management company. In addition, groups like Denver-based DaVita Healthcare Partners, which last September announced plans Monday to acquire The Everett (Wash.) Clinic, a 500-physician group, have been very active consolidating physician practices. "This is kind of a perfect storm," Mr. Strode says. "Private equity sponsors with capital to employ and an interest in high-quality platform practices are converging with physicians who are interested in cashing equity out of their practices and obtaining growth capital. We are seeing a lot of activity in areas such as dermatology and pain management along with hospital-based practices like anesthesiology and radiology."
FTC challenges
3. Challenges to hospital mergers. As the volume of healthcare M&A deals increased, so have challenges from the Federal Trade Commission. Last December, the FTC authorized action to block the planned merger of Downers Grove, Ill.-based Advocate Health Care and Evanston, Ill.-based NorthShore University HealthSystem — a deal that would create the largest health system in Illinois. The month prior, the FTC authorized action to block the merger of Cabell Huntington (W.Va.) Hospital and Huntington-based St. Mary's Medical Center.
The FTC will continue to challenge what they believe to be problematic combinations as long as they keep winning, according to Mr. Strode. He noted some public FTC victories in recent years. In April 2014, for instance, the U.S. Court of Appeals for the 6th Circuit issued a major decision within the hospital sector, as it backed the FTC and ordered Toledo, Ohio-based ProMedica to unwind its acquisition of St. Luke's Hospital in Maumee, Ohio. Mr. Strode, though, was quick to point out the dichotomy between antitrust law and the Affordable Care Act and the new payment models burgeoning because of the ACA. "We have a reimbursement system that would seem to encourage consolidation of hospitals and physicians ... and which are pro-competitive, such as cost cutting, increasing of efficiencies, raising capital to build IT infrastructure and to acquire physicians. Yet we have an antitrust enforcement system that seems to view this type consolidation as a bad thing," he says. "Those two ideologies seem at odds with each other."
4. Advocate/NorthShore merger. In discussing the specific proposed merger between Advocate and NorthShore, Mr. Strode says Advocate/Northshore and the FTC have completely different visions of the market and whether ther are efficiencies to be gained through the merger. "Right now they're very far apart. The government asserts that the merged entity will comprise more than 55 percent of the market while the merger partners contend that they will capture little more than 20 percent," he says. "Right now, the FTC does not appear interested in negotiating a settlement short of abandonment of the proposed deal."
Mr. Strode noted that hospital-FTC challenges are lengthy, painful battles. "They're expensive. If [the government] believes they have a good case, they're unlikely to back down," he added.
5. Challenges to physician group mergers. Mergers between physician groups have also caught regulators' eye. "They're concerned not only about combinations of hospitals but also what they believe to be anti-competitive combinations of physicians," Mr. Strode says. For instance, in January 2014, a federal judge sided with the FTC, ruling that Boise, Idaho-based St. Luke's Health System violated antitrust law with its 2012 acquisition of Saltzer Medical Group in Nampa, Idaho, one of the largest independent multispecialty groups in the state.
Private equity firms
6. Private equity firms in M&A. In 2016, Mr. Strode believes private equity firms will continue to be active in M&A. "There's still plenty of money to be put to work out there, and even though there's been a pullback in the broader stock market, I think that private equity is still pretty darn bullish on physician groups, pretty bullish on service lines [such as] pain management, dermatology, radiology and anesthesia," he says, "We will see private equity continue to be interested in those lines and services."
More articles on healthcare industry transactions:
5 recent hospital transactions and partnerships
Kindred inks swap arrangement for 5 hospitals: 6 things to know
Why one hospital merger could be off limits to the FTC