The market for ancillary services providers' consolidation appears to be moving at a less rapid pace than the hospital consolidation market. Twice as many hospital mergers occurred last year than in 2009.1 Driving these mergers in the hospital market are market and legal pressures. Large systems are trying to develop a broader footprint to succeed in a value-based world and not have patients need to go out of network. Further, there are smaller and mid-sized hospitals concerned with their ability to go it alone. Such fears drove the Yale-New Haven Hospital acquisition of St. Raphael, a hospital independent for over 100 years.2
By contrast, in the ancillary services market, hospitals do not seem as focused on acquiring every ancillary service. They also understand physician practices are a key part of their network, and more focus has been spent on these acquisitions. There is some acquisition activity going on by hospitals of ancillary services such as surgery centers, home health agencies and urgent care providers. However, the pace is not overly rapid.
In the private for-profit world, there is a mix of activity. For example, the urgent care market remains one where there is rapid consolidation, such as Mesa, Ariz.-based NextCare Holding Inc.'s acquisition of 11 centers in the Dallas/Fort Worth area.3 Despite this pace, pricing has gotten softer as the sustainability of some of the urgent care margins are showing challenges. With home health, we see some additional acquisition activity, like Gentiva's purchase this month of Harden Healthcare Services for $409 million,4 but not rapid acceleration.
With surgery centers, certain of the national chains are still trying to grow, buying individual surgery centers one-off and smaller chains to try and do so. This strategic focus means there is a real mix in the positions of independent surgery centers on the potential of sale. For example, if the surgery center is really struggling, the owners want to sell but potential buyers are not very interested. In one recent transaction, Chicago-based Swedish Covenant Hospital bought out its ASC partners mainly by assuming debt to convert it to a hospital-based facility.5 If in contrast, the surgery center continues to thrive, there is often not much interest in selling absent an imminent threat.
Plus, in all these spaces, there are challenges to completing transactions with ancillary services providers. As we watch buyers and sellers in these transactions, we see more focus by buyers on both the quality of earnings diligence and regulatory compliance diligence. Buyers want to see sustainability in the earnings, whether that is through stable payor mixes, customer concentration, reimbursement or numbers of procedures or visits. Further, buyers closely examine the legal or regulatory challenges or landmines that should be reviewed.
We expect continued ancillary services deal activity, but foresee increased caution by purchasers whether they are hospitals, financial sponsors or strategic non-hospital buyers.
1 Creswell, J. & Abelson, R. (2013, August 12). "New laws and rising costs create a surge of supersizing hospitals." New York Times. Available online at: http://www.nytimes.com/2013/08/13/business/bigger-hospitals-may-lead-to-bigger-bills-for-patients.html?partner=rss&emc=rss&_r=2&
2 Grais, S. (2013, February 1). "A cure for the community." Yale Herald. Available online at: http://yaleherald.com/news-and-features/a-cure-for-the-community/
3 McGraw Walsh, A. (2013, August 26). "PE activity in the urgent care space continues." Lexology. Available online at: http://www.lexology.com/library/detail.aspx?g=2d21319c-6bed-440b-be74-b3fc049930953
4 Manocha, V. (2013, September 19). "Gentiva buys private home health business to cut Medicare dependence." Reuters. Available online at: http://www.reuters.com/article/2013/09/19/us-gentiva-acquisition-idUSBRE98I0HR20130919
5Bushey, C. (2013, July 25). "Swedish Covenant Hospital to buy out surgery center partners." Crain's Chicago Business. Available online at: http://www.chicagobusiness.com/article/20130725/NEWS03/130729869/swedish-covenant-hospital-to-buy-out-surgery-center-partners