In a nod to Shakespeare we look back at 2014 to see what, we believe, 2015 holds for hospitals, healthcare systems, physicians and others with an interest in healthcare in the United States. Is past, prologue?
On the heels of 2010-2013, a period that saw more merger and acquisition activity among healthcare providers than before, this past year was characterized more by the rationalization and reorganization by hospitals and health systems of assets and business lines than it was by acquisitions, mergers or consolidations. The activity in 2014 appeared to be in response to the changing regulatory environment and, more importantly, to a morphing reimbursement landscape, which is changing from one more focused on the value of healthcare services provided than on volume of such services. Providers, in 2014, seemed to spend more time reallocating resources, forging alliances and aligning with physicians, investing in information technology infrastructure and developing relationships with payers or becoming payers themselves.
What does the abovementioned activity mean for 2015? And beyond? We believe that the activity of 2014, while somewhat lackluster, set the stage for a robust 2015, and beyond. Here are some predictions:
Continued Consolidation of Hospitals and Health Systems
While 2014 was a "down" year for consolidation activity among hospitals, it is unlikely that 2015 will be as soft. In a recent Access to Capital webinar series sponsored by Foley & Lardner, Jim Moloney, Co-Head of Mergers and Acquisitions for Cain Brothers predicted that the market should see an increase in system-making among hospitals and health systems. Much of this activity will be designed around the creation of local market scale and to take advantage of geographic contiguity. Mr. Moloney noted that over the past couple of years, systems like Scottsdale Healthcare and John C. Lincoln Health Network, in Scottsdale and Phoenix, Arizona and Edward Health Services and Elmhurst Memorial Healthcare, in Chicago's western suburbs, to name just a few, created larger systems with this type of scale and geographic coverage in mind.
This trend, it is expected, will make the hospitals that grow and join these systems more relevant to employer groups, payers and accountable care and other managed care organizations. It will also allow them to come up with the capital necessary to implement, in many cases, needed information technology upgrades, both in the hospital and in aligned physician practices, in order to form or participate in ACOs and other initiatives designed around the changing payment environment.
In a recent announcement, Moody's Investor Service said it expects that struggling smaller hospitals may benefit from being bought by larger, stronger systems. Moody's notes further that larger, for-profit operators HCA, Tenet and Community are likely to continue looking for targets that fill out existing markets or provide opportunities to enter new ones. Hospitals in general, Moody's predicts, will continue to benefit from a reduction in the number of patients without health insurance as the Affordable Care Act continues to gain traction.
Academic medical centers are also likely to continue to participate in the expansion trend, and not necessarily always as the acquirer. Certain AMCs, such as those that are government sponsored and/or bereft of large or affluent donor bases, are finding themselves capital strapped and struggling to continue their academic missions. These organizations may become attractive candidates for larger, cash-rich systems looking for patient access. Banner's recent agreement to acquire and support the University of Arizona Health Network, based in Tucson, is a prime example of such a transaction. Banner's commitment to UA Health Network is a step toward the formation, by Banner, of a state-wide system and will help UA stay competitive in southern Arizona.
Other AMCs looking for outlets for more cost effective community-based care will seek out merger partners in order to free up space for high acuity tertiary and quaternary care. Patients in need of more routine care attracted to the brand and perceived higher quality of an AMC are able to access that care in a more convenient, community-based location. Northwestern Medicine's recent affiliation with Cadence Health, in Chicago's western suburbs is a nod to this trend. The key for these types of affiliations to work will be the ability to adapt to the changing payment system that will reward keeping costs in check while providing high quality care and reducing average lengths of stay.
Payer-Provider Activity
Payer-provider activity is likely to be equally robust with continued, creative, integration of payers and providers, noted Mr. Moloney. Payers, seeking to drive volume and leverage the growing numbers of insured individuals, are increasingly interested in the development of narrow networks, with tiered pricing, designed to take advantage of the burgeoning consumerism. Good examples of this type of integration are arrangements such as Anthem's Vivity Network, the joint venture formed in Southern California including providers such as UCLA Health and Cedars-Sinai. In all, Vivity will include 14 hospitals and over 6000 physicians. Networks, such as Vivity, are being designed to produce significant savings and profit by reducing unnecessary tests and unneeded hospital and emergency room admissions.
Payers are also likely to become much more interested in the acquisition of physician practices and/or independent practice associations. Like hospitals and health systems, payers are keenly aware that physicians mean patients. Health plan/IPA transactions, especially IPAs with the capability to manage risk, seem like natural outgrowths of the trend to more value based reimbursement models.
It is also likely that certain providers will consider testing the waters and becoming payers themselves. Anxious to jump start population health management and take advantage of local branding, we expect certain markets to see providers developing their own health plans, either by themselves or in partnership with existing insurers and health plans. Hospitals will want to tread lightly, however, and/or ensure that they pick the right partners. The business of taking population risk as a payer is complicated and fraught with traps for the unwary.
Physician-Hospital Relationships
There is little doubt that physicians and hospitals will continue developing new, and modifying old, partnership arrangements. Hospitals remain very interested in their relationships with physicians, whether through employment or joint ventures such as co-management or shared savings, i.e., gain sharing, arrangements or facility deals around outpatient services. Likewise, many physicians see hospital partnerships as "safe harbors" and continue to seek them out.
In this regard, we expect to continue to see physician owned outpatient facilities, such as ambulatory surgery centers and physician owned hospitals, seek out hospital system partners, and to be welcomed by their new partners with open arms. Physician-only owned facilities are finding it increasingly difficult to contract with payers on terms they (the physicians) find acceptable. Doctors have come to realize that a hospital system partner can make a significant difference when negotiating favorable rates and deals payers. In addition, multiples for these facilities are at all time highs (approaching 9-10 times free cash flow in some markets) making this an advantageous time to trade interests in these organizations. Hospitals, anxious to buy back volume lost long ago, are happily spending the capital necessary to invest in these entities and, in many cases, are taking majority ownership stakes
Roger Strode is a partner in the Health Care Practice at Foley & Lardner LLP. His practice focuses on health care business transactions, including mergers, acquisitions, corporate restructurings and joint ventures; general corporate matters and health care regulation. Mr. Strode can be reached at 312.832.4565 or rstrode@foley.com
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