The federal government recently loosened the index it uses to measure the amount of concentration in each hospital market and thus determine whether agencies like the Federal Trade Commission would oppose the merger. Navigant Consulting analyzed the government's changes in the Herfindahl-Hirschman Index and determined 11 markets would move from "moderately concentrated" to "unconcentrated." Here Chris Myers, a director at Navigant, discusses the implications of this change.
Question: What will be the impact of this change?
Chris Myers: Hospital merger and acquisition activity is already picking up and this will likely accelerate the trend. The markets that have moved to "unconcentrated" because of changes in the index are Baltimore, Boston, Detroit, Houston, Kansas City, Miami, New Orleans, Orange County, Oklahoma City, San Francisco and Seattle. It is interesting that several of these markets were already heating up. The two largest acquisitions this year are in the Boston and Detroit areas, which are on the list.
Q: Why do you think the government has loosened the standards?
CM: The guidelines had not been updated since 1992. I also suspect healthcare reform has a role in this. The federal government may think that is hospitals consolidate more, it will be easier for them to coordinate care. Even before this change, the Federal Trade Commission wasn't blocking that many hospital deals. In some cases, they objected to a deal but allowed it to go through as long as the two hospitals agreed to negotiate separately with payors.
Q: How consolidated are hospitals compared with other industries?
CM: Hospitals are a cottage industry. The airline industry has just a few large players, but in healthcare, the 10 largest health systems have less than 15 percent market share. Prestigious brand names tend to be local, such as Johns Hopkins in Baltimore. Except for the for-profit systems, hospitals have not moved into new markets. There are a few exceptions, such as Novant straddling two markets in North Carolina and Sutter in both Sacramento and San Francisco. But in most places you don't see it, even in the same state. For example, there is no effort to link St. Louis hospitals with Kansas City hospitals. But this may change. Advocate recently went out of the Chicago area and acquired a hospital in central Illinois.
Q: How strong is the current trend of mergers and acquisitions?
CM: One impressive development is the fact that even distressed hospitals can attract the interest of a few borrowers. For example, Forum Health in Youngstown, Ohio, had the interest of multiple parties, even though it was bankrupt. The thinking seems to be that even in a battered economy like Youngstown's, the uninsured will gain coverage under healthcare reform. Of course, it tends to be the for-profits that buy up distressed hospitals. They tend to have the best access to capital.
Q: Are not-for-profits also participating in buying up hospitals?
CM: Yes, but they tend to do it in a smaller scale, one hospital at a time. When they buy a facility, they expect to hold onto it, which is not always the case for the for-profits.
Learn more about Navigant Consulting.
Question: What will be the impact of this change?
Chris Myers: Hospital merger and acquisition activity is already picking up and this will likely accelerate the trend. The markets that have moved to "unconcentrated" because of changes in the index are Baltimore, Boston, Detroit, Houston, Kansas City, Miami, New Orleans, Orange County, Oklahoma City, San Francisco and Seattle. It is interesting that several of these markets were already heating up. The two largest acquisitions this year are in the Boston and Detroit areas, which are on the list.
Q: Why do you think the government has loosened the standards?
CM: The guidelines had not been updated since 1992. I also suspect healthcare reform has a role in this. The federal government may think that is hospitals consolidate more, it will be easier for them to coordinate care. Even before this change, the Federal Trade Commission wasn't blocking that many hospital deals. In some cases, they objected to a deal but allowed it to go through as long as the two hospitals agreed to negotiate separately with payors.
Q: How consolidated are hospitals compared with other industries?
CM: Hospitals are a cottage industry. The airline industry has just a few large players, but in healthcare, the 10 largest health systems have less than 15 percent market share. Prestigious brand names tend to be local, such as Johns Hopkins in Baltimore. Except for the for-profit systems, hospitals have not moved into new markets. There are a few exceptions, such as Novant straddling two markets in North Carolina and Sutter in both Sacramento and San Francisco. But in most places you don't see it, even in the same state. For example, there is no effort to link St. Louis hospitals with Kansas City hospitals. But this may change. Advocate recently went out of the Chicago area and acquired a hospital in central Illinois.
Q: How strong is the current trend of mergers and acquisitions?
CM: One impressive development is the fact that even distressed hospitals can attract the interest of a few borrowers. For example, Forum Health in Youngstown, Ohio, had the interest of multiple parties, even though it was bankrupt. The thinking seems to be that even in a battered economy like Youngstown's, the uninsured will gain coverage under healthcare reform. Of course, it tends to be the for-profits that buy up distressed hospitals. They tend to have the best access to capital.
Q: Are not-for-profits also participating in buying up hospitals?
CM: Yes, but they tend to do it in a smaller scale, one hospital at a time. When they buy a facility, they expect to hold onto it, which is not always the case for the for-profits.
Learn more about Navigant Consulting.