For-Profit Firms Eyeing Non-Profit Hospitals: A Growing Trend?

In the wake of healthcare reform's passage, two major deals involving the possible acquisition of large non-profit hospital systems by for-profit firms have been announced: Vanguard Health Systems' acquisition of eight-hospital Detroit Medical Center and private equity firm Cerberus Capital's acquisition of Boston's Caritas Christi Health Care.

The deals — worth $850 million and $830 million, respectively — are leading investors and others to wonder if the recent passage of health reform has made non-profit hospitals, as the Wall Street Journal put it, the new "hot commodity?" Obamacare is expected to expand the number of insured Americans by 32 million, which is expected to increase the revenue of non-profit hospitals that currently write off at least a portion of the cost of care they provide to the uninsured.

However, reform "isn't a total boon for [these] hospitals," according to the Wall Street Journal report. Under Obama's plan, Medicaid enrollees will grow but annual increases in Medicaid reimbursements will be cut. At the same time, many within the healthcare industry expect similar Medicare reimbursement cuts are inevitable in coming years as Medicare rolls expand.

While Nashville, Tenn.-based Vanguard is experienced in hospital turnarounds, typically acquiring bankrupt or near-bankrupt facilities and turning them into for-profit hospitals, New York-based Cerberus's acquisition of Caritas Christi will be the first health system in the firm's portfolio, according to a report by the Boston Globe

The move by a traditionally non-healthcare investor into the healthcare sector signals a possibly emerging trend brought on by the passage of healthcare reform wherein more and more investors are seeing ailing health systems as profitable investments, if they can be successfully turned around.

Richard Ciccarone, head of municipal research at McDonnell Investment Management, said in a report by financial news outlet, The Bond Buyer, "The fact that these two hospitals, which have struggled over the years and are situated in markets with lower incomes and higher uninsured patients, are targets of takeovers suggests [private companies] are looking at these types of systems as being beneficiaries under the new rules."

Transitioning a non-profit hospital to a for-profit one has at least one benefit for communities — increased tax revenue. Brett Ingersoll, co-head of private equity at Cerberus, said in the Boston Globe report that transitioning Caritas Christi to a for-profit entity would "create jobs [and] expand local tax bases." Critics of such deals, however, argue that the loss of health systems providing charity care further threatens healthcare access to the uninsured. The CBO has estimated that about 23 million Americans will remain uninsured even after current legislation is fully enacted (view the CBO estimate (pdf)).  Both the Vanguard and Cerberus deals face several stages of approval, and healthcare and financial industry insiders alike are likely to closely follow their outcomes.

The investment by private equity firms in these hospitals in large part reflects the fact that money is not coming out of the healthcare system over the course of the next several years. While reimbursement cuts could eventually impact profit margins, they aren't likely to be enacted for at least 3-5 years, and the hospital sector is in as good as shape as any sector in terms of protection from reimbursement cuts.

Contact Lindsey Dunn at lindsey@beckersasc.com.



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