More hospitals looking to merge, buy physician groups

Looser credit and anticipation of changes under health system reform are among factors fueling renewed interest in creating more consolidated systems.

By — Posted Sept. 7, 2009

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After a lull in hospital and health system mergers, the deals are coming back. As a result, physicians interested in selling their practices to hospitals might find more willing takers.

Experts say thawing credit markets are helping to restart mergers that had stalled after these financial markets seized up last fall. The ongoing recession and the possibility of health system reform also has hospitals talking deals as a way to protect themselves in uncertain times.

"With the debate about health care reform and the current economy, there's a sense that the economics of health care are never going to be the same," said Rick Wade, senior vice president at the American Hospital Assn. "Maybe it is time to look at consolidation and be prepared."

There also may be an increased interest in acquiring physician practices. An AHA survey released April 27 found that the number of hospital CEOs observing an increase in the number of physicians looking to sell their practices grew from 31% in November 2008 to 37% in March of this year. The report did not note how many institutions were actually buying, but observers believe that hospitals are increasingly looking to do so.

"I'm seeing now more hospitals buying physician groups and physician groups agreeing to be bought," said Sandy Steever, PhD, editor of the Health Care M&A Information Service published by Irving Levin Associates Inc.

A market overview of Chicago issued by HealthLeaders-InterStudy, a Nashville, Tenn.-based company that provides managed care data, concluded that "many practices [in this part of the country] that were already considering consolidating with a larger group or health system in financially secure times are now actively shopping their practices, and hospitals are buying."

Consolidations dropped in 2008

Hard numbers documenting an increase in either hospital mergers or medical practice acquisitions are not yet available for this year, although those for 2008 documented a significant downturn. According to the "Health Care Acquisition Report" issued March 26 by Irving Levin and edited by Steever, 468 deals involving health care service companies occurred in 2008. This was a decrease of 4% from the 489 in 2007. The biggest impact came in the dollar value of those deals, which fell by 68% from $56.8 billion in 2007 to $18.2 billion in 2008.

Several large deals have, however, been made public recently, and those who monitor the industry suspect the numbers to start increasing.

For example, Prince William Health System in Manassas, Va., which includes a 170-bed hospital along with several other facilities, and Novant Health, a much larger system in North Carolina, completed a merger July 1.

Lifespan, which includes five hospitals in Rhode Island, filed an application July 9 with the state to affiliate with Care New England Health System, which runs three institutions in the state. On July 17, South Dakota's Sanford Health and North Dakota's MeritCare Health System signed a letter of intent to merge. The consolidation will create a system spanning span five states.

The April 27 AHA report noted that 9% of hospital CEOs were contemplating a merger in response to the poor economic conditions, but experts also suspect that several other trends are triggering more activity in this area. Some of this is a result of demand that built up during the downturn. Recent loosening of the credit and bond markets is making these deals more possible.

"The capital markets are starting to unfreeze," said Steever. "We're going to be seeing more activity. We have seen less in the last year or so because of the terrible conditions in the credit and bond markets. It was hard to raise money."

Experts caution, however, that just because merger arrangements have been announced does not always mean they are done deals. Many suspect the Federal Trade Commission under the Obama administration will be subjecting these deals to greater scrutiny than it did under the Bush administration. And mergers do sometimes fail for other reasons. Experts say it is critical to involve physicians and others affected in order for the process to go well.

"It can be quite tumultuous in the community," said Alison Cuellar, PhD, associate professor in health administration and policy at George Mason University in Fairfax, Va., who has researched the impact of hospital mergers. "And if physicians are not on board, you cannot make a lot of progress in terms of patient care and quality."

American Medical Association policy advocates that when consolidation occurs, a joint committee of affected medical staffs be formed to tackle representation on the board of the newly formed organization, determine what clinical services to offer where, and work out the process for amending medical staff bylaws among other issues.

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