Experts Urge More Caution in Hospital Consolidation

The drive toward value-based care and reimbursement pressures will continue to drive hospital consolidation, according to several panelists at last week’s Healthcare Dealmakers Conference at the Ritz Carlton in Dallas.

Anne McGeorge, managing partner at Grant Thornton in Charlotte, North Carolina, called consolidation “the gift that keeps on giving for consultants.”

“It is being driven by costs and capital spending requirements (especially for information technology),” she continued.

Some panelists warned that systems are consolidating with inadequate due diligence.

“You have to do your homework,” said David Kottak, partner at BKD LLP, an accounting firm in Louisville, Kentucky. “Once you are out of your regional footprint, you have to be careful because there may be other influences” that affect successful integration.

Peter Urbanowicz, managing director at Alvarez & Marsal Healthcare Industry Group in Washington, D.C., said systems are getting bigger and assume that they will be able to gain economies of scale but “don’t know whether this will actually happen.”

Gordon Maner, president of AMB Investment Banking in Charleston, South Carolina said he expects a wave of acquisitions among physician-owned hospitals. He said national health systems view acquisition of those hospitals as a way to establish a beachhead in specific markets. He estimated that 90 percent of physician-owned hospitals are considering being acquired or doing joint ventures.

Brent McDonald, of Bank of America Merrill Lynch in Dallas, warned that the federal government “is putting the brakes on same-market mergers aimed at building scale.”

In 2013, more than 3 out of 4 either were exploring a possible merger or were in the midst of one.

There has been a steady increase in hospital merger and acquisition (M&A) deals in the past decade. In 2003, there were 38 M&A deals involving 56 hospitals. In 2011, there were 90 deals involving 156 hospitals. From 2007 to 2012, 432 deals were announced, involving 835 hospitals.

The Healthcare Financial Management Association identified three major forces behind recent hospital mergers:

  • The need to improve economies of scale and market leverage in negotiations with payers.
  • Physician employees, technology and regulatory compliance are raising overhead costs.
  • The drive to create accountable care delivery systems to improve quality and lower costs.

McGeorge said she is seeing an increased number of failed health systems, pointing out that her company’s fastest-growing division deals with bankruptcies and company turnarounds. She said the most frequent causes of those failures were poor management, inadequate board oversight, compliance breaches, overreliance on government reimbursement, and stubbornly clinging to independence.

Urbanowicz said he is also seeing more systems in default “or on the road to it.” He said companies are struggling with lower patient volumes, lack of market power, and poor revenue-cycle management. He said bad debt is growing because systems have not adjusted well to the growth of high-deductible health plans.

There were seven hospital bankruptcies in the first quarter of 2014.

The conference, previously called the Southwest Healthcare Transactions Conference, is in its seventh year. The invitation-only gathering attracted more than 200 attendees from 20 states, which was a 25 percent increase from the 2013 event.

Steve Jacob is founding editor of D Healthcare Daily and author of the books Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors and Skyrocketing Costs Are Taking Us and So Long, Marcus Welby, M.D: How Today’s Health Care is Suffocating Independent Physicians. He can be reached at

Posted in Hospitals, News.