With the dust settling on the Supreme Court's Affordable Care Act ruling, the question of whether the decision will lead to increased M&A activity in the hospital and healthcare industry can now be answered with a definitive yes, no and we'll see.
The Supreme Court's ruling left the 2010 healthcare reform legislation largely in place, nullifying only the provisions that would have penalized states choosing not to expand Medicaid eligibility. A legislative repeal of the Affordable Care Act (ACA) would likely require a Republican sweep in the November elections, and despite campaign rhetoric to the contrary, this seems to be highly unlikely (especially to obtain a 60-seat filibuster-proof supermajority in the Senate). It would appear that the ACA, which represented a significant overhaul of the country's health care system and structure, will be with us for at least the near future.
With some measure of certainty now in place, there has been a noticeable increase in interest in deal-making activity in the hospital sector. Hospital systems that adopted a wait-and-see attitude have started to explore acquisitions, partnerships and alliances, and there is no shortage of potential partners who are willing to listen to fresh overtures. Increasingly, these organizations, primarily nonprofit hospitals, recognize that even two- and three-hospital systems will be hard pressed to stand on their own in light of the Medicare reimbursement cuts contained in the ACA and new payment models on the horizon.
For hospitals in states that opt-out of the Medicaid expansion, the need to align with larger systems will be even greater. Several governors have already announced their states would opt out, and hospitals in these states that are already facing a steep uphill climb could have no alternative but to consolidate if there is no increase in the number of insured residents.
Drivers for consolidation in the healthcare industry can be either financial requirements or strategic opportunities. Alignment with larger health systems provides operational savings through group purchasing, back office expenses and other efficiencies and economies of scale. On the acquisition side, distressed hospitals and systems are not the only candidates looking for potential partners. It can also be expected that high-performing, credit-worthy hospitals and health systems will draw significant interest. Investor-owned healthcare providers will be motivated to enhance their cash flow and buoy their stock prices by acquiring these prime facilities and systems. Large tax-exempt health systems, on the other hand, are in a good position to absorb an underperforming asset and improve its margins. This turnaround approach provides return on investment while simultaneously establishing scale.
Increased transactional volume is also likely in vertical markets as hospitals and payors acquire or align with home health agencies, skilled nursing facilities and other providers to position themselves for new delivery and payment models - such as accountable care organizations (ACOs) and bundled payments.
Also likely is increased consolidation among post-acute care providers seeking to gain critical mass. For example, Genesis HealthCare LLC, which operates long-term care, senior living and rehabilitation facilities, recently announced that it had agreed to acquire skilled nursing provider Sun Healthcare Group Inc. With more than 420 facilities nationwide, the combined organization would have the "scale necessary to remain competitive in the post-acute sector," according to a statement released by the two companies following the announcement.
While the Genesis HealthCare-Sun Healthcare transaction involves providers with similar service lines, there have also been announcements of acquisitions and joint ventures involving somewhat strange bedfellows. DaVita, Inc., a Fortune 500 provider of dialysis services, announced plans for a merger with HealthCare Partners, the country's largest operator of medical groups and physician networks. Inova Health System and Aetna announced their strategic partnership to establish a jointly owned health plan to serve the Northern Virginia market.
In addition, with the anticipated increase in the number of Medicaid enrollees, private Medicaid managed care companies and similar players are being sought after, as recently seen in WellPoint's announcement of the proposed acquisition of Amerigroup Corp. It is likely that there will be more announcements involving organizations aligning their interests with partners from different segments of the healthcare industry.
For the reasons outlined above, an increase in healthcare M&A activity seems probable in the wake of the Supreme Court decision. It must be noted, however, that healthcare M&A has been on the rise for the past few years for precisely the same reasons. Many health systems have been gearing up to operate under the ACA's full provisions since the date of its enactment in 2010. Most healthcare providers believed declining Medicare reimbursement rates and the development of new payment and delivery models were here to stay no matter how the Supreme Court ruled. This perspective is underscored by the fact that hospitals and health systems have been actively pursuing the acquisition of physician practices and other healthcare providers in the markets in which they operate since the ACA's enactment.
The reshaping of the healthcare marketplace through innovative partnerships also predates the Supreme Court ruling. Duke LifePoint Healthcare, a joint venture between Duke University Health System and LifePoint Hospitals, and Ascension Health Care Network, a joint venture between Ascension Health Alliance and Oak Hill Capital Partners, were each established in early 2011 to assemble networks of hospitals and healthcare providers. Both joint ventures have been actively seeking and acquiring and partnering with hospitals since their formation despite any perceived uncertainties associated with the Supreme Court ruling.
We'll See . . .
The simple truth is that acquiring a hospital or a health system takes time. If an organization waited until the Supreme Court ruled on the ACA to begin making plans for an acquisition, merger or joint venture, it could very well be the second half of 2013 before the transaction is finalized. In addition, any consolidation within the healthcare industry could be further complicated and delayed by the increasing level of scrutiny the Federal Trade Commission is directing toward healthcare transactions with respect to antitrust issues and state attorneys general challenges to hospital transactions. Between now and then, a number of other factors could come into play that could also impact individual transactions and industry trends, including election results, economic conditions and other market developments.
While the Supreme Court's ruling upholding the ACA may trigger a further rise in healthcare transactional volume, a great deal of activity was already under way. Will these trends continue? We'll see what happens.
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