Hospital Mergers & Acquisitions: Opportunities and Challenges

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1 HEALTHLEADERS MEDIA INTELLIGENCE UNIT Access. Insight. Analysis. Hospital Mergers & Acquisitions: Opportunities and Challenges Healthcare leaders expect some high-quality bargains among recession-wracked organizations, and the continuing courtship between hospitals and physician practices is expected to heat up in BY KAREN MINICH-POURSHADI An independent HealthLeaders Media Survey supported by About This Survey. The Hospital Mergers & Acquisitions: Opportunities and Challenges study was conducted by the HealthLeaders Media Intelligence Unit. It is part of a series of monthly Thought Leadership studies. In September 2010, an online survey was sent to the HealthLeaders Media Council and select members of the HealthLeaders Media audience. For the purposes of this study, respondents were screened to ensure they work in a hospital or health system setting. A total of 208 completed surveys are included in the analysis. The margin of error for a sample size of 208 is +/- 6.8 percentage points. A detailed report and analysis can be found online after November 15, at doug ponte 50 HealthLeaders November 2010

2 Do you expect acute care hospitals M&A activity in the following sectors to increase, decrease, or remain the same over the next 12 months? INCREASE DECREASE STAY THE SAME Physician practice acquisition and employment 92% 2% 6% Diagnostic imaging 64% 8% 28% Ambulatory surgery center 64% 7% 29% Insurance/payer plan 49% 16% 35% What Healthcare Leaders Are Saying Here are selected comments from the HealthLeaders Media intelligence report, Hospital Mergers & Acquisitions: Opportunities and Challenges. Home health 46% 14% 40% Long-term acute care hospital 40% 9% 51% Rehabilitation 38% 11% 51% Hospice 33% 12% 55% Nursing home 32% 17% 51% Dialysis 27% 17% 56% Psychiatric hospital 14% 24% 62% Has your organization engaged in or considered the acquisition of distressed assets in your market or in another attractive market segment (geographic or operational)? No 50% Yes 50% There just isn t the money available for capital for infrastructure, let alone the capital for acquisitions. So those that have it will continue to acquire what they need to be an accountable care organization. Vice president, large nonprofit health system There will be incentives to merge because small hospitals cannot financially keep up with new technology requirements and thus their aging infrastructure will drag down their competitive capabilities. There will be tax incentives, opportunities to spread. CIO, large nonprofit health system If it seems as if merger and acquisition activity has picked up in 2010, just wait. The 2010 HealthLeaders Media Healthcare Mergers and Acquisitions Survey shows that 86% of healthcare leaders expect that 2011 will hold more mergers and acquisitions in the acute care hospital sector. Only 1% of respondents expect an M&A slowdown. With many facilities struggling financially over the past two years, most survey respondents feel that a tide of transactions is inevitable, and more than half (56%) say acquisitions will involve distressed acute care hospitals and 54% believe distressed acquisitions will take place with other providers of services (e.g., ambulatory surgery centers). Interestingly, nondistressed acquisitions scenarios stacked up nearly equally; 60% of respondents expect acquisitions involving healthy hospitals or other providers of services. I think there will be a lot of distressed organizations looking for homes. Dennis Dahlen In better economic times, distressed acquisitions were viewed as a no-no in some circles, especially as a mechanism for growth. However, the recession put a lot of financially stable organizations on shaky financial ground, opening up the market The financial performance of healthcare as a whole is going in the toilet and it will get worse as the reform legislation is implemented. The cost to implement will be three times what has been projected. CEO, small nonprofit hospital Although reimbursement, uncompensated care, and an aging population will all adversely affect margins, ACOs and the possibility of bundled payments related to value-based purchasing will place demands to expand integration strategies to survive. Chief medical officer, large nonprofit health system Hospitals with good ratings will be able to borrow money as it provides a relatively safe haven for investors in these turbulent times in the market. CFO, midsize nonprofit hospital HealthLeaders November

3 How likely do you expect each of the following transaction types between or impacting acute care hospitals will be over the next 12 months? TOP 2 (Extremely EXTREMELY LIKELY NEUTRAL NOT VERY NOT AT likely, Likely) LIKELY LIKELY ALL LIKELY Acquisitions 60% 26% 34% 32% 6% 1% Distressed acquisition 56% 26% 30% 30% 11% 3% Joint venture with another acute care hospital 43% 14% 29% 37% 18% 2% Mergers of equals 32% 9% 23% 34% 31% 4% Private equity purchase 23% 7% 16% 34% 34% 9% How likely do you expect each of the following transaction types between acute care hospitals and other providers of services, such as ambulatory surgery centers, diagnostic imaging, home health and hospice, will be over the next 12 months? TOP 2 (Extremely EXTREMELY LIKELY NEUTRAL NOT VERY NOT AT likely, Likely) LIKELY LIKELY ALL LIKELY Acquisitions 59% 24% 35% 26% 13% 1% Distressed acquisition 54% 18% 36% 31% 13% 3% Mergers of equals 26% 7% 19% 31% 37% 6% Private equity purchase 26% 6% 20% 34% 35% 5% How challenging do you anticipate each of the following issues in the M&A process will be over the next 12 months? TOP 2 (Extremely EXTREMELY VERY CHALLENGING NOT VERY NOT AT ALL challenging. Very CHALLENGING CHALLENGING CHALLENGING CHALLENGING CHALLENGING challenging) Access to capital 65% 28% 37% 31% 3% 0% Agreement on valuation 54% 16% 38% 38% 8% 0% Medical staff issues 54% 18% 36% 32% 13% 1% Integration 54% 17% 37% 36% 10% 0% Political considerations 48% 18% 30% 37% 14% 1% Competition for targets 46% 10% 36% 40% 13% 1% Community considerations 41% 9% 32% 37% 22% 0% Resolution of regulatory compliance issues 38% 13% 25% 46% 16% 0% Identifying the target 22% 3% 19% 39% 36% 2% for stronger organizations to swoop in and get a great bargain. I think there will be a lot of distressed organizations looking for homes, says Dennis Dahlen, senior vice president of finance and CFO for the 23-hospital, Arizona-based Banner Health. In many cases you find a distressed organization and there s somebody who could make something out of it. In a general sense no one wants to take on a distressed problem but you can use it to build market coverage and strengthen your network. What we see happening is hospitals are preparing for new payment models, like ACO and bundled payments, so they want to align themselves with physicians plus the emphasis on quality and efficiency and the EMR will drive physician practices to be more open to employment arrangements and acquisitions. Reggie Hill The survey indicates that 92% of healthcare leaders expect physician practices to make up the lion s share of mergers and acquisitions over the next 12 months, while 64% of respondents expect to see both diagnostic imaging centers and ambulatory surgery centers changing hands in A large volume of private practices will seek merger partners among hospitals, and independent physician groups will join multispecialty group practices, wrote one respondent, a CEO at a midsize hospital. 52 HealthLeaders November 2010

4 In which of the following physician specialties do you expect acute care hospitals M&A activity to increase in the next 12 months? Hospitalists Primary care Cardiology 66% 69% 70% Orthopedics Cardiovascular Oncology General surgery 43% 45% 54% 57% Women s health 38% Imaging/radiology 33% Emergency medicine Anesthesia Neurosurgery Neuroscience Pediatrics Geriatrics 29% 28% 28% 27% 27% 25% Neonatology 14% In a general sense, no one wants to take on a distressed problem... but you can use it to build market coverage and strengthen your network. Dennis Dahlen The hospital and physician practice merger scenarios are already taking shape in For instance, Northwest Community Hospital in Arlington Heights, IL, and Affinity Healthcare, a multispecialty physician practice in Riverwoods, IL, began the merger process last March. In October, Michigan-based Saint Joseph Mercy Health System and IHA, a leading physician group practice in that region, announced a strategic merger with the goal of developing a new integrated health network. With practices topping the most likely to merge list, most of the respondents see hospitalists, primary care, and cardiology group practices as the most likely candidates to couple with acute care hospitals. What we see happening is hospitals are preparing for new payment models, like ACO and bundled payments, so they want to align themselves with physicians plus the emphasis on quality and efficiency and the EMR will drive physician practices to be more open to employment arrangements and acquisitions, says Reggie Hill, partner at Nashville-based Waller Lansden Dortch & Davis LLP, a national healthcare law firm that provided support for this independent HealthLeaders Media research. HealthLeaders November

5 Which of the following issues in the M&A process has resulted in termination of a proposed transaction at your organization in the Past 12 months? PERCENT Agreement on valuation 50% Access to capital 48% Political considerations 44% Community consideration 36% Medical staff issues 31% Resolution of regulatory compliance issues 19% Integration 17% Identifying the target 5% Not applicable 43% Applicable 57% Which of the following financing approaches would your senior management team seriously consider as a means to finance acquisitions in the next 12 months? PERCENT Tax-exempt bond or debenture financing 63% Traditional bank financing (senior secured) 50% Healthcare specialty lending (senior secured) 45% Intercompany financing (through parent or system) 31% Taxable bond financing (convertible or high yield) 27% Private equity investment 20% Divestiture of other assets 17% HUD 242 loan financing 9% REIT mortgage financing 8% Seller financing 6% Mezzanine financing or subordinated debt 6% Public sale of equity securities 4% Second lien financing 2% Not applicable 31% Applicable 69% Do you anticipate access to capital for acquisitions will improve, decline, or stay the same over the next 12 months? Remain the same 38% Improve 25% Decline 38% With 2010 offering a glimpse of what may be coming, both hospitals and group practices will likely be keeping a watchful eye on their competitors not only for the opportunity to buy, but also the opportunity to sell in Interestingly, the need to merge may be in sharp contrast with the ability for many to do it. The survey results also showed that 65% of respondents think that getting access to capital will be challenging or extremely challenging in the coming year, while 54% anticipate problems reaching an agreement on valuation. One area, however, that doesn t appear to concern healthcare leaders is identifying the target for acquisition. Only 22% of respondents felt that would be a challenge in the coming year. Karen Minich-Pourshadi is senior finance editor for HealthLeaders Media. She may be contacted at [email protected]. Reprint HLR P o w e r e d b y C HEALTHLEADERS uncil MEDIA The nation s most exclusive healthcare intelligence community About the HealthLeaders Media Intelligence Unit The HealthLeaders Media Intelligence Unit, a division of HealthLeaders Media, is the premier source for executive healthcare business research. It provides analysis and forecasts through digital platforms, printed publications, custom reports, whitepapers, conferences, roundtables, peer networking opportunities, and presentations for senior management. The HealthLeaders Media Intelligence Unit is powered by the HealthLeaders Media Council. To learn more about joining the Council, please visit mediacouncil.com/. 54 HealthLeaders November 2010

6 The Go-To Law Firm for Healthcare M&A In 2010, Waller Lansden has been counsel to healthcare mergers and acquisitions with an aggregate value of more than $4 billion. Hospitals Surgery Centers Cancer Treatment Dialysis Senior Living Home Health and Hospice Life Sciences Healthcare Information Technology 511 Union Street Nashville, TN