HealthLeaders Media

Don’t look for a slowdown in healthcare mergers and acquisitions anytime soon. While the era of mega mergers has peaked, one observer says to watch for robust consolidation activity among small health systems and stand-alone hospitals.

How are hospitals and health systems preparing for the financial effects of health insurance exchanges and other key pieces of health reform legislation? One popular strategy that is unlikely to abate any time soon is to consolidate with other providers.

This is a way of creating population health management alliances, preparing for the shift in patient volume to ambulatory settings, and finding economies of scale for supply chain purchasing.

Birth of a Mega System
The latest health system mega merger is between Baylor Health Care System and Scott & White Healthcare, which sealed the deal to create Dallas-based Baylor Scott & White Health in September, almost a year after it was announced.

The combined $8.3 billion organization has 43 hospitals, more than 6,000 physicians, 34,000 employees, and more than 500 patient care sites, making it the largest not-for-profit health system in Texas.

I recently asked Frederick Savelsbergh, who was CFO at Baylor Health Care System and now holds the same position within the new organization, what influenced Baylor’s decision to merge with Scott & White. He said preparing for the impact of the Patient Protection and Affordable Care Act was a major factor.

“Obviously, this is a time of great change in how healthcare is delivered in our country. In this new era, health systems must be prepared for declining reimbursement, high levels of information management, an increasing demand for outpatient services, and the population health management drive to advance the wellness of large groups of patients rather than to focus on sick care,” Savelsbergh says.

“We think that this has led to the need for more partnerships among those who provide healthcare. Baylor Scott & White Health is building a new national model for healthcare delivery engineered to meet the demands of healthcare reform, the changing needs of patients and payers, and the extraordinary advances in clinical care.”

Savelsbergh also says that the union was a long time in the making. “Baylor and Scott & White began talking years ago because we both understood how joining forces could provide us greater strength through this changing time.”

He says the organizations are “like-minded” and are looking to achieve the same strategic and financial goals from the merger.

“Strategically, it’s important to keep in mind that this merger was done to improve care and increase access to care for patients while gaining efficiencies to bend the cost curve.… We expect improved patient outcomes by combining the expertise of primary care physicians, medical specialists and adopting the best practices of both organizations,” Savelsbergh says.

“From a finance perspective, there are a number of ways we are exploring financial improvements, including increased use of technology, supply purchasing, shared best practices, and other operational efficiencies that will benefit the organization and patient services,” he adds.

Smaller M&A Deals Expected in 2014
While the Baylor and Scott & White merger is one of several transactions between major players this year—including Tenet Healthcare Corp’s purchase of Vanguard Health and Community Health Systems’ purchase of Health Management Associates—Lisa Phillips, editor of healthcare data research firm Irving Levin Associate’s Health Care M&A News, doesn’t expect to see many big mergers and acquisitions deals in 2014.

“It’s easy to say [there will be] more of the same, but I don’t think we will see more multi-billion-dollar deals in this sector next year. Perhaps one, but not more,” Phillips says, noting that the Tenet/Vanguard and Community Health/HMA deals represent a total value of $11.9 billion.

Deals at that value level “probably won’t be repeated next year,” she told me.

What Phillips does expect to see is robust consolidation activity among small health systems and stand-alone hospitals.

“The obvious driver is the Affordable Care Act and the changes it requires in the economics of delivering healthcare. That in turn is driving hospitals and health systems to seek greater economies through scaling up, partnering, or merging with other hospitals or health systems,” she says. “One-off deals will continue to happen as the ACA’s full effects kick in.”

Phillips also predicts that next year’s most vigorous healthcare M&A action will be in post-acute care settings as hospitals and health systems work to improve their ability to provide care outside of the hospital setting and to reduce their readmission rates.

“Hospitals that have already merged or aligned with other systems and have secured the physicians medical groups that they need will turn their attention to the post-acute care side of the delivery system,” she says. “I think we’ll see more deals in the home health and hospice, skilled nursing facilities, rehabilitation, and behavioral healthcare sectors as health systems try to nail down their end-to-end care continuums.”