Facing financial difficulties and an eagerness to grow, nonprofit and smaller hospitals are looking towards merging with larger health systems. Moody’s Investors Service’s new report found that 20% of nonprofit hospitals were losing money. Not only that, the report also found 63% of nonprofit hospitals’ attained 0 to 5% margins.
What is the cause of this attraction to larger hospital systems? Three items come to mind: reimbursement cuts, increased capital and large hospital systems seeing an economic advantage.
1) Lower Reimbursements:
More severe cuts are being made to Medicaid and Medicare and some states are even trying to opt out all together. A judge in Arizona recently upheld the state’s plans to implement harsh cuts to its Medicaid program. Now adults will not be covered which should save the state $190 million. As their main source of reimbursement, nonprofit hospitals need to find new solutions to mitigate this dwindling financial strategy making them seek larger health systems’ assistance.
2) Increased Capital:
When seeking to merge and/or sell themselves to these larger entities, the smaller and nonprofit hospitals can expect some of their capital needs to be met: increasing efficiency, lowering operating costs and making the once financially unstable hospital a lucrative one. Such was the case for Detroit Medical Center (DMC) when they sold themselves to Vanguard Health Systems. In the deal, the floundering medical center received $417 million to reduce its debt and an additional $850 million to revamp their facilities. Through the sell, DMC has the ability to not only keep the facility running by investing in the latest technology, but to enhance patient care and reduce operating margins as well.
3) Eager Health Systems:
While helping the nonprofit systems, there is much to look forward to for the health system looking to acquire. Health reform is a blessing in this case. While reimbursement may be low, health reform will only help the bottom line as indigent care will now have increased value. With increased support service, the acquiring health system will have more centralized and consolidated support services providing considerable cost savings as indicated by the Moody’s Investors Service report. Additionally, outpatient revenues may also be increased as outpatient care clinics may compose part of the smaller health systems portfolio and since patients continue to seek treatment in these preferred locations.
When a nonprofit hospital is considering becoming acquired the advantages are great, but be wary the core mission is not compromised. When for-profits health systems become involved the charity care aspect has a way of being reduced. As the uptick in hospital merges continues, the potential for fledging health systems’ is promising.
James Ellis, CEO, Health Care Realty Development Company, is a nationally recognized successful real estate investor and developer of medical office properties with a comprehensive knowledge of sophisticated real estate transactions, cost effective designs, and efficient property management.
Aaron Razavi is Associate Marketing Director at Health Care Realty Development.
Visit their blog at http://www.hcrealty.com/medicalrealestatedevelopment/