Merger and acquisition activity continued at a robust pace in the closing months of 2013, and by all accounts, the industry will see more of the same in 2014.
Consider a few recent statistics from M&A data publisher Irving Levin Associates and from Hammond Hanlon Camp, a New York-based strategic advisory and investment banking firm that is focused on the healthcare industry:
M&A activity increased by nearly 20 percent in the third quarter of 2013 compared with the same period in 2012 The number of reported mergers or acquisitions in the third quarter 2013 was 267, up from 223 in the same period in 2012 The value of M&As in the third quarter 2013 was $51 billion, a 35 percent increase from the 2012 value of the same period, but it was down by 4 percent from the second quarter of 2013What these statistics speak to is a trend playing out nationwide – a steady increase in the number of mergers and acquisitions taking place, but a declining total in the overall value of those deals. The reasons for this trend include less uncertainty around the healthcare reform law and that there are fewer and fewer independent hospitals and healthcare facilities ripe for the picking, and the ones left are often smaller in size.
These trends have been seen first-hand by Frank Trembulek, chief operating officer at Geisinger Health System.
“We’ve seen significant consolidation in the last couple of years, both mergers and closures,” Trembulek says of activity in Pennsylvania, where Geisinger has hospital and healthcare facilities in 33 of the state’s 67 counties. “The pace has accelerated, and there are few remaining free-standing hospitals. They’ve either been acquired by us, or they have been acquired by Community Health Centers.”
With most of the hospitals now acquired by larger groups, an area where Trembulek expects to see more activity is with physician groups joining the networks.
“The smaller, one, two, or three doctor practices can’t afford to go it alone,” Trembukek said. “We’re now seeing accelerated interest by [independent] physicians to become employed.”
Whether it is the transition to electronic records, the impact of new healthcare regulations, or just the cost of running an independent business, many physician groups are looking to share their burdens with a larger partner.
“These trends are playing out across the Commonwealth of Pennsylvania, and across the country,” Trembukek said.
The driving factor behind all of this activity is simple economics. There is financial strength in numbers. Or, more accurately, there is less financial vulnerability in numbers.
Take the example a merger between two southern Maine hospitals that became effective at the start of this year. Southern Maine Medical Center in Biddeford and Goodall Hospital in Sanford merged to become Southern Maine Health Center, the fifth largest healthcare system in Maine, with 46 locations in York County.
In a story about the merger published in the Bangor Daily News, executives of the two hospitals said the merger will make for increased efficiencies to help control the rising costs of healthcare.
Another significant factor in the merger and acquisition landscape in 2014 will be a relaxing of the uncertainties around the launch of major parts of the Affordable Care Act, said Tom Carden, senior managing director at New Jersey-based Martin Health Advisors.
“In 2012, there were a lot of questions about the Affordable Care Act: Will it happen? What will it look like? Will it have a real impact on my business?,” said Carden. “In 2013, the uneasiness was taken out of the equation.”
The result is a greater willingness to invest in hospital and healthcare organization acquisitions, Carden said. “There is a lot of money sitting on the sidelines not being used,” he said. “There is plenty of equity capital available.”