CFO Alert: Hospital Mergers and Acquisitions Just Ahead

Karen Minich-Pourshadi, for HealthLeaders Media , May 10, 2010

"A lot of not-for-profits have emerged stronger," he says. "That's made these health systems even more attractive to investors."

Who's investing?
That brings me to another interesting point in Moody's comment and one that Reiboldt echoed in his discussion with me. While the most likely scenario is for for-profits and not-for-profits to participate in these mergers, other outside investors are salivating over the chance to invest in healthcare facilities—after all healthcare is still a growth industry, albeit a slow one.

"There's a new group of people who are becoming more interested in investing in hospitals, including private equity firms and large institutional firms," Reiboldt notes. "Financial advisors realize they can't expect the same kind of returns as other investments and they look at this in terms of a long term investment."

Which is why the proposed acquisition of Detroit Medical Center by Cerberus Capital Management, may be viewed as a harbinger of mergers to come. Moody's goes so far as to say that these deals could "signal an increased appetite for challenged credits by for-profit investors," as the facility is Ba3 rated.

What did they forget?
When it comes to M&A there are a host of influences that go into the decision to consolidate. One factor that Moody's doesn't touch on in its report is the role that physicians play. These deals sound great but they'll take far more than an investor and C-suite buy-in to happen.

"You have to factor in the relationship the physician has with the hospital and in the community," he says. "They can't do anything without the physicians onboard because if the hospital loses those doctors—if they aren't happy with the deal—then the investor is losing the revenue stream which made the hospital attractive in the first place."

So, to round out the Moody's analysis, investors would need to gauge how their potential hospital investment might be viewed by the folks that make profit in healthcare possible everyday—the doctors. It's highly likely that this factor is something most outside investors would never have had to consider with their previous investment adventures. Nevertheless, if they are going to dabble in healthcare they need to realize that this industry doesn't operate like other industries—though it's still a great investment.

Now that we are five months into 2010, I have a little more time to see if my prognostication that there will be a slew of these M&As taking place will come true. I'll be keeping a watchful eye to see how things progress; I suspect most CFOs will be watching to see how they and their competitors fare during that time as well.

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Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.

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