Rise in Hospital Consolidations 'Favorable,' Says Moody's

John Commins, for HealthLeaders Media , October 12, 2010

Consolidations involving for-profit hospital companies acquiring struggling not-for-profit hospitals are a growing and "favorable" trend that will increase competition in local markets, increase efficiencies, and improve leverage with payers, Moody's Investors Services says.

"More consolidation is coming as weaker not-for-profit hospitals seek capital partners in larger for-profit or not-for-profit hospital systems," Moody's said. "Larger systems with greater economies of scale will benefit from healthcare reform because Medicare payments will favor more efficient, lower average cost health providers."

Moody's pointed to the recently completed $120 million acquisition by Tennessee-based for-profit Community Health Systems of the bankrupt not-for-profit Forum Health, a small hospital system in Youngstown, OH.

"Although small, this consolidation indicates that for-profits believe even bankrupt hospitals offer opportunities for future growth, a favorable development for holders of low-rated not-for-profit hospital bonds," Moody's said. "Proceeds from the purchase will (void) outstanding tax-exempt bonds creating an immediate exit strategy for bondholders."

Moody's said the expected sale of Boston-based non-for-profit Caritas Christi Healthcare System to New York-based private-equity firm Cerberus Capital Management—which last week won the approval of the Massachusetts Attorney General—will be closely watched by the for-profit hospital industry.

"The approval is significant: If Cerberus completes the purchase and does well with this investment, it will likely encourage other private equity firms to find hospital acquisition targets," Moody's said.

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