Hospital Consolidation 2016 Forecast: 'More of the Same'

The volume and pace of consolidation, marked by more large deals, more small deals, and more partnerships among hospital providers, physician providers, and insurers will continue "for many years and well past this current decade," says one industry analyst.

By all accounts, hospital consolidation continued at a strong pace in 2015. Kit Kamholz, managing director with Skokie, IL-based Kaufman Hall, has tracked the hospital mergers and acquisitions market for more than two decades. He spoke with HealthLeaders Media this week about market trends in 2015, and what lies ahead in 2016 and beyond. The following is an edited transcript.

HLM: Give us the broad view of hospital consolidation in 2015.

Kamholz: It looks like 2015 is going to be one of the higher numbers of transactions. We are looking at over 100 transactions in hospitals and health systems, which is modestly higher than it has been in the past five years, which has been in the range of 90 to 100 transitions. I don't see it as setting a new trend line.

I see it as modestly higher than prior years but consistent with levels we've seen historically.

HLM: What is sustaining this consolidation?

Kamholz: There are a lot of clouds on the horizon for healthcare providers, and that is leaving independent hospitals to pursue two major initiatives. The first is to develop the competencies that will be necessary to be successful in the value-based business model and with population health management.

The second area is on various levels of cost management. There is probably not a hospital in the country right now where taking some cost out of the system is not being evaluated.

When organizations come to the realization that they cannot accomplish either of those initiatives on their own, or they can't do it fast enough based on how quickly their markets are evolving, that is largely what is leading them to pursue partnerships. Those factors have been consistent for the past several years and we are seeing more of it in 2015.

HLM: What's trending within these consolidations?

Kamholz: We are seeing more of the larger transactions in the marketplace. We went from a period between 2000 and 2010 when there were essentially one or two or no transactions where the target had $1 billion or more in revenue.

Since then on an annual basis, about five to six of those transactions have been announced in any given year. We continued to see that in 2015. Some of the more recent ones in 2015 were Robert Wood Johnson and Barnabus in New Jersey and Penn State and Pinnacle in Pennsylvania.

We are actually seeing a bifurcation between the sizes of hospitals that are transacting. We are seeing [that] more of the smaller transactions occurred in 2015. In approximately 40% of the transactions announced in 2015 the target acquisition had less than 100 beds.

We are also seeing more of the larger transactions, and I'm taking about more than $300 million in revenue. We are getting away from the mid-size community hospitals. We are seeing less of those transactions in 2015.

Another trend that continues from the past two years is partnerships between hospital providers, physician providers, and insurers.

HLM: What is driving these provider/payer partnerships?

Kamholz: The biggest driver is trying to figure out who is going to control the premium dollars. It's really unclear who is ultimately going to be the organization that is going to control those dollars. Clearly the hospitals would like to play that role.

The insurers have played that role historically and would like to continue to play that role, and physicians in certain areas are large enough and have enough geographic coverage that they can play that role in certain markets. It's a jump ball right now to determine who in five years will control those dollars.

HLM: Is there anything particularly unique about hospital mergers and acquisitions in 2015?

Kamholz: One trend we are seeing that is more unique to 2015 than in prior years is portfolio rationalizations by larger health systems. That is divestitures from the publicly traded hospital management companies like Tenet or Community Health Systems, as well as the not-for-profits, particular on the Catholic side. Ascension Health has sold several facilities, as has Catholic Health Initiatives.

HLM: What is driving these rationalizations?

Kamholz: A health system such as CHS owns several hundred hospitals across the country. We see them looking at their portfolio of hospitals and determining which of those hospitals are winners for them, which can no longer be successful for them, or which they don't perceive can be successful, and rationalizing or selling those hospitals.

HLM: Do you believe the Federal Trade Commission has stepped up scrutiny of hospital consolidations?

Kamholz: They clearly are getting more scrutiny at the federal level. That is a trend that probably has been accelerating for four or five years now. It's going to be an impediment to certain transactions getting accomplished going forward.

HLM: What do you see happening in hospital consolidation in 2016?

Kamholz: We are going to see more of the same. We don't see a rapid acceleration or deterioration from the levels of the past five years. I don't know that we are going to get over 100 transactions again, but I would see us being at a level consistent with the past five or six years.

HLM: What's the five-year outlook?

Kamholz: Right now the primary transactions taking place are the smaller community hospitals are joining health systems. At some point, the smaller health systems will join larger health systems, the midsized systems will join larger systems or form their own larger health system. We see the cycle continuing for many years and well past this current decade.

HLM: Is the independent community hospital an endangered species?

Kamholz: I don't know that every independent community hospital will ultimately go away. There may be a role and place for some of those, but the environment is getting significantly more difficult for those folks to be successful. The level of investment that is necessary to develop the competencies to be successful in the value-based care business model is significant.

And not all organizations are going to be able to accomplish that. In certain markets, independent community hospitals will be challenged to achieve a cost level that is competitive in the marketplace when compared with larger organizations.

That said, there is a lot of rural America and there is probably a place for independent community hospitals in those rural settings in some form or fashion.

HLM: The hospital sector went through contractions in the mid-1990s. Do you sense it will be more sustained this time?

Kamholz: I started working in a period that was going through very rapid consolidation in the mid-1990s, largely driven by what was considered to be HMOs driving capitation. Ultimately, that did not materialize at that time.

Then we went through a period where there was relatively limited consolidation. From 2000 to 2010 there were somewhere from 50 to 60 transactions a year. Now we are significantly above that range, and I'd say it's more permanent.

When healthcare expenses account for 20% of the gross domestic product, that is an imbalance in our economy and it is not sustainable. So, while the government is driving certain parts of this, the commercial markets are accelerating this more than the governmental markets.