Study: Health Care Models to Shift from Small- to Large-Scale Operations
The health care industry will see an uptick in mergers and acquisitions as providers consider the implications of the Affordable Care Act (ACA), the recovering economy and demand for capital and technology improvements, a new survey finds.
“As the implementation of the ACA continues, larger entities will be better positioned to leverage capital resources and a stronger infrastructure to benefit from the changing reimbursement and regulatory landscape,” say authors of the Bass, Berry & Sims survey, published in association with Mergermarket. “These factors point toward continued consolidation.”
Eighty-six percent of survey respondents say they expect mergers and acquisitions to increase in the health care industry, the report, “Healthcare & Life Sciences M&A Outlook,” finds. The rising demand for facility and equipment improvement is cited as the top strategic driver of mergers and acquisitions, according to 46% of respondents. Other factors driving consolidation include increased demand for facility and equipment improvement and increased need for IT support and capabilities.
“Companies are looking to consolidate to build infrastructure, get access to new technology and increase market share,” says a principal from a U.S.-based private equity firm in the report. “Consolidation among mid-sized firms with a strong balance sheet will help them gain operational excellence and scale.”
Consolidating resources is a way for health care companies to achieve growth strategies and meet new legislation provisions, respondents in the survey agree.
The ACA compels providers to treat patients as effectively and quickly as possible by offering a lump-sum payment for various services rendered, instead of a fee-for-service model. This payment system contributes to the expected increase in mergers and acquisitions among health care providers.
Home health consolidation is expected to increase, albeit slowly compared to other facets of the health care industry, the study projects.
Fragmented ownership of home health agencies, with smaller agencies operating at negative margins; home health’s status as the low-cost post-acute alternative; and spending in the field projected to continue, with 80% of home health services being paid by Medicare and Medicaid, are reasons why consolidation should continue, authors say.
Going forward, base rate reductions will be phased in over four years beginning in 2014 with the maximum cumulative reduction expected to be about 7%, authors say, adding, “All of these factors favor continued consolidation and larger players who can weather the reimbursement storm.”
A growing number of providers, including hospitals and health systems, are incorporating home health and hospice services into their models, whether through direct ownership or through the addition of such providers in their accountable care organizations (ACOs).
Because the hospice industry continues to be dominated by small, nonprofit, community-based organizations, the industry may move toward fewer, larger providers as smaller organizations struggle to manage business in a low-volume environment, authors say.
Read the full report here.
Written by Cassandra Dowell