Health System Consolidation_Navigating the New Wave of Mergers and Acquisitions
Sg2 Intelligence
Health System Consolidation
Navigating the New Wave of Mergers
and Acquisitions
Sg2 Staff and Contributors
Project Directo
Elyse Forkosh Cutle
Project Associate
Dorothy Scott
Editorial Review
Stephen Jenkins
Linda O Prage
Bill Woodson
Production Team
Suzanne Claussen
Julie Bastian
Contributors
Ascension Health Care Network
Molly O’Neill
SVP, Chief Business Development Office
Carolinas HealthCare System
Russell C Guerin
EVP, Business Development and Planning
HCA
Chip Blaufuss
AVP Strategic Resource Group
PeaceHealth
Peter Adle
SVP for Strategy, Innovation and
Development
St Joseph Health
Annette Walke
EVP, Strategic Services
St Peter’s Health Partners
James K Reed, MD
President & CEO
Sutter Health
Peter Anderson
SVP, Strategy and Business Development
Trinity Health
Daniel Hale
EVP, Trinity Institute for Health and
Community Benefits
Vanguard Health Systems
Rob Jay
VP, Development
Trip Pilgrim
Former Chief Development Officer and SVP
Yale New Haven Health System
Gayle L Capozzalo
EVP, Strategy and System Development
Copyright © 2013 Sg2
This analysis was prepared by the staff and consultants of SG-2®, LLC (“Sg2”) and is proprietary and confidential information to be
used solely by clients of Sg2’s systems. The projections, trends, forecasts and conclusions provided herein were assembled using
the best judgment of Sg2, its staff and consultants, but should not be construed as definitive projections for purposes of financial
feasibility or other economic decision making. Events, conditions or factors, unanticipated at the time of the development of this
analysis, may occur which could have a material impact on the conclusions contained within. No assurances are offered, either
implicitly or explicitly, that the projections, trends or forecasts will occur.
Sg2’s analyses, recommendations and forecasts are based on a thorough and comprehensive review of literature, client interviews
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ors in its
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Health System Consolidation
Confidential and Proprietary © 2013 Sg2 | Sg2.com 1
Health System Consolidation: Navigating the New Wave
of Mergers and Acquisitions
Executive Summary
Making a
Strategic
Partnership
Decision
■ Put strategy first.
■ Evaluate the market.
■ Identify gaps and determine if partnership can advance the strategy.
■ Quantify the organization’s indispensability.
■ Weigh options based on the Sg2 Indispensability Assessment.
■ Carefully manage communications.
■ Choose the optimal transaction structure.
Considerations
for Sellers
vs Buyers
■ For sellers it all comes back to strategy.
■ Sellers must identify the best partner.
■ For buyers an analytical approach to selecting partners is essential.
■ Buyers must put relationships to work.
Health systems around the country are entering into new relationships at a frenetic pace. From small
community hospitals to large systems, the mania for mergers and acquisitions (M&A) has become so
widespread that some executives are predicting the demise of the independent hospital. Soon, the thinking
goes, all hospitals and health systems will be swallowed up, leaving only a handful of national “mega-
systems.” This leaves many leaders wondering if they also must get into a deal before it’s too late.
At the same time, many organizations do not recognize the value a partnership can
ing until the wolves are
at the door. At that stage, a hospital’s ability to negotiate an ownership deal that will ensure its ability to thrive
in the future can be seriously compromised.
Not every independent hospital or health system needs to be part of a traditional merger or acquisition to
e successful in the future. But whether or not to partner is one of the most critical judgments health care
systems will make. And once a system has decided to consider a deal, determining the right timing, the right
partner and the right transaction structure can literally mean the difference between a smooth integration
that leads to success and a very bumpy ride.
How can organizations best make these critical decisions? Despite the sense of urgency in the marketplace,
partnership determinations should not be made in haste—by either buyers or sellers. Rather, these
deliberations should be:
■ Grounded in strategy—focused from start to finish on advancing the organization’s vision and strategic
objectives
■ Planned, not panicked—methodical and proactive, not simply a reaction to today’s headlines or what
the organization’s largest competitor is doing
■ Quantitative, not emotional—based on a specific evaluation of the system’s strengths and challenges,
ather than either undue enthusiasm or denial and paralysis
■ Business driven—reflecting a partner’s ability to meet a strategic need, rather than rigid assumptions
Health System Consolidation: Navigating the New Wave of Mergers and Acquisitions is designed to help
executives steer their organizations through the tu
ulent cu
ents of rapid market consolidation.
Confidential and Proprietary © 2013 Sg2 | Sg2.com2
Industry Consolidation Again Accelerates
Sources: Irving Levin Associates, 2013; Ba
P and Kutscher B. Mod Healthc. 2013;43:S1–S7.
Almost every week for the last year, a new health system merger was being announced. Some of these
transactions were large, such as the Catholic Health East–Trinity Health merger; many others were more
local, such as the affiliation of St Joseph Health and Hoag Memorial Hospital Presbyterian in Southern
California. The number of transactions climbed 18% in 2012, while the number of facilities involved in these
transactions was up by well over 60%.
Number of Hospital Merger and Acquisition Transactions, US Market, 1994–2012
XXXXXXXXXX XXXXXXXXXX
200
175
150
125
100
75
50
25
0
JJ East, U
an Markets Hottest
While deals are being struck all over the country, the large majority of transactions are occu
ing in the
eastern half of the country, where many local markets remain fragmented. Local market fragmentation is
particularly pervasive in major metropolitan areas, where transactions have also been common. Perhaps
no market has been more active than the Chicago metro area, with nearly a dozen transactions in the
last three years.
Confidential and Proprietary © 2013 Sg2 | Sg2.com 3
Different Environmental Forces Drive Today’s Deals
Sources: Medicare Payment Advisory Commission. A Data Book: Health Care Spending and the Medicare Program. 2012; American Hospital
Association (AHA). Trendwatch Chartbook 2011; Impact of Change® v13.0; NIS; Sg2 Analysis, 2013; Moody’s Investors Service. Moody’s: 2012 not-
for-profit healthcare sets new record in downgraded debt. Fe
uary 12, 2013; AHA. How Hospital Mergers and Acquisitions Benefit Communities.
June 2013.
The last wave of M&A, in the late 1990s and early 2000s, was largely in reaction to the rapid consolidation
among health insurers over the same period. At that time, the focus of consolidation was primarily on
gaining payer leverage. The for-profit hospital sector was also emerging. Now, however, the factors pressuring
hospitals to consolidate are different.
JJ The Declining Middle Class (of Hospitals)
National statistics on hospital margins reveal one reason for the cu
ent round of consolidation—
a skewed income distribution, with many hospitals enjoying comfortable margins, a smaller number with
poor margins, and a very small group in the middle. The resulting mix of haves and have-nots fuels M&A
activity, with both haves and have-nots looking for partners, but for opposite reasons.
Hospital Margins, US Market, 2005–2009
Number of Hospitals
Note: Non-Medicare margin includes commercial, Medicaid and self-pay.
At the same time, Sg2’s Impact of Change® forecast projects that inpatient volumes will decline by 6%
over the next 10 years. With revenues stagnant to declining at many hospitals and the inpatient growth
engine faltering, the increased scale resulting from consolidation holds the promise of cost containment.
The track record on cost savings from consolidation of hospitals is mixed. But in the cu
ent cost-
conscious era, this savings potential must be realized.
JJ Need for Capital
Perhaps the most often cited reason for a merger today is capital access. Since 2008, Moody’s has had
a negative outlook for the hospital industry overall, indicating a challenging credit market, particularly for
small hospitals with limited market diversification. In 2012, Moody’s downgraded a record $20 billion in
health care debt, an increase of more than 200% from the year before.
Adding to capital needs, the average age of plant for US hospitals has been on the rise for nearly
two decades, and now exceeds 10 years. Many organizations are also facing large capital outlays for
electronic medical record (EMR) systems and the acquisition of physician practices.
JJ Shift From Fee-for-Service to Accountable Care and Population Health
As more health systems integrate ACO models, competencies in risk-based contracting and population
health management are essential. Hospitals are making classic “buy” vs “build” decisions, recognizing
that building value-based care competencies can take years. Systems with these capabilities can
immediately add value to organizations that have yet to begin the journey from volume to value.
Health System Consolidation
742
1,712
438
Non-Medicare
Margin ≤1%
Non-Medicare
Margin >1% to 5%
Non-Medicare
Margin >5%
0
400
800
1,200
1,600
2,000
Confidential and Proprietary © 2013 Sg2 | Sg2.com4
Macroeconomic forces sweeping over the health care industry have led to scores of mergers and
acquisitions, but these deals tend to fall into six categories. (Some deals may fit into more than one category.)
JJ The House Is On Fire
Perhaps the most common, yet often preventable, type
of transaction occurs when an organization is financially
distressed and reaches the
ink. The result is a “fire sale”:
little to no residual value for the organization and few
potential partners. If the hospital’s leaders had been more
proactive earlier, the organization might have