Consolidation is the name of the game in health care
One key factor has changed the whole playing field
It is no surprise that health care is one of the most important topics this generation – and those to come – will face. And it should be. According to the World Health Organization, the U.S. spends more money per person on health care than any other country in the world. In 2014 alone, U.S. health care spending grew 5.3 percent reaching more than $3 trillion – approximately 17.5 percent of the nation’s GDP*. In addition, we are only beginning to see the full implications of the Affordable Care Act (ACA) and what it means for health care providers, patients and the industry at large.
One of the more interesting, and possibly unintended, consequences of the ACA is that it has generated increased merger and acquisition (M&A) activity throughout the health care industry. It is estimated that more than 25 percent of hospital executives are currently involved in M&A transactions and more than 50 percent are exploring potential deals. Standard & Poor’s currently rates 625 hospitals and believe that this number will decrease to 500 by the end of this consolidation cycle.
Why the sudden need for health care providers to consolidate? Under the ACA, hospitals and other providers are no longer being reimbursed for volume but for the quality of care they provide. That’s a very big shift from how the system used to work. To increase revenue in the past, hospitals and other providers would say let’s do more…more patients, more procedures, more business. Now, it’s all about the quality of care. And if health care providers don’t meet quality care benchmarks set by the ACA, then Medicare, Medicaid and eventually private insurance companies will hit the providers with a penalty.
This puts a number of hospitals in a challenging situation. Many of them may not be prepared or may not have the software or technology to report outcomes the way the ACA requires. Or they may not have the ability to provide the quality outcomes that are demanded. In that case, they need bigger hospitals or better experts to help them provide a higher quality of care. The result is that smaller hospitals are being driven to partner with larger hospitals for their services and outcomes. And if they can’t find someone to partner with, many of them will cease to exist.
Consolidation in the physician practice and long-term care space is also happening as health care providers try to consolidate revenue. By purchasing physician practices, hospitals are locking in physician referral patterns, or simply buying practices to lock in patients. Hospitals are also buying long-term care facilities or rehab hospitals to provide the full continuum of care, from a physician’s referral to a patient’s hospital visit to rehab or long-term care. By owning the full spectrum of care, hospitals are better able to control the quality each patient receives and in turn, the most reimbursement for that care.
Tips to Financial Success
Success in today’s health care environment comes down to quality care and access to capital. And if you are in the health care space, you want a bank or lender who understands where the health care industry is headed. An experienced health care banker can work with a provider to identify efficiencies, ensuring that their capital structure is efficiently constructed and their financings are well organized. Health care bankers can also review efficiencies on the accounts payable and accounts receivable sides. Across the spectrum, efficiency is increasingly more important today then it was yesterday. The prevailing thought is, “How can you do it faster, better and at lower cost?”
The reality is that health care bankers have become even more careful about which hospitals and health care providers they are lending to given the rapidly changing environment. They are now looking at measures beyond financial performance, including readmission rates, quality benchmark performance and how the hospital fits within the community. As the health care industry continues to change, so do the financial strategies surrounding it. And the best way to be prepared is to partner with people who understand your business and the road ahead.