Hospital Mergers Down For Fourth Straight Year

Merger and acquisition activity declines in response to a variety of market factors

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CEO SUMMARY: Changes in hospital ownership often drive laboratory restructuring projects. But hospital merger and acquisition activity has declined for four consecutive years. Consequently, comprehensive laboratory restructuring efforts have declined in parallel. Hospital M&A numbers for 2003 are predicted to remain at a low level. Meanwhile, cross-system laboratory ventures seem to be also languishing.

FOR THE FOURTH CONSECUTIVE YEAR, the number of hospital mergers and acquisitions in the United States declined by a significant amount.

Hospital mergers and acquisitions often drive subsequent laboratory consolidation. The decline in such merger activity directly contributes to a decline in laboratory consolidation projects.

For 2002, only 163 hospitals were involved in mergers or acquisitions. This was a decline of 40% from 2001, when 267 hospitals found themselves in such deals. The number of transactions also fell by a similar amount, 37%. Only 60 transactions were closed in 2002, compared to 95 deals the previous year.

This data comes from Modern Healthcare’s ninth annual survey of hospital consolidation activity. THE DARK REPORT tracks these numbers annually and was first to correlate the hospital merger boom of 1995 to 1998 with the tidal wave of hospital laboratory consolidation that occurred between 1997 and 1999.

Different trends in hospital merger and acquisition activity directly drive changes in the laboratories of the hospitals involved. For 2002, hospital merger activity shifted away from larger urban institutions. A larger share of such deals involved rural hospitals.

New Twists To Trend

That trend is predicted to continue through 2003, with some interesting twists. “Fewer organizations have jumped to acquire larger hospitals relative to three and four years ago,” noted Bruce Gordon, Analyst at Moody’s Investors Service in New York City. “Fewer are willing to take the risk.”

According to Gordon, the operational integration of big hospital mergers has not yielded the benefits that owners expected. That should not surprise most laboratory directors and pathologists, who’ve seen these pro- jects from the inside.

Instead of deals involving bigger urban hospitals, most merger activity in 2002 involved community hospitals that wanted to acquire neighboring facilities. The two biggest deals for the year were Ascension Health’s purchase of the eight-hospital Carondelet Health System in St. Louis, Missouri and HCA’s acquisition of the 13-hospital Health Midwest system in Kansas City, Missouri.

Financial Pressure To Sell

Predictions are that most merger and acquisition activity during 2003 will focus on rural hospitals, particularly those with ailing finances. Likely buyers for these hospitals will be investor-owned private hospital companies because they have a stronger capital base and are actively seeking to acquire not-for-profit hospitals.

The slackening pace of hospital mergers and acquisitions since 1999 can be attributed to two different factors. First, by 1998, consumers were moving away from enrollment in closed-panel, gatekeeper model HMOs. As insurers reacted by offering out-of-plan options, hospitals felt less pressure to be part of a region-wide organization as a strategy to counter sole-source, capitated managed care contracts.

Second, by 1999 hospital administrators were dealing with the challenges and difficulties of integrating the multiple hospitals in their integrated delivery network. It was taking too much effort to generate even modest benefits from cross-facility integration.

These dynamics were reflected by developments in laboratory services. In 1999 and 2000, there were many examples of projects to link laboratories between two systems. The first, and largest, was the combination of laboratories in Milwaukee’s 12-hospital Aurora Health Systems with Chicago’s 8-hospital Advocate Health Care. (See TDR, April 17, 2000.)

Stopped At Talking Stage

The Milwaukee-Chicago super-lab consolidation effort continues to operate. But other projects to consolidate and unify laboratory testing services across two or more health systems never got past the talking stage. Some have unraveled, like the marriage of the UCSF and Stanford Health systems in Northern California.

The linkage between changes in hospital ownership and laboratory restructuring is often overlooked when assessing lab industry trends. Based on current hospital merger data from the Modern Healthcare survey, it appears that 2003 will be a quiet year for hospital laboratory restructuring across the United States.

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