Health-care reform limbo sets stage for wave of hospital mergers

Analysts expect health-reform stall to strain nonprofits By Getahn Ward • THE TENNESSEAN • February 19, 2010 Health-care reform was a pill that many hospital operators were willing to swallow, especially given the promise of insurance coverage for more people that would offset expected cuts in reimbursements. Now, with comprehensive reform in limbo and expectations of piecemeal legislation that would bring more gradual changes, analysts see continued growth in patients who can't afford to pay even as cuts to programs such as Medicare remain possible. "Our fear is we're going to see the cuts without the coverage," said Craig Becker, chief executive of the Tennessee Hospital Association, a trade group. Analysts expect a new wave of mergers and acquisitions in the wake of the collapse of comprehensive health reform, as nonprofit hospitals faced with financial pressures seek alliances with larger hospital chains that are better capitalized. "Providers will continue to be pressed to operate their institutions at lower costs and more efficiently utilizing the best available health-care information technology," said Leigh Walton, an attorney and co-head of the health-care group at Bass Berry & Sims law firm here. "Some of the smaller systems will not have access to the capital to, for example, implement strong health-care IT and... may suffer from basically the inability to run as efficiently as a large system." In recent conference calls with analysts, officials of several Nashville area hospital chains have cited encouraging prospects for mergers and acquisitions. On Thursday, executives of Community Health Systems said a fair amount of activity should continue in the next 18 months as lower investment returns hinder abilities of hospitals, especially not-for-profit players, to fund capital projects. "It's not that their operating results haven't been decent, but they are all continuing to miss those nice investment returns they enjoyed for several years," said Charlie Martin, chief executive of Vanguard Health Systems, during that company's conference call last week. "So their balance sheets are not necessarily in good shape." More competition for acquisitions, however, could drive up prices that had fallen sharply, said Wayne T. Smith, CEO of Franklin-based Community Health, citing its plans for at least two acquisitions this year. "The difference between today and a year ago is buyers have interest in acquisitions and have access to capital," said CRT Capital analyst Sheryl Skolnick. "A year ago, they might have been interested, but the credit markets has just began to open up again." While some CEOs have avoided direct answers to questions on reform, Iasis Healthcare's David White bluntly called the effort a "disjointed, herky-jerky process" and more health-care "deform" than reform. "My suspicion and guess is that they're going to go ahead and implement their cuts that supposedly the health-care industry agreed to, at some point in time in the future," Martin said, referring to $155 billion in cuts the hospital sector pledged as part of reform. Although a comprehensive expansion of coverage in exchange for the cuts isn't likely, considering that the reform push has stalled, experts see incremental reforms in areas such as allowing for sale of policies across state lines and restricting denial of coverage by insurers because of pre-existing conditions. Those along with other potential measures, such as coverage for more children, could help hospitals, but not like expanding coverage to a majority of the 46 million people nationwide without insurance. Rate cuts expected With government's share of the nation's health-care bill is expected to rise to more than half of all spending by 2012, cuts in Medicare rates are inevitable, experts said. If next month's release of the Medicare Trustees Report shows acceleration of the time by which a key fund would run out of money, there could be pressure on Congress to make sharp cuts, said John M. Cousins, an analyst with CIT Group based in Tallahassee, Fla. "We all know that the deficit cannot continue to grow at the way it is, so payment cuts are going to come," said Reggie Hill, a health law attorney and partner in the Waller Lansden Dortch & Davis law firm in Nashville. "It's just the question of when." Hill will be watching to see the outcome of the health-care summit that President Obama plans next week. Many experts said chances are slim for compromise between Republicans and Democrats on differences that have stalled the reform. "It could turn out to be a bust," Hill said about the summit. "On the other hand, it could be some indication there'll be agreement to move forward on some sort of piecemeal reform."