Mergers and acquisitions reverse trend and rise

Hospitals lead revitalized interest

During the second quarter, mergers and acquisitions (M&As) in the health care services sector rose for the first time in two years with 17% more deals than the previous quarter, according to New Canaan, CT-based health research firm of Irving Levin Associates.

"After two straight years of decline in health care services, M&A activity, the M&A market has finally pulled out of its nose dive," notes Stephen M. Monroe, a spokesman for the company.

Three sectors — physician medical groups, hospitals, and behavioral health care providers — accounted for 50% of the total mergers and acquisitions last quarter. For the third quarter in a row, the hospital sector led all others as the single most active sector in the industry.

The physician medical group sector "appears to have entered what we might call the post-physician practice management company phase following what amounted to a reckless trend of acquisition of practices for acquisition’s sake,
and the subsequent crash-and-burn of the PPMC [physician practice management company] industry," says Monroe.

For instance, PPMCs still exist, but now appear to be focusing on specialty practices or ancillary services instead of attempting to sign up as many physician groups as possible.

"Similar to the market of four years ago, the hospital sector appears to be re-establishing itself at the cornerstone of the health care services industry and attracting the lion’s share of attention when to comes to mergers and acquisitions," says Monroe.

In the second quarter of 2000, the hospital sector led the activity, with 31 deals accounting for 23% of all health care mergers and acquisitions during the quarter.

"These 31 deals represent a total of 45 acute care facilities, which have a combined total of 7,400 beds and generate more than $1.6 billion in annual revenue," observes Monroe. "Publicly traded corporations, privately held companies, and nonprofit organizations all took an active part in this market."

The behavioral health sector had 16 deals, representing a 167% gain. However, much of this activity can be attributed to the sell-off of 24 facilities by a bankrupt provider.

"The fact that buyers were found for these facilities at all suggests they feel confident that they can operate inpatient psychiatric facilities in the current reimbursement environment," notes Levin staffer Sanford Steever.

Meanwhile, the managed care sector experienced a 50% drop in activity during the second quarter. "The drop was the result of two concerns which diverted insurers’ attention from their M&A programs: how the Supreme Court would rule on lawsuits against HMOs, and preparations to withdraw from many Medicare markets," he reports.

As payers and providers adapt to new reimbursement protocols and regulatory mandates, "we believe managed care players will pursue a prudent, but steady, stream of M&A deals," Steever predicts.