Becker's Hospital Review

32 Executive Briefing: Hospital & Health System Transactions 4. Pricing power Commercial payer consolidation has been increasing in recent decades. According to IBIS World, in the five years ended 2012, the number of health insurance companies decreased by approximately 1.8 percent annually due to consolidation, and consolidation is expected to continue at a 0.3 percent annual rate through 2017. According to the Department of Justice and Federal Trade Commission, an industry is highly concentrated if the HerfindahlHirschman Index is greater than 2,500. Based on this standard and based on research conducted by The American Medical Association, 70 percent of the United States' 385 metropolitan areas are highly concentrated for insurers, while in 38 percent of areas one insurer had a share of at least 50 percent. This consolidation in the managed care industry has led to payers having more clout in regards to contract negotiations with regional and community health systems.  As a result, health systems have consolidated themselves as a way to increase their size, and in turn increase their own negotiating clout with managed care companies.  ll things are created equally. While much of the consolidation happened in the mid-1990s through the early 2000s, recently we have observed mergers of several of the big commercial payors. In 2012 alone, the industry experienced Aetna's $5.6 billion merger with Coventry Health Care, WellPoint's $4.9 billion acquisition of Amerigroup, and Cigna's $3.8 billion acquisition of HealthSpring. These large industry consolidations are possible due to the decades old antitrust exemption for the health insurance industry contained in the McCarran-Ferguson Act of 1945. There has been effort in recent years to amend this piece of legislation through the Health Insurance Industry Fair Competition Act, which requires that the health insurance industry be held to similar antitrust standards as other industries. While in 2010 the bill passed on a 406 to 19 majority vote in the United States House of Representatives, the bill did not make it to a vote in the Senate before the Congressional recess of the 111th Congress. The bill was reintroduced to the House Judiciary committee by sponsors Rep. Peter DeFazio (D-Ore.) and Louise Slaughter (D-N.Y.) in February of 2012. The legislative attention the industry has received in recent years has likely helped spurn the recent wave of consolidation. We are not your average althcare Valuation Firm. 5. Management 6. Lack of name recognition A number of transactions have involved the use of a more recognized name, in the hopes of shoring-up or expanding the existing services offered to patients. Hospitals may look for the use of a more recognized name in order to stop patient leakage from primary and even secondary markets. Health systems such as the Mayo Clinic, Cleveland Clinic and Johns Hopkins Hospital are internationally known for their reputation of quality and innovative patient care. On a more regional level, many areas throughout the country contain a health system whose reputation, though not national, is recognized as providing the highest quality of patient care for their local or regional market. For a lesser known hospital, an alignment strategy that permits re-branding with the trade name of a better known system may prove beneficial in boosting a declining or stagnant patient base. A transaction such as a joint venture or similarly structured alignment between hospitals allows a lesser known hospital to not only utilize the brand name of a better known competitor, but may also improve access to care. This is particularly true when the alignment partner has specific expertise, including centers for excellence in oncology, orthopedics and cardiology. 7. Increased patient base The quickly changing, and often ambiguous, landscape in healthcare has required health systems to become more dynamic and nimble to remain profitable, avoid regulatory violations and to provide the care their patients have come to expect. Recent developments include the emergence of accountable care organizations, which are expected to replace traditional fee-for-service payment models. This has resulted in health systems acquiring a variety of healthcare entities from physician practices to hospitals as they seek to increase their ability to provide adequate healthcare at all phases of the care process as efficiently as possible. The continued rollout of PPACA will also lead to a larger amount of the population seeking healthcare, which has led health systems to acquire other health systems as they seek to prepare for the increase in demand for their services. The Congressional Budget Office projects the number of people gaining insurance coverage from the newly developing exchanges will rise from 7 million in 2014 to 24 million in 2016, while the number gaining coverage through Medicaid will rise from 8 million in 2014 to 11 million in 2016.  Given the high fixed costs associated with running a health system, a failure to increase its patient base as a result of the aforementioned increase in demand may result in a health system finding itself at a disadvantage to its competitors. Frequently large health systems have more experienced leadership and greater breadth and depth of management. The benefits of having an experienced and proven leadership team in place for a health system can be easily overlooked given the multitude of seemingly macro-level pressures. While many of these industry pressures are universally shared, a savvy leadership team can Conclusion navigate these turbulent industry conditions with a greater likelifactors driving the increased number of hosars in the business and thousands of fair market not have the There are numerousrecent years. Regardless of the driving force hood of success. Frequently, smaller hospitals do value opinions transactions in pital thCare manpower or has assembled a of management experience to behind the transaction, it is more important than ever to underAppraisers depth and breadth diverse, highly experienced steer through the many nuances of PPACA and/or prepare for the opportunities and risks that it u navigate through new law willof valuation needs andmay also stand the acquire a hospital or enter into may present. Whether outcomes the a myriad create.  Smaller hospitals dilemmas. looking to a joint venture or other have difficulty with succession planning, particularly as seasoned alignment, hospital management must be prudent in selecting management teams opt for retirement instead of retooling for the well versed in the various Appraisers - Redeening Healthcare Valuation Since can be advisors who aremanifest in these deals. n structural, legal and forthcoming industry transformations. Without resources it 2000 valuation issues very difficult to train and groom a new set of executive leaders, and it may be more effective to simply tap into an already proven executive team at a different health system. HealthCare Appraisers, a nationally recognized valuation and consulting firm, provides services exclusively to the healthcare industry, including: business valuation (e.g., ASCs, hospitals, physician practices, dialysis centers, home health, diagnostic/treatment facilities, and intangible assets); fixed asset appraisals for furnishings, machinery and equipment; fair market value opinions for compensation and service agreements (e.g., employment, ED call coverage, medical directorships, collection guarantees, equipment lease/use arrangements, and service/co-management arrangements); consulting and advisory www.HealthCareAppraisers.com | info@hcfmv.com | (561) 330-3488 services (including valuation for financial reporting); and litigation support. RAY BEACH | DENVER | DALLAS | CHICAGO | PHILADELPHIA

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