Flurry of hospital offers reshape Atlanta healthcare market

Alex Kacik: Whats up, and welcome again to Fashionable Healthcare’s Past the Byline, the place we provide a behind the scenes look into our reporting. I am your host, Alex Kacik. I write about hospital operations for Fashionable Healthcare. Right this moment I am speaking with Tara Bannow, our finance reporter, to speak about hospital mergers and acquisitions. Thanks for becoming a member of me, Tara.

Tara Bannow: Thanks for having me.

Alex Kacik: Tara, we wrote a few trio of offers that occurred during the last month, shuffling some Atlanta space hospitals round. Might you are taking me by a few of them?

Tara Bannow: Yeah, plenty of Atlanta information. First there was the announcement originally of Might, that Piedmont was shopping for 4 hospitals from HCA, all inside about 90 miles of Atlanta, the place Piedmont’s based mostly. They anticipate to shut that deal by the tip of July, I believe they anticipate to have a reasonably simple time with it. Then a few week later, Piedmont introduced it plans to purchase College Well being, which is a three-hospital system in Augusta. Augusta’s about 150 miles Southeast of Atlanta.

Piedmont CEO advised me, by the best way, that the timing of these bulletins was simply coincidental. College had gone by a protracted course of of selecting a companion after which it landed on Piedmont. That deal, they anticipate to shut on the finish of the yr. The very subsequent day, after that Piedmont and College Well being announcement, HCA introduced it was promoting a hospital in Rome, Georgia, which is about 70 miles Northwest of Atlanta, to Creation Well being. That’s a part of HCA’s technique to get out of the better Atlanta space and focus on its 5 hospitals in Southeast Georgia, the place it just lately purchased one other hospital.

Alex Kacik: For Piedmont, they’re getting what? Seven hospitals in a brief span. It would not sound like that was deliberate, and such as you mentioned, HCA had this philosophy that it operates in markets the place it needs to steer, after which it has a bundle of providers throughout acute and outpatient care and residential care. I do not assume it noticed a means ahead on the acute aspect to compete with the likes of Piedmont, Emory and the opposite huge gamers. We determined to look into this to know, is that this a coincidence simply when it comes to all this exercise on this market, is there one thing distinctive about this? Why are these programs deciding to dump a few of their hospitals to those different gamers?

We have been trying on the monetary knowledge to determine concerning the hospitals. Tara, if you wish to take me by what you discovered whenever you have been trying on the monetary knowledge. We checked out these hospitals and plenty of occasions we’ll see distressed hospital gross sales, ones that are not financially performing nicely, however that wasn’t the case right here. You had fairly worthwhile hospitals and it appeared just like the consumers have been desirous about and noticed a possibility right here to tackle this market share, after which tackle hospitals that have been doing fairly nicely.

Tara Bannow: Yeah. This can be a nice deal for Piedmont really, this isn’t the standard distressed hospital sale in any respect. As you mentioned, the 4 HCA hospitals that Piedmont goes to purchase are very worthwhile. Fashionable Healthcare makes use of Medicare price reviews, that are annual reviews which are on the facility degree that hospitals file with CMS. It is not going to incorporate earnings bills which are centralized on the well being system degree. In different phrases, you could not add up all of HCA’s hospitals within the database to reach at HCA’s complete income and bills.

It is a bit completely different in that means than an audited monetary assertion or perhaps a quarterly monetary report. However that mentioned, it is actually fascinating knowledge to take a look at if you wish to get info on a selected hospital. Anyway, these HCA hospitals, there’s this Cartersville Medical Heart, it is a 119-bed hospital, they posted a remarkably excessive, virtually 33% working margin, in 2020. That’s exceptional, I really feel like, for a small hospital like that. Cartersville is about 40 miles from Piedmont’s Atlanta hospital, in order that’s most likely going to be a very good referral supply for Piedmont.

The deal additionally expands Piedmont into Macon, Georgia, lower than 90 miles from Atlanta. HCA is bigger. It is bought a bigger 300-bed hospital in Macon that had a few 12% working margin in 2020, which is superb. The smaller hospital there that Piedmont’s going to purchase from HCA has a 4% working margin. There’s one other HCA hospital in Snellville, which is about 30 miles from Atlanta. That they had virtually a 5% working margin in 2020. That is additionally an excellent get for Piedmont as a result of it’ll be a very good referral supply.

All 4 of those hospitals that HCA is shopping for averaged 13.4% working margins of their newest price reviews, which is significantly better than the 6.7% throughout Piedmont’s 11 hospitals within the newest price reviews. So yeah, these are very worthwhile hospitals. I’d anticipate for-profit hospitals to simply usually be a bit bit extra worthwhile than not-for-profits, however this was means above my expectations. Piedmont’s hospitals, I believe it is essential to notice, are fairly worthwhile in their very own proper.

Piedmont’s hospital in Stockbridge, Georgia posted virtually a 17% working margin in 2020, which is large. Piedmont has two hospitals in Columbus which are fairly worthwhile as nicely, 13% and virtually 16% working margins. 4 of Piedmont’s hospitals really misplaced cash in 2020. They don’t seem to be all doing nice.

Alex Kacik: Piedmont is without doubt one of the few huge gamers within the acute care area there, so it is fascinating to see from College’s standpoint and HCA, if they’d a go to attempt to compete on that degree. It seems like they mentioned that, “We’ll look to promote a few of these belongings as a result of we do not see a means ahead the place we may doubtlessly be high two available in the market.” Simply one other word, after we take a look at Medicare price reviews, they’re self-audited so it may be a bit difficult usually. An accounting agency audits these quarterly reviews, however these aren’t as granular in terms of the information. You may have sure metrics within the Medicare price reviews like provide prices, per adjustment affected person day, and full time workers, the typical occupied mattress.

It is fascinating, however on the identical time these are self-reported by the hospitals and so they do not embrace issues like doctor teams, they do not take a look at it like a holistic image throughout the system. We have been some Well being Care Value Institute knowledge, and that ranked Atlanta as one of the aggressive acute care markets within the nation. They have been rating 108th least concentrated out of 124 markets. They use this HHI index to strive to determine if there’s sufficient competitors.

I reached out to the Legal professional Normal final week and so they mentioned that they won’t be reviewing HCA’s sale of the 4 hospitals to Piedmont. They solely take a look at offers which are altering palms from a not-for-profit to a different not-for-profit or do it for a for-profit entity. I believed that was fascinating simply when it comes to the regulatory side. It seems like doubtlessly because it wasn’t already a extremely concentrated market, I am unsure this may elevate the flag of any perhaps federal regulators.

Tara Bannow: Yeah, that is proper. I do not foresee Piedmont or HCA operating into any points right here with closing these offers. This can be a actually concentrated market. Not solely is there Piedmont, Emory, WellStar, competing available in the market, there’s Northside Hospital system, which is a 5 hospital system additionally based mostly in Atlanta. They acquired Gwinnett Well being System in 2019. Emory Healthcare has 11 hospitals, so that they’re simply as huge as Piedmont. They acquired DeKalb Medical, which has three hospitals, in 2018. On the anti-trust entrance, I talked to a lawyer who used to work for the FTC concerning the Atlanta market. One factor he mentioned was that city and suburban areas like this are fairly troublesome for the company to problem.

He pointed to the truth that the company misplaced its preliminary problem of the proposed Advocate Well being, NorthShore College merger. They later received on attraction, however then the FTC just lately misplaced the Jefferson Einstein case involving hospitals round Philadelphia. So yeah, it seems like on the federal degree, there may not be an excessive amount of and clearly on the state degree, the College Well being deal is the one one which Georgia’s Legal professional Normal will evaluation as a result of it includes the sale of not-for-profit amenities. As you mentioned, the AG’s workplace shouldn’t be … they do not have purview over the sale of for-profit amenities, so these HCA gross sales will not get state evaluation.

Alex Kacik: Simply making an attempt to gauge too on M$A expectations, we have seen it fall off throughout 2020 and we’re listening to that there is some pent-up demand for some offers, notably the smaller hospitals that have not fared as nicely by the pandemic. On the identical time, we’re seeing payments transfer by Congress which are making an attempt to bolster the budgets of the FTC and DOJ in terms of their oversight. Additionally, there’s some state payments like one in California that modifications the edge that may set off an investigation and likewise simply typically tightens up a few of that regulatory scrutiny.

It is fascinating to see these competing components right here and what is going to play out for the hospital area in terms of mergers and acquisitions. I am questioning what you have been listening to when it comes to the anticipated exercise going ahead.

Tara Bannow: A few of the M&A trackers have proven that healthcare offers went down originally of 2021 simply as they have been in 2020, but it surely looks like many of the expectations is that these offers will speed up by the remainder of 2021 and into 2022. Hospitals as we all know, they speak lots about efficiencies and reducing prices. The proof there may be fairly restricted, however the motivation actually behind these mergers appears to be extra about getting greater, gaining leverage over well being insurers, after which demanding greater charges. You may see why that is a pretty factor for well being programs to strive to do that yr.

Alex Kacik: Positive. To that time too, I have been … engaged on a narrative, offers which have been previously unwound, so mergers which have been consummated after which they’ve both filed a lawsuit to separate from their mother or father or discovered one thing out of court docket. We have been 4 or 5 completely different offers the place they’re unwinding their mergers and we have famous that revenues had gone up at a reasonably constant tempo post-merger however bills had often outpaced that income development. Whenever you’re these, quote unquote, “efficiencies,” generally if they do not do the correct integration course of you continue to have a number of executives and managers overseeing sure departments. You do not renegotiate a few of these provide contracts, perhaps the market share is unfold out so you are not getting that leverage with the insurers that you simply anticipated, which may additionally dampen these potential income positive factors.

It is fascinating to see why … within the outset, why these offers are consummated after which what can go flawed, and why a few of these previously unwind. You even have govt bonuses that come into play I do know you have checked out, however what are you noticing when it comes to a few of the incentives which are driving consolidation and whether or not or not these efficiencies have been met?

Tara Bannow: I believe that is all very true, however I believe the incentives for stepping into these offers are going to be intensified proper now, following the pandemic as a result of these stressors that hospitals are underneath are simply actually accelerated proper now.

Alex Kacik: To your level, scale helped plenty of programs throughout this time after they needed to shuffle PPE, and physicians, and different labor forwards and backwards between hospitals to regulate to demand. I will be to see how a lot of a method from a defensive standpoint, they will take up a few of these M&A offers to attempt to insulate themselves from future pandemics or different emergency situations. However on the identical time, we’d see extra scrutiny from the state and federal strains.

Tara Bannow: Yeah, and there is nonetheless plenty of CARES Act grants floating round and further liquidity from the Medicare accelerated funds. I believe that is giving plenty of, particularly the for-profits a lift and so they could be trying to do some extra acquisitions proper now, particularly of those weaker programs which have gotten much more so throughout the pandemic.

Alex Kacik: Nice. Tara, thanks a lot for taking the time. I recognize your sharing your time and perception with us.

Tara Bannow: Thanks. It has been enjoyable.

Alex Kacik: All proper. Thanks all for listening. If you would like to subscribe and help our work, there is a hyperlink within the present notes. You may subscribe to Past the Byline wherever you hearken to your podcasts, and you may keep related with our work by following Tara and I and Fashionable Healthcare on Twitter and LinkedIn. We recognize your help.

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