Healthcare provider M&A gaining pace in U.S.

THE U.S. Affordable Care Act is expected drive consolidation in the healthcare provider industry, as companies attempt to recover from the reduced profitability and operating margins caused by the economic downturn. The industry sees merger and acquisition (M&A) as a key means to reverse the trend of declining profits as they boost economies of scale and provide access to more capital, which is required to comply with the various regulatory standards, says Frost & Sullivan.

"The full-fledged implementation of the Affordable Care Act – that aims to improve access to healthcare among U.S. citizens – is expected to drive consolidation in the healthcare provider industry over the next 12 months," said Frost & Sullivan Business and Financial Services research analyst Dr E. Saneesh.

New analysis from Frost & Sullivan's Analysis of Mergers and Acquisitions Trends in the United States Healthcare Provider Industry  reveals the volume of M&A deals has increased from 199 in 2007 to 260 in 2013. In particular, the post-acute care, surgical and emergency centre segments are expected to drive M&A activity in the U.S. healthcare provider industry.

"While the regulation is likely to foment a modest rise in hospital revenues in the short term, the influx of new, insured patients will prompt the government to introduce cuts in Medicare and Medicaid reimbursements in the long run, thus adversely affecting the financial performance of healthcare providers," Dr Saneesh said.

The M&A trend is also being fuelled by other factors that are hurting healthcare providers' bottom line. This includes the charges levied on hospitals that get admissions due to hospital-acquired conditions, the Hospital Readmissions Reduction Program that imposes penalties on hospitals with high readmission rates, and value-based purchasing that ties hospitals' performance to reimbursement rates for Medicare patients.

"In the coming years, healthcare real estate investment trusts will stimulate M&A activity in the U.S. healthcare provider industry," added Dr Saneesh. "Future M&A deals will also witness more participation from private equity investors as healthcare providers seek capital to cover rising compliance costs."

Finally, acquisitions in the healthcare provider industry will become more local, resulting in regional consolidation. Increasing local presence will enable healthcare providers to offer end-to-end care, spread fixed costs, and leverage the advent of state-based health insurance marketplaces.