Small and midsize hospitals and health systems, facing a list of highly disruptive forces including rising demand for ambulatory and outsourced outpatient care and increasing bad debt levels as a result of the impact of the Affordable Care Act, have experienced a surge in mergers and acquisitions in recent years.
Last week, one of the largest players, Tenet Healthcare, announced that it is exploring strategic alternatives, including a potential outright sale. What impact will a transaction involving one of the largest for-profit hospital systems have on the accounts receivable management (ARM) industry?
Let’s take a look.
According to Kaufman, Hall & Associates, LLC, the number of hospital and health system transactions have increased 55 percent, from 66 announced deals in 2010, to 102 in 2016.
Additionally, as we can see by the below graph, there were 300 fewer hospitals in 2014 (most up-to-date available data) than in 1994, the first observed year of data.
Tenet, which according to their website operates 470 outpatient centers including 79 hospitals, is the third largest for-profit hospital system, behind Community Health Systems and Hospital Corporation of America (HCA). Over the past decade, some of the largest hospital systems formed their own outsourcing businesses to provide revenue cycle, supply chain management and other outsourced services initially to their own hospitals and later to additional providers outside of their respective systems. For example, HCA started Parallon Business Solutions in 2011. Tenet Healthcare formed Conifer Health Solutions, their own outsourced service provider, even earlier in 2008. In 2012, Conifer formed a strategic partnership with Catholic Health Initiatives, acquired Dell Revenue Cycle Solutions and started aggressively servicing non Tenet hospitals.
According to their website, Conifer currently serves more than 700 clients in the healthcare industry, including nearly 300 hospitals. Behemoth outsourced service providers like Conifer created disruption for smaller, stand-alone healthcare ARM companies competing for the same clients. Now their parent company, Tenet Healthcare, is exploring their own strategic alternatives, which includes a potential outright sale, increasing the level of disruption in the market depending upon the result of this transaction.
Potential acquirers include competing for-profit hospital chains, like HCA or Community Health Systems, but we think this is highly unlikely unless the Tenet hospital system is broken apart and not sold in a single transaction. Regulators are highly unlikely to support the formation of a larger hospital system by combining two of the largest players in the market. Companies from other segments of healthcare, such as UnitedHealth Group, could emerge as a choice buyer as they seek to aggressively expand their outpatient care business. Large private equity firms, like The Blackstone Group and KKR, have a lot of money burning a hole in their pocket. With very few $20 billion potential acquisitions available, they are likely to join the potential pool of acquirers.
With significant change comes significant opportunity. Transactions like the sale of Tenet could significantly impact the ARM industry. Hospitals are among the most conservative credit grantors and they don’t like change. When a large outsourced provider sells, their community hospital clients may return to smaller and midsize ARM players to service their collection and revenue cycle needs. In addition, senior level management and other experienced staff will become available for hire. ARM companies in expansion mode could tap into this experienced labor pool.
We will continue to monitor this impactful transaction. We encourage ARM executives focused on the healthcare market segment to register to KG Prime to receive the latest market segment updates and expert opinions.