A look back at 2013 … Look ahead in the new yearThe Affordable Care Act, coupled with new models of reimbursement, has undoubtedly impacted the way the healthcare industry conducts business today and strategically plans for the future. For some industry sectors within healthcare services, a ‘strength in numbers’ mentality has caused a marked uptick in mergers and acquisitions in comparison to a few years ago. For others, the strategy has been to take more of a ‘wait and see approach’ while trying to figure out just how the new rules will impact their specific markets.Frank Morgan, the Nashville-based managing director for Healthcare Services and Equity Research with RBC Capital Markets, recently shared his thoughts with Nashville Medical News on the level of activity in 2013 and his expectations for the coming year. With more than two decades experience in equity research and investment banking, Morgan primarily focuses his research on facility-based healthcare services including hospitals, skilled nursing and assisted living facilities, long-term acute care (LTAC), behavioral health services and rehabilitation. Morgan, who has been recognized for his expertise within the health services industry by multiple national publications and industry rankings, is a popular speaker and participant in financial panels. Overall, Morgan said there was a general uptick in activity in 2013 compared to 2012. That was particularly true within the hospital sector. “’13 … if not a record year … was a very good year for M&A activity,” he noted. “You really saw it on the not-for-profit side,” he added. There are several reasons for the ‘super-sizing’ of hospital systems starting with implementation of ACA but exacerbated by other market forces including an increase in physicians seeking an employment model, implementation of EHR and changing payment methodologies. “The overarching uncertainty about how the world is going to play out over the next four or five years has led to the leveraging of strengths,” said Morgan. He added the leaders of individual hospitals or small systems are faced with deciding to weather the changes on their own or join forces to be part of a bigger group that has the infrastructure in place to manage and deal with the new healthcare delivery landscape.From mergers to acquisitions to strategic joint ventures, there was a lot of movement on the not-for-profit side, which makes up about 80 percent of hospitals in America. Dallas-based Baylor Health Care System and Temple, Texas-based Scott & White Healthcare completed their merger in late September to create the largest not-for-profit health system in Texas. Earlier in the year, Michigan-based Trinity Health merged with Pennsylvania-based Catholic East in one of the largest nonprofit mergers of 2013. And some interesting partnerships occurred between not-for-profit hospitals and systems and publicly traded operators. LifePoint Hospitals and Duke continued to acquire hospitals for their joint venture. One of the largest mergers occurred between a nonprofit hospital system and a major insurer when the Pennsylvania Insurance Department approved the affiliation between Highmark (a BlueCross BlueShield subsidiary) and West Penn Allegheny Health System, both based in Pittsburgh. After closing that deal in April, Highmark went on to add two more Pennsylvania-based hospital systems to its integrated delivery system, Allegheny Health Network.While a lot happened on the non-profit side, Morgan noted there were also major acquisitions within the publicly traded hospital space. “On the for-profit side, there were two notable deals completed or announced in 2013 — Tenet Healthcare & Vanguard Health Systems and Community Health Systems & Health Management Associates.” In the first deal, Nashville-based Vanguard was the target of Dallas-based Tenet. The latter completed its acquisition of Vanguard at the beginning of October in a deal valued at approximately $4.3 billion ($1.8 billion purchase price plus assumption of $2.5 billion of Vanguard debt). The second deal, Morgan said, was announced last year and is anticipated to close in the first quarter of 2014. In this case, Community Health Systems, headquarered in nearby Franklin, seeks to acquire HMA, which is based out of Naples, Fla. Just before Thanksgiving, CHS and HMA announced the companies’ proposed merger had been declared effective by the Securities and Exchange Commission (SEC), clearing the way for a vote by HMA stockholders, who approved the deal last month with 98.7 percent of votes in favor of the merger. With a purchase price close to $4 billion plus assumption of debt, the overall value of the merger is anticipated to be in excess of $7.5 billion, making it the largest deal since the HCA buyout in 2006. Once the merger is executed, CHS will own and/or operate 206 facilities with more than 30,000 licensed beds.“From and M&A perspective, I would expect to see a continued robust level of activity,” Morgan said of 2014. However, given the limited number of publicly traded companies and the amount of activity that has already occurred in that space, he said he expects much of the future activity to be in the not-for-profit world.Behavioral health had a “decent” 2013, Morgan said. Franklin-based Acadia Healthcare enjoyed another healthy year of growth. The company began the year by completing previously announced deals acquiring Behavioral Centers of America and AmiCare Behavioral Centers and then proceeded to acquire additional individual facilities in Georgia, Tennessee, Florida, and Puerto Rico during the remainder of the year. Morgan said he expected the company to continue to grow in 2014.A behavioral health “marriage” announced in late 2013 is expected to come to fruition in 2014. In November, the leadership of Centerstone, which has a major presence in Tennessee and Indiana, and the H Group, with facilities in Illinois and Kentucky, announced their intent to affiliate. Although the H Group will operate under the Centerstone flag, David Guth, CEO of Centerstone of America, said the affiliation had no money or assets changing hands and was instead a joint effort to “create a stronger and more effective behavioral health service organization.” Earlier in November, Hazelden and the Betty Ford Foundation also announced a mega-merger in the addiction space.After a slow start, Morgan noted home health saw some movement by late 2013. “In home healthcare, we did see a little bit of pick up at the end of the year,” he said, noting Louisville, Ky.-based Almost Family acquired Nashville-based SunCrest Healthcare in December. Going forward, Morgan said, “2014 could potentially be a year where you see more consolidation in the home health space.”Other sectors, said Morgan, were considerably quieter in 2013. Senior housing saw some limited activity, as did dialysis. Morgan said the latter was already pretty consolidated with the two big players being DaVita and Fresenius. “Between the two, they already control about 55 percent of the domestic market,” he pointed out. It was also a fairly quite year for labs, hospice, skilled nursing and LTACs as these sectors restructure and re-evaluate expectations under ACA and the impact of post-acute bundled payments. In the lab space, Morgan noted, “They’re not redeploying capital for growth right now. They’re trying to pacify stockholders by buying back shares and paying dividends because of the weaker organic growth because of pricing and volume pressures.”In general, Morgan concluded, there was good news in the equity markets for a number of healthcare sectors in 2013. “The S&P was up almost 30 percent … healthcare services was up over 37 percent,” he noted. For some, the gains were even greater. Morgan said behavioral healthcare was up over 100 percent and hospitals up over 44 percent. Looking ahead, he said, “I still think you can have really attractive returns for 2014 given valuations are still reasonable and the growth opportunities presented by the Affordable Care Act, but I think you need to pick your subsectors carefully.”
