Experts say hospital M&A will continue unabated

Hospitals face increasing pressure to engage in mergers or acquisitions, according to officials connected to three large financial firms with ties in the healthcare sector.

Gregory Park, senior managing director for Ernst & Young's U.S. healthcare mergers and acquisition division, Cecilia Gonzalo, managing director of the Essex Woodlands venture capital firm and Robert J. Fraiman, chief executive officer of Cain Brothers & Co., spoke about those pressures during a video webinar on Tuesday.

"The hospital market [remains] very fragmented, and there are long tails of hospitals to be consolidated," Gonzalo said. Many of the deals tend to be very modest, averaging about $70 million in size, she added. All of the presenters agreed that hospital transactions tend to be middle-market size or lower in terms of dollar volume.

Despite their relatively small size, Park noted that the volume of deals is hiigh. The Affordable Care Act represented a "tectonic shift" in the way hospitals do business, he said, and many are left with few choices but to be acquired or merge with another entity. "It's a market of self-determination," he said.

According to data from Irving Levin Associates, there were 267 healthcare-related transactions during the third quarter of 2013, an increase of 16 percent from the second quarter of the year and a 20 percent jump from the third quarter of 2012, FierceHealthFinance previously reported.

Some of the biggest pressures currently prompting hospitals to engage in mergers and acquisitions are unfunded mandates such as ICD-10, Fraiman noted. "You can't use the bond market to finance IT," he observed, which means some facilities have little choice but to seek a partner with deeper pockets.

Additionally, rural hospitals and systems find their geographical isolation makes it too difficult to find consistent financial traction, Fraiman noted. "We are likely to see small rural providers to consolidate, perhaps with tertiary provides, or with another community-based provider," he said.