New York, August 04, 2010 -- For-profit hospitals have increased their acquisition activity significantly in 2010 due to clarity over healthcare reform, a build-up of cash among many for-profit hospitals and more certainty over access to the capital markets for the for-profit operators, said Moody's Investors Service in a new report.
"We expect the U.S. healthcare reform to continue spurring M&A activity, since the new healthcare law stresses efficiencies, poses increased administrative burdens, and will likely result in additional pressure on business with managed-care payers," said Dean Diaz, Moody's Vice President - Senior Credit Officer.
While recent acquisitions within the U.S. for-profit hospital sector could strengthen the profiles of each acquiring company, further consolidation may have the effect of limiting rather than fostering competition under healthcare reform, the report said.
The changes in local market dynamics and healthcare reform should fuel a continuation of the acquisition activity seen in the first half of 2010. "This flurry of acquisitions could continue as long as credit conditions remain favorable and valuations on attractive targets remain reasonable," Dean said.
Historically, an underperforming hospital in a high-growth market would have been the obvious takeover target in this sector, but acquisition targets during the ongoing wave of acquisitions have fit into a broader range than usual. "In some cases, the acquisitions mark investments in new or different markets, some of which might have longer-term returns," Diaz noted. "For example, some markets which are saddled with large populations of uninsured could benefit the most from healthcare reform's increased access to health insurance."
Many of the takeover targets also require significant capital investment, since capital spending was cut back in order to preserve liquidity or bolster operating results at many of the acquisition targets, said Moody's.
The full report, "M&A Activity Accelerates Among For-Profit Hospitals," is available at www.moodys.com.