What hospital M&A scrutiny means for health deals

Pro Deals: In increasingly concentrated markets, lawmakers argue there's merit in encouraging providers to compete on quality while prices are regulated. Fair or flawed?

• "In a perfect world, that is a very good and proper approach, but right now, we're living in an imperfect world," says KPMG national health care lead Ash Shehata.
• Hospital performance has become increasingly difficult to assess post-pandemic, and a health staffing crisis alongside a squeeze in Medicare Advantage reimbursement rates are putting pressure on systems.
• "When you look at the regulations, it's more of a hammer than a scalpel," says Ropes & Gray partner Torrey McClary, noting there's often an uptick in cost after a deal to pay for integration.
• "If you're looking at an immediate post-closing period, as opposed to a longer-term trajectory, are you really kind of capturing accurately what the benefit of the deal is?" McClary adds.
• "I think is probably the best course of action around quality is to continue the measures, the quality programs, the initiatives, but to be patient with both regulators and providers as we basically reset a baseline after the pandemic," Shehata says.

Pro Deals: How is the bipartisan push for Medicare site-neutral policies to pay hospitals the same as independent physicians impacting private equity investment in providers?

• "It's hard to separate the site neutrality discussion from the overall reimbursement issues of health systems," Shehata says.
• A push to remove the differential payment for site neutrality "will have a detrimental impact to health systems in net," unless that can be made up in other reimbursement programs like 340B, he adds.
• Yes, but: As Medicare Advantage grows, site neutrality could become less of an issue from a reimbursement standpoint, Shehata says.

Pro Deals: To what degree are big corporate buyers like Amazon or CVS increasing consolidation and reducing competition?

• Retail's health care play relies on having a profitable pharmacy business, according to Shehata.

• "And if we look through that lens, then we can get a sense of where we think the transactions and the deals are going to flow, but they have to be linked to pharmacy," Shehata says.
• Meanwhile, vertically integrated "payviders," all of which have different approaches, continue to invest in programs likely to drive consolidation or pricing in the market, he adds.

Pro Deals: How much are cross-market mergers between providers in, say, different parts of a state, going to dominate the health deals space?

• McClary says she expects continued cross-geography M&A, noting these types of deals are often more transformational and involve stronger, more stable health systems.
• "The balancing act is going to be: If we don't have these consolidations, will hospitals close?" Shehata says. "Access is going to need to be the big discussion of the day"
• "You have transactions that can preserve necessary health care in a community where otherwise those services might not be available," says McClary. "There's sometimes an advantage to operating at scale."

Further reading:

Hospital acquisitions draw House's attention.

Unchecked hospital mergers increased health costs, study finds.

2023's new trend: consolidation angst.

Ten things to know about consolidation in health care provider markets (KFF).