NEWS ANALYSIS : Prospect of Reform Already Fueling a Rush to Acquire : Health care: Deals involve everyone from hospitals to HMOs to drug firms. And the pace is likely to quicken.
About four months ago, an upstart health care company called Columbia Hospital Corp. made history by fashioning a $3.2-billion merger that transformed it into the nation’s largest for-profit hospital chain.
Columbia has done it again--this time combining with HCA-Hospital Corp. of America to create a $10-billion monolith--illustrating the health care industry’s urgency to position for reform.
Deals involving everyone from drug companies to health maintenance organizations to medical equipment makers have multiplied, as each tries to compete better at lower cost. And the pace promises to accelerate.
“We haven’t begun to see the level of merger activity that we are going to see,” said Philip M. Lohman of First Consulting Group, a Long Beach-based health care consulting firm. “The stronger organizations will flourish and control the merger activity. The weaker and smaller ones will have to look for partners.”
Recent deals include drug giant Merck & Co.’s pending acquisition of mail-order pharmacy Medco Containment Services Inc. for $6 billion; the proposed merger between insurer Blue Shield of California and Unihealth America, which operates hospitals and HMOs; the merger of HMOs Qual-Med Inc. and Woodland Hills-based Health Net, and Abbey Healthcare Group Inc.’s purchase of Total Pharmaceutical Care Inc.
“Health care reform is leading companies to the decision that they have to make acquisitions” if they want to increase volume, said Kurt Kammer, an analyst with Advest Inc. in Washington. The only way to combat the lower profits that will result from lower prices dictated by reform is to “go out and acquire,” he said. “It’s a proven, reliable way to increase revenue.”
Columbia knows the value of a merger. It has grown rapidly since its founding in 1987, buying hospitals aggressively. The company was transformed into Columbia Healthcare Corp. this summer after merging with much larger Galen Health Care Inc., once part of the Humana Inc. health care empire. Galen operated 73 hospitals to Columbia’s 26.
The deal was notable not just for its geographic synergies, which gave the combined company a strong presence in key markets in Florida and Texas, but also because it would achieve a large economy of scale. Columbia Healthcare said it would save $30 million a year through lower purchasing and data processing costs.
Columbia picked up four California hospitals as part of its merger with Galen: Huntington Beach Medical Center, San Leandro Hospital, West Anaheim Medical Center and West Hills Regional Medical Center. HCA owns two facilities in the state: Los Robles Regional Medical Center, a 210-bed general acute care hospital in Thousand Oaks, and Las Encinas Hospital, a 146-bed psychiatric hospital in Pasadena.
The hospital mergers “put HMOs on notice that hospitals will be a force after health care reform,” said David Langness, a spokesman for the Hospital Council of Southern California, a trade group. “What that means is negotiating clout with the people who pay providers, namely HMOs and insurance companies.”
About 75% of the more than 200 hospitals in Southern California are already aligned with some larger group, such as for-profit or nonprofit corporations and religious organizations, Langness said. The largest California-based hospital company is National Medical Enterprises Inc., a Santa Monica firm that operates 16,000 beds at acute care, physical rehabilitation and psychiatric facilities.
In its $5.7-billion merger with HCA, forged quickly and announced over the weekend, Columbia anticipates saving $130 million annually by consolidating administration and “combining national purchasing contracts.” That means driving even harder bargains with suppliers, who are eager to feed its 190 hospitals and 42,000 beds.
Together, Columbia and HCA buy $1.7 billion worth of medical supplies a year.
“The move to one single (purchasing) contract will give suppliers much greater volume,” said Victor Campbell, HCA’s vice president for corporate and investor relations. In return, the prices that suppliers charge should decline. “This is what health care reform is all about,” he said. “Consolidating, reducing costs.”
Eran Broshe, vice president of the Boston Consulting Group’s health care practice unit, said reform especially will force hospitals to examine and cut their costs, or face losing business to competitors.
Broshe said managed care companies and HMOs, which direct their patients to selected hospitals, “are going to shift volume to the hospitals that offer the better cost opportunity.”
While reform has raised questions for all health care companies, “hospitals are going to be one of the hardest-hit segments of the industry,” Broshe said. Since fewer medical procedures require an overnight stay, hospitals now have 30% to 40% more beds than they need.
Columbia’s occupancy rate is about 46%. But when that figure is adjusted to reflect space occupied by the many outpatients who travel through its hospitals, the rate jumps to about 70% on any given day.
HCA also has successfully secured outpatient business. Campbell said outpatient procedures make up 30% of the company’s business, and 60% of HCA hospital surgeries result in one-day patient stays.
Richard Scott, Columbia’s chief executive, predicted that the number of hospital beds around the country will contract by 30% in the next five years.
Despite its formidable size--only the government’s Veterans Affairs Department controls more beds--Columbia-HCA Healthcare is planning additional acquisitions, perhaps a dozen or more.
Some hospitals considered inefficient competitors will be acquired simply to eliminate them, Scott said in a telephone interview.
“We’ve bought eight hospitals in the last five years solely to shut them down and consolidate them into our operations,” he said.
Columbia-HCA is determined to “build local networks city by city so that we will be the logical provider for health care buyers, whether they be health alliances, HMOs or through an individual employer contract,” Scott said.
