CHICAGO — The “national explosion of consolidation” across the health care sector differs in key ways from past trends, as providers face new, complex problems and new players have entered the game to craft merger models that include risks and benefits, Moody’s Investors Service said in a report released Thursday.
For bondholders, the outcome is often often positive but can pose risks depending on the structure of the merger, Moody’s said in its report, “New Forces Driving Rise in Not-for-Profit Hospital Consolidation.”
Considering the myriad of financial pressures facing providers, a successful merger can offer an exit strategy for investors in troubled providers, as the debt is often defeased or assumed by the stronger credit, analysts said. Health care providers are increasingly seeking various forms of consolidation to manage industry pressures, which include reimbursement and volume declines.
Unlike past periods of consolidation — most recently in late 1990s and early 2000s — the industry faces new problems this time, including the new federal health care law, risky debt portfolios that feature costly interest-rate swaps or bank covenants, high pension liabilities, and spiraling health care costs.
Also unlike in the past, a handful of new players have entered the industry looking to acquire or partner with providers.
Among them are health insurance companies, as seen in the proposed merger of Highmark Inc. and West Penn Allegheny Health System, as well as new large private equity firms, like HCA and Vanguard. In 2011, the private equity firm Oak Hill Capital Partners established a joint venture with Ascension Health to acquire distressed Catholic hospitals.
Like the players, the models of consolidation vary, from larger non-profit provider acquiring a smaller, often struggling credit, to various types of joint ventures and joint operating companies or agreements.
In many cases, bond buyers benefit as the debt is 100% defeased and the ratings are withdrawn, Moody’s said.
When the merger is between two nonprofit providers, there are several possibilities for outstanding bonds. The debt may remain outstanding with no changes in security, or the stronger credit may act as a guarantee for bonds issued by the lower-rated credit, or each hosiptal may join each other’s obligated group. Such mergers can be complex and sometimes mean a loss of control, but often broaden access to capital markets, diversify cash and allow the system to spread its costs over a larger system.
“The growing trend toward not-for-profit hospital consolidation is positive for the financial health of many, but not all hospitals,” the report says. “However, given current looming headwinds confronting the sector, those hospitals left out of consolidations ... will face greater negative rating pressure going forward.”