CHICAGO — The consolidation trend that has characterized the nonprofit health care sector for the last few years is positive for both hospitals and bondholders, Fitch Ratings said in a comment released last week.
Mergers have increased for the last two years as hospitals sought partners to help navigate the myriad challenges facing the sector. The trend is expected to continue as providers face mounting reimbursement pressures from payers, Fitch said in the report “U.S. Hospital M&A Generally Positive for Bondholders.”
The treatment of the bonds issued by the merged facilities is usually positive for investors that hold the debt, said Fitch analyst James LeBuhn.
The most common type of consolidation is when a large, highly rated entity takes over a smaller, lower-rated one. The larger organization can take over the smaller issuer’s outstanding debt, leave it as a separate obligation, or pay it off.
For private companies that acquire nonprofit systems and cannot assume the tax-exempt bonds, bondholders will almost always get their bonds paid off at par. That was the case when private-equity group Cerberus Capital acquired Boston-based Caritas Christi Health System and when Vanguard Health took over Detroit Medical Center.
It’s rare that a bondholder of a merging facility’s debt would lose money because of the transaction, LeBuhn said in a telephone interview.
“You may have a bondholder who’s sitting on some bonds with a nice big coupon and doesn’t want to see them taken out,” he said.
From a credit perspective, the consolidation trend is generally positive for hospitals, but could pose some risk to the larger institution that is taking on a struggling facility.
“The question becomes for the organization that is doing the acquiring, is there any risk to their credit profile, and there is a dilutative effect that could possible happen,” LeBuhn said.
He cited the recent merger of Providence Health & Services and Seattle-based Swedish Health Services, describing it as a merger of two large entities that may create some short-term pressure but will likely benefit both providers over the long term.
Reimbursement pressures, which hospital officials cite as a top concern, will continue to drive the trend over the next few years, Fitch predicted.
Medicare and Medicaid are both expected to see reduced payments over the next several years, due to both scheduled reductions that are part of the new federal health care as well as to state and federal fiscal stress, according to Fitch.
“We believe that [mergers and acquisition] activity will be driven as much by strategic considerations as by financial need, with larger systems acquiring stand-alone facilities,” LeBuhn said in the report.
