NEW YORK - A wave of healthcare consolidation activity by Moody's-rated not-for-profit hospitals and healthcare systems in the State of New Jersey is expected to continue in response to lackluster financial performance, revenue contraction, and the varied implications of healthcare reform, says Moody's Investors Service in a report.

"Merger and acquisition activity in New Jersey is gaining increasing acceptance as a way for hospitals with weak operations and financial challenges to avoid closure, bankruptcy, or payment default by obtaining an infusion of cash and operational support from a buyer or by merging into a larger system," said Moody's Assistant Vice President Sarah Vennekotter, author of the report.

For hospitals unable to successfully improve operating efficiencies, engage in growth strategies, and align more closely with physicians, according to Moody's, the most viable alternatives may prove to be acquisition by a for-profit buyer or merger into a larger not-for-profit system, many of whom are looking to gain size and scale through affiliations and M&A.

With many smaller independent providers facing significant financial challenges, the past decade has seen several hospitals in the state file for bankruptcy or close their facilities.

"Hospital consolidation is often a credit positive for bondholders as mergers and acquisitions lead to debt repayment or guarantees by higher-rated systems," according to Vennekotter. "When mergers do not result in improved operating performance, credit deterioration can result."

Reimbursement changes associated with federal healthcare reform may present special adaptation challenges as the hospital and physician communities in the state have not been historically aligned or integrated. In addition to operating in very competitive local markets with fragmented physician communities, New Jersey hospitals must also manage a unionized labor force and related high labor costs.

While Moody's outlook for the state's not-for-profit hospitals remains negative along with the national sector, New Jersey hospitals and healthcare systems continue to perform at levels that compare unfavorably to their national peers, including on many key financial metrics. The median rating for hospitals in the Garden State is Baa2, two notches lower than the national median of A3.

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