Health insurer deal fever may spread to hospitals next

Mergers among some of the biggest U.S. health insurers could soon push America’s top hospital operators to combine.

Anthem Inc. on Friday announced it was acquiring Cigna Corp. for $188 a share, or about $50 billion including debt. This is the third major combination between health insurers announced in July.

The biggest deals — Anthem and Cigna and Aetna Inc.’s $37 billion offer for Humana Inc. — will be heavily scrutinized by antitrust regulators. There’s no guarantee either will be approved, even with divestitures. But if they are, health-care facility operators are going to have to contend with bigger, more powerful insurers. Striking deals of their own could improve their negotiating power over medical reimbursements.

“If the insurers are going to have more leverage, hospitals have to have a bigger network,” Jason McGorman, an analyst at Bloomberg Intelligence, said in a phone interview.

HCA Holdings Inc. is the biggest U.S. hospital operator with a market value of $39 billion. Universal Health Services Inc. and Community Health Systems Inc. are No. 2 and No. 3 at $14 billion and $7 billion, respectively. Tenet Healthcare Corp. is the fourth-largest, valued at about $6 billion, and LifePoint Health Inc. is fifth at $3.7 billion.

Acquirers could target the more rural-focused of the largest health-care facility operators, which have room for margin improvement. LifePoint, based in Brentwood, Tennessee, may fit that bill. The many private companies that run large networks of hospitals may also be ripe for consolidation.

The arguments for provider and insurer consolidation are, in a sense, circular. Insurers have been adding scale in part to gain negotiating leverage with hospitals and doctors, who’ve also been forming larger affiliations.

The need for greater efficiency under the Patient Protection and Affordable Care Act has already spurred some consolidation as health-care operators sought to expand market share and cut costs. Community Health agreed to buy Health Management Associates Inc. for about $7.5 billion in 2013, the same year that Tenet struck a deal for Vanguard Health Systems Inc.

Since then, most deals have tended to be smaller takeovers of hospital properties and physician practices or joint ventures. Large combinations of hospital operators can be difficult to pull off because regulators don’t want to repeat the mistakes of past deals that eventually led to higher prices for consumers, McGorman of Bloomberg Intelligence said.

That said, if the seven biggest health insurers can shrink down to four, the largest public health-care facility operators could have a better argument for looking at each other as potential partners.

One deal scenario is for predominantly urban hospital operators to expand into rural areas. While facilities in less populated areas don’t get as much traffic, their patients generally have lower incomes and there can be a greater opportunity to take advantage of subsidies under the Affordable Care Act. There are also usually cost cuts and other operational improvements to be made, offering potential gains for a buyer.

“From a regulatory perspective, the easiest thing to do to consolidate something that’s public would be to look at something that is in a rural area,” said Brian Wright, an analyst at Sterne Agee CRT. “The ACA benefit has been more quickly realized in the urban areas, but there’s more long-term opportunity for the uptake in the rural communities.”

LifePoint and Franklin, Tennessee-based Community Health both have a large number of rural hospitals.

Public hospital operators could accelerate takeovers of their private peers, said Joshua Schachter, a money manager at Snow Capital Management. His firm oversees about $5.4 billion including shares of Community Health.

Most of the companies that run the nation’s health-care facilities are closely held. The smallest of that bunch are at a disadvantage for negotiating with managed-care providers and could benefit from becoming part of a larger entity.

“They need to make a move,” Schachter said.

LifePoint could be one of the more active buyers of smaller, private operators as it seeks to compete with its larger public peers, he said.