Hospitals Going Out For Profitable Care

Hospitals are looking to expand their services to help cut costs and bring in higher-paying patients, as changes in the health care industry force providers to revamp their strategies.

Medicare isn't growing as fast as it did in previous years due to the budget sequester in 2013, and reimbursements are lower, putting more focus on finding savings. And ObamaCare made re-admission rates and other patient care metrics key factors in figuring out reimbursement, adding another layer of strictness.

Hospitals also want to operate more outpatient and integrated care facilities to secure higher-margin patients in suburban communities vs. urban stand-alone hospitals with higher numbers of uninsured patients.

"There is a shift in the business model and payment structure," said Michael Waterhouse, an equity analyst at Morningstar. "There is a lot more of an incentive for these providers to offer integrated type of care, like following up on patients to make sure they are taking their medication so they don't have to come to the emergency room.

What Tenet's Deal Means

That trend toward a broader lineup of services can be seen in Tenet Healthcare's (THC) March 23 deal to form a joint venture with United Surgical Partners International.

Their combined short-stay surgery and imaging-center assets will create the largest U.S. provider of ambulatory surgery. Tenet will own 50.1% of the venture, with the option for full control over five years.

Ambulatory centers provide same-day surgical care, including diagnostic and preventive procedures for patients, and operate with lower costs than emergency rooms and other hospital centers do.

The $2.6 billion Tenet-USPI venture will have ownership interests in 244 ambulatory surgery centers, 16 short-stay surgical hospitals and 20 imaging centers in 29 states.

"The partnership accelerates Tenet's and USPI's shared strategy to expand our ambulatory service offerings to meet growing consumer demand for services that are provided in a lower cost, more convenient setting and that are aligned with the long-term transition to value-based care," said Tenet CEO Trevor Fetter in a statement.

The deal's size of 280 care units is unusual in the health care sector, as hospitals typically look to buy a few outpatient clinics and physician groups at a time in smaller transactions.

But expect more deals on the horizon. The fragmented ambulatory, or outpatient, center industry is ripe with buying opportunities for hospitals.

Why Bigger Is Better

Health care merger-and-acquisition activity rose 16.3% in 2014 vs. 2013 thanks to a flurry of deal-making in the fourth quarter, according to a PricewaterhouseCoopers report. The managed care, long-term care and behavioral care divisions saw the biggest increases. PwC sees similar levels in activity this year.

The bigger a company's presence is in a community, the easier it is to drive down costs for equipment and services.

"Bigger isn't always better but with these players, the more geographically diversified they get the more synergies they get from the back office stuff to help lower costs," Waterhouse said.

Insurers are pressuring hospitals to provide lower cost settings for patients, and the geographic and service expansion helps with forming PPO options.

"Getting bigger gives hospitals more negotiating leverage with insurance companies to create other PPOs," Waterhouse said.

In addition to the new regulatory and fiscal landscape, technological advances are enabling doctors to perform more surgeries in an outpatient setting.

Consumerism has added a new dimension to health care as well, said Tenet spokesman Dan Waldmann.

"People are seeking out more convenient, more retail-like health care experience," he said. "High deductible health plans have more costs burned on the patients, so they are shopping around for the cheapest care."