For-Profit Health Going Big

Posted on April 29, 2011

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Whatever the consequences from federal healthcare legislation and the struggling economy, for-profit systems are sending the message to competitors:  go big or risk being marginalized.

Last December, Community Health Systems (CHS) made an unsolicited proposal to purchase another large, for-profit healthcare provider, Tenet Healthcare. Tenet shareholders rejected the offer, so CHS more recently sweetened the offer to merge. A resolution is to-be-determined, but would likely create the largest for-profit system in the U.S.

This move was apparently a proactive strategy to challenge the Hospital Corporation of America (HCA), which went public with an IPO back in March.  Selling stock to become publicly traded offered HCA a massive amount of cash to help handle debt and position it for aggressive acquisitions, right at a time many hospitals are on the brink of insolvency and not only available at cut-rate prices, but receptive to ‘being saved’.

Another active for-profit system, Vanguard Health Systems, has been growing via those very attractively-priced acquisitions mentioned above. They remain a talked-about player in any failing hospital system takeover.

It is unclear how the minority behavior of large, for-profit, publicly traded corporations affect the majority strategies of non-profit healthcare systems and independent community hospitals.

Apparently the for-profit health systems believe size is an advantage in the future; otherwise, growth would not be such a pressing goal at the moment. Besides capturing more market share in various geographic regions, size provides economies of scale, which help hospitals negotiate more favorable reimbursements, terms with doctors, supply purchasing agreements, and larger purchases like medical equipment. Earlier this month , I questioned whether expansion was required for future survival. The answer coming from the for-profits is a resounding “yes!”

Savvy managers will recognize affordable growth opportunities, and there are many out there right now. Whether mega-systems have sustainable advantages and become the dominant industry model, it is too soon to tell. Likewise, what it means for the patient and overall market, no one knows just yet.

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