Dan Primack

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Hospitals after healthcare reform: 'Big guys getting bigger'

November 11, 2010: 1:52 PM ET
This week, Cerberus Capital Management completed its $895 million acquisition of New England hospital chain Caritas Christi Health Care. It comes as private equity-owned HCA remains in registration for a giant IPO, and as Blackstone-backed Vanguard Health Systems awaits approval to buy Detroit Medical Center's eight hospitals.

So we felt it was a good time to catch up with Chris Jedrey, a partner at McDermott Will & Emery, who represented Caritas Christi. Not about that deal, per se, but about the overall state of healthcare system M&A:

Fortune: You believe that the healthcare reform legislation is speeding up healthcare system M&A. How come? Shouldn't it be slowing down, until everyone understands what the new laws really mean?

Jedrey: It's driven by the perception that there are only so many ways to get at the cost question. One is single-payer, which most Western democracies use, but that is politically unacceptable in this country.

So if you eliminate single-payer, the only other strategy likely to make a significant difference is shifting a lot of the costs of care risk to the providers. So a lot of providers are making calculations about how much financial reserves they need to bear the risk, and on which to spread the costs of IT and other infrastructure.

One metric I've heard is $4 billion or more in annual revenue, which is way to much for most smaller systems to bear alone.

So does that mean you expect small systems to band together?

No, this will be big guys getting bigger. For example, I recently repped Lenox Hill Hospital in upper Manhattan, which had decided that it had to be part of something bigger. So it joined the North Shore Long Island Jewish Health System. Lenox became that system's 14th or 15th hospital, bringing them to between $5 and $6 billion in annual revenue.

Chris Jedrey

So healthcare reform creates behemoths?

Remember, some of this is just reactionary. The failed healthcare reform effort of the 1990s also drove some consolidation on the provider side, some of which was later undone. On the private insurer side, however, that consolidation continued for 15 or so years. In fact, a figure I saw suggests that between 80 and 90% of private insurance healthcare markets meet the Department of Justice standard for 'highly-consolidated,' meaning that just two or three plans have over 80% of the market share.

The other piece of the insurance side is the government, which by definition is consolidated. And under healthcare reform, they're getting a bigger mandate.

You just represented Caritas Christie, which was acquired by Cerberus. Do you expect private equity firms to keep buying up hospital systems, and possibly using them as platforms for further consolidation?

Yes, I think we're going to see a lot more activity. Remember, there are about to be 32 million more insured people.

But if that happens, we'll begin to see more for-profit hospitals. Is that a good thing, given that debt-to-revenue ratios at for-profit hospitals are far worse than at not-for-profits?

It's a great question, and I lack a great answer to it.

I can say, however, that while the total number of hospitals has fallen, the percentages of for-profit, non-profit and public hospitals hasn't changed much over the past four decades. Usually it's around 80% or so not-for-profit. So what I think you'll see are changes in two directions: The percentage of for-profit hospitals will increase, and the non-profit sector will become more dominated by large systems. What will decrease will be the number of free-standing non-profits, like Lenox Hill.

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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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