Opinion: Health care consolidation changes lending structure

It is no surprise health care is one of the most important topics this generation – and those to come – will face. And it should be. According to the World Health Organization, the U.S. spends more money per person on health care than any other country in the world. In 2014, U.S. health care spending grew 5.3 percent reaching more than $3 trillion – approximately 17.5 percent of the nation’s gross domestic product, according to the Centers for Medicare and Medicaid Services’ National Health Expenditure Accounts.

In addition, we are only beginning to see the full implications of the Affordable Care Act and what it means for health care providers, patients and the industry at large.

One of the more interesting, and possibly unintended, consequences of the ACA is that it has generated increased merger and acquisition activity throughout the health care industry.

It is estimated that more than 25 percent of hospital executives currently are involved in M&A transactions and more than 50 percent are exploring potential deals. Standard & Poor’s currently rates 625 hospitals in existence and analysts believe that this number will decrease to 500 by the end of this consolidation cycle.

Why the sudden need for health care providers to consolidate? Under the ACA, hospitals and other providers no longer are being reimbursed for volume, but for the quality of care they provide. That’s a very big shift from how the system used to work.

To increase revenue in the past, hospitals and other providers would do more – more patients, more procedures, more business. Now, it’s all about the quality of care. And if health care providers don’t meet quality care benchmarks set by the ACA, then Medicare, Medicaid and eventually private insurance companies will hit the providers with penalties.

This puts a number of hospitals in a challenging situation. Many of them may not be prepared or may not have the software or technology to report outcomes the way the ACA requires. Or they may not have the ability to provide the quality outcomes.

In that case, they need bigger hospitals or better experts to help them provide a higher quality of care. The result is smaller hospitals are being driven to partner with larger hospitals for their services and outcomes. And if they can’t find someone to partner with, many of them will cease to exist.

Consolidation in the physician practice and long-term care space also is happening as health care providers try to consolidate revenue. By purchasing physician practices, hospitals are locking in physician referral patterns. Hospitals also are buying long-term care facilities or rehab hospitals to provide the full continuum of care. By owning the full spectrum of care, hospitals are better able to control the quality each patient receives and, in turn, the most reimbursement for that care.

As the health care industry continues to change, so do the financial strategies surrounding it. Success in today’s health care environment includes access to capital.

The reality is bankers have become even more careful about which hospitals and health care providers they are lending to given the rapidly changing environment. They now are looking at measures beyond financial performance, including readmission rates, quality benchmark performance and how the hospital fits within the community.

Across the spectrum, efficiency is increasingly important today then it was yesterday. The prevailing thought is, “How can you do it faster, better and at lower cost?” A health care banker can work with a provider to identify efficiencies and improve the hospital’s overall performance.

Richard Ziegner is director of health care banking at UMB Bank in the greater Denver, Colo., area. He can be reached at richard.ziegner@umb.com.