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Deloitte: Reform should spur provider, health plan M&A activity

With the Patient Protection and Affordable Care Act in place, the healthcare industry should expect changes in the ranks of providers and health plans – which should fuel increased mergers and acquisition activity, according to a new report from Deloitte Development LLC.

Among providers and physician practices specifically, changes related to health reform and expected changes to the tax code have placed a large number of practices in play, according to "Health Plans and Providers: Implementing Strategic M&A Transactions in a Post-Reform Environment."

"When most physicians evaluate healthcare reform they see the possibility of increased patient volumes at lower levels of reimbursement. As a consequence, more and more are aligning/integrating their practice with a hospital or health system," the report notes. "Reform also could make it less attractive for physicians to continue owning ancillary assets, due to anticipated reimbursement reductions. This is driving physicians to exit those businesses and seek alternative employment models. The anticipated increase to the federal capital gains tax rate in 2011 upon the expiration of the Bush-era tax cuts is also prompting some physicians to seek transactions during 2010."

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Hospitals aren't immune to changes in the healthcare landscape either. They're girding for expected cuts in Medicare and the advent of bundled payments, all while feeling the financial pinch of needing to make significant IT investments to support electronic medical records.

On the other side of the equation, health plans have been consolidating for some time as larger companies seek economies of scale. The report contends that health insurers this year and next will be occupied making tactical investments in operations.

Increased M&A activitywill likely occur in a couple of years, though, as the real challenges associated with healthcare reform won't be implemented until between 2014 and 2017.

"As health plans large and small begin to develop the strategic responses necessary to effectively address these challenges, many will look to M&A activity for either offensive or defensive purposes," the report notes. "Some smaller health plans with less scale may seek the safe haven of larger players with bigger balance sheets and more diversified business portfolios. Larger players, in turn, may seek to enter new lines of business to further diversify their revenue streams, and/or aggressively seek either distressed targets or other like-minded players with complementary assets, values and objectives."