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Healthcare M&A predicted to be robust in 2013 as ACA uncertainty lifts

With the Affordable Care Act surviving the Supreme Court ruling and the presidential election, healthcare mergers and acquisitions will be robust in 2013 as investors feel less uncertain about the fate of the reform legislation, analysts predicted Thursday during a live webcast hosted by research and publishing firm Irving Levin Associates.

M&A in the hospital market is going to be strong throughout most of the country, said Joshua Nemzoff, president of New Hope, Penn.-based M&A consulting firm Nemzoff & Co. Nemzoff called the sector a “target rich environment.”

[See also: M&A: What is driving the market?]

“There are lots of hospitals that are distressed and there are lots of buyers out there,” he said. “The West is a huge market and the Midwest is a veritable gold mine with lots of hospitals that are becoming distressed.”

The one geographic area that Nemzoff does not expect will see much M&A activity in the hospital sector is the Southeast.

“The Southeast is tapped out,” he said. “There are not a lot of future deals there.”

According to Nemzoff, hospitals that have been struggling to stay afloat will have an even tougher time financially as the ACA rolls out and will become more vulnerable to being bought out.

[See also: Healthcare IT experiences robust M&A activity in 2012]

“Healthcare reform is not going to be a savior for a lot of these hospitals that two or three years ago might have thought that,” he said. “Everyone thought Obamacare would be positive as far as the hospital bottom line, but I think they are realizing it is not going to be positive.”

Hospitals looking to buy physicians’ practices will continue to be a trend in 2013 as it has been for the past several years, said Steve Monroe, managing editor and partner of Irving Levin Associates.

Hospitals cite improved care quality and a greater ability to control costs as the main reasons for wanting to buy physicians’ practices but those aren't the only driving forces, said Monroe.

“In my mind, one of the real reasons is they want to lock in physician referrals for their own hospitals,” he added.

Nemzoff agrees that hospitals are motivated mainly by referrals when they look at buying physicians’ practices.

“The reasons hospitals buy physicians’ groups are to increase volume and get referrals,” said Nemzoff, who noted that hospitals are often surprised by the decrease in physician productivity after the transaction closes.

“The biggest problem is a hospital buys a physician practice and the physician would all of a sudden work 40 hours a week instead of 50 or 60,” he said. “That’s not a profitable venture. The only way for a hospital to make money on this is if it buys a physician's practice from a competitor and those physicians start referring to them.”

Skilled nursing facilities are another big target for acquisition in the current market, said Monroe.

“You would think with all the Medicare cuts, you would see a falling off of demand for SNFs, but that hasn’t happened,” he said. “The industry is not going away.”

Home healthcare will see robust M&A activity this year, said Carsten Beith, managing director, group head, tax-exempt M&A at New York-based investment banking firm Cain Brothers.

In particular, Beith thinks small companies will be motivated to sell, in part because they will not be able to purchase the expensive IT systems required to collect data and report outcomes as mandated by the ACA.

“The sun is setting on the mom-and-pop home healthcare sector in favor of much larger companies,” said Beith.