While the hospital consolidation market continues to move at a rapid pace, the market for consolidation of ancillary services providers appears to be moving at a slower and more uneven pace. In the hospital market, there are large systems that are trying to develop a broader footprint to succeed in a value-based world and not have to go out-of-network. For example, earlier this year Tenet Healthcare Corp. acquired Vanguard Health Systems for a total of $4.3 billion, which gave Tenet the ability to expand into markets including San Antonio, Chicago and Detroit.
Further, there are smaller and mid-sized hospitals concerned about their ability to go it alone. In the ancillary services market, hospitals do not seemed as focused on acquiring all of the ancillary pieces, focusing rather on physician practices as a key part of the network. According to a Jackson Healthcare survey, 58 percent of hospitals claim building a competitive advantage is the impetus behind physician practice acquisition. There is some hospital acquisition of ancillary services activity going on, such as surgery centers, home health agencies and urgent care providers. However, the pace is not overly rapid.
In the private for-profit world, there is a mix of activity. In 2012, private equity firms invested $4 billion in health and medical services, including urgent care centers, according to a Reuters report. The urgent care market remains one where there is rapid consolidation. This year there have been three major urgent care acquisitions. Yet, pricing has grown softer as the sustainment of some of the margins in urgent care is proving challenging.
Within the home health industry, we see some acquisition activity, but not at a rapidly accelerating pace. With surgery centers, certain national chains are still trying to grow, purchasing individual surgery centers to achieve this goal. In 2012, 100 percent of ASC chains were actively performing due diligence on potential acquisitions, according to HealthCare Appraisers ASC Survey 2013. In contrast, there is a real mix in the position of independent surgery centers on the potential for sale. For example, a struggling surgery center wants to sell, but attracts little interest from buyers. On the other hand, a surgery center that consistently performs extremely well has no great interest in selling absent an immediate threat. Plus, there are challenges to completing transactions.
As we watch buyers and sellers in these transactions, we see a greater focus on each regulatory compliance, diligence and quality of earnings issue. Buyers are asking if there are sustainability concerns in the earnings, payer mix, customer concentration, reimbursement or numbers of procedures or visits. Furthermore, buyers want to know if there are any legal or regulatory challenges or potential landmines that should be reviewed. These hurdles can be in Stark Law, Anti-Kickback Statute, state licensure, HIPAA compliance, FDA regulation, billing and coding or other realms.
We expect continued deal activity, but increased caution from purchasers whether hospitals, financial sponsors or strategic non-hospital buyers.