Healthcare Industry Executives Expect Massive Consolidation Ahead

Just as reimbursement pressures may spur short-term consolidation within the home health sector, the same may be the case for the senior living and broader healthcare industry as well.

Both healthcare service providers and product companies operating in the space are facing margin pressures due to challenges of growing revenue and the rising costs of doing business, according to the findings of a recent GE Capital survey.

The second quarter 2014 GE Capital Healthcare Industry Economic Outlook surveyed executives from 86 companies in the healthcare industry to gauge their outlook on a variety of economic, industry and business-level issues. Companies surveyed included responses from executives at middle-market companies with revenue ranging from $10 million to $1 billion.

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Ability to maintain margins, grow revenue and the cost of doing business were the topmost concerns among survey participants, especially among post-acute care providers, says Anil Joseph, managing director with GE Capital’s Healthcare Financial Services.

“There’s some pressure on utilization broadly speaking, however, service providers are optimistic over the long-term,” Joseph told SHN. “Most view the Affordable Care Act as long-term positive, but the expectation is going to be continued pressure on reimbursements.”

The majority of healthcare services firms expect commercial reimbursement rates to remain flat over the next six to 12 months, while only 29% expect a modest increase, according to GE Capital’s analysis of the surveyed responses.

Given these expectations, 65% of respondents indicated they anticipate capital spending will remain flat, while 30% expect a modest spending increase in the range of 1% to 5%. Areas where capital spending is likely to focus include replacement of existing equipment, maintenance of infrastructure and new equipment purchases.

Fragmentation across many sectors—senior living and home health care included—is triggering more consolidation, while simultaneously forcing others to diversify their service offerings.

“We’re seeing massive consolidation within sectors,” Joseph said. “Most of the sectors are extremely fragmented and we’re seeing more diversification.”

But whether it’s home health providers acquiring hospice agencies, or skilled nursing facilities (SNFs) and long-term care companies looking to move downstream in the post-acute care continuum, more consolidation has been taking place in recent years among various providers, Joseph added.

“With reimbursements dropping, providers are going to have to take on more risks,” he said. “We’re seeing a lot of providers with goals of building a post-acute care platform in the market and negotiating with payers to provide services for all of them.”

Nationally prominent providers like Brookdale Senior Living (NYSE:BKD) and Kindred Healthcare, Inc. (NYSE:KND), are among those that have been diversifying, either by providing ancillary services or by trying to build all of the pieces of the post-acute care network together, noted Paul Nevala, vice president of Investment Research Group with GE Capital’s Healthcare Financial Services.

During the JMP Securities Financial Services Real Estate Conference last October, Brookdale executives indicated the company sees expansion among its ancillary businesses, particularly in home care and hospice.

The company’s acquisition earlier this year of Emeritus, which bought Florida-based home health provider Nurse On Call for $102 million in November 2012, adds to Brookdale’s home health offerings.

“When looking at a big provider like Brookdale, it can service its independent living residents with its own home health entities,” Nevala said. “When managed care plans catch on, it comes down to who can be the best, biggest consolidated players to serve patients.”

Written by Jason Oliva

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