Healthcare reform drives trends in market consolidation

The impact of legislation on healthcare market transactions is one aspect of healthcare industry finance and the valuation of healthcare entities that should not be overlooked. The market is consolidating in response to conditions that existed before reform as well as conditions that were exacerbated by reform. Two critical trends in consolidation that are in the headlights for valuation analysts and appraisers are the employment of physicians by hospitals and the alignment of physicians with hospitals through contracting.

Physician employment. Hospitals employ physicians for a variety of reasons but a key financial motivation may be to create an opportunity for so-called provider-based billing. Here, hospitals can charge and collect more for a given service than when the identical service is provided in an independent physician's office. This is analogous to the common experience of receiving two bills when one goes to the emergency room—a "facility" fee bill from the hospital and a "professional" fee from the physician. Readers should note that the extra facility fee revenue available to the hospital when it acquires an independent physician practice should generally not be included in a valuation revenue stream as it is inconsistent with the fair market value requirement that the revenue be available to any "hypothetical" party.

Physician-hospital alignment. Physician-hospital alignment through common contracting is another accelerating trend resulting from reform. Accountable care organizations—currently voluntary and a key feature of reform—require hospitals, physicians, and other healthcare providers to share risk for the cost of caring for patients through a common entity.  Because the cost risk is more manageable in a single entity, ACOs create an incentive for consolidation and, very importantly, can create a shift of market negotiating strength away from health insurers to healthcare providers.