NEW YORK--(BUSINESS WIRE)--Fitch believes that the trend towards consolidation in the healthcare sector will continue and is generally beneficial for investors in nonprofit hospital bonds. Mergers, acquisitions, and strategic partnerships and alignments between hospitals, health systems, and physician practices have accelerated over the past two years.
We believe this trend will continue because the key factors driving change remain in place. Reimbursement under the Medicare and Medicaid programs is expected to be constrained due to the weak economy and difficult fiscal conditions at both the state and federal levels. Certain supplemental funding programs such as disproportionate share are facing reductions as part of the Patient Protection and Affordable Care Act. We also expect pressure on commercial and managed care insurance rates, which have historically offset losses on governmental reimbursement. Consolidation activity has been a result since institutions in this sector benefit from size and scale, which allows for diversification of revenue sources, elimination of duplication of costs, and allocation of resources to better withstand likely future reductions in funding.
A common theme shared by many mergers and acquisitions (M&A) in the nonprofit healthcare sector has been financially stronger credits acquiring stand-alone hospitals or smaller health systems. For example, Ascension Health, the largest nonprofit and Catholic health system in the U.S., acquired Alexian Brothers Health System with its two acute care facilities in northwest suburban Chicago earlier this year. Moreover, private equity investors and for-profit hospital companies have been active acquirers in the nonprofit space, particularly for distressed facilities. Vanguard Health's acquisition of Detroit Medical Center and Cerberus Capital's acquisition of Caritas Christi Health System benefited bondholders who had their bonds refunded at par.
Going forward, we believe that M&A activity will be driven as much by strategic considerations as by financial need, with larger systems acquiring stand-alone facilities. A positive from a credit perspective, an acquisition or merger may result in several potential outcomes for bondholders: debt becomes the obligation of acquirer through substitution of security, debt is refunded by the acquirer, or the debt remains a separate obligation of the acquired entity.
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