One by one over the past month, local health-care providers changed hands: a radiology company, a chain of blood-testing clinics, a hospital.
They joined well-funded outside companies intent on piecing together health-care providers in Kern County and across the country. And while it’s true businesses can lower costs through the economies of scale that often come with mergers and acquisitions, there can be a host of reasons why these deals make financial sense for buyers and sellers alike.
Attractive purchase offers figure into some transactions, as do independents’ need for resources to compete in the expensive world of medical technology and regulation. Another big motivator that’s typically invisible to customers is a battle for market share, which can factor into important contract negotiations with insurance companies.
Who benefits from this continuing consolidation of the local health-care industry? It depends on the specifics of the situation: Rural hospitals, for instance, may have little choice but to throw their allegiance behind a larger entity whose mission is to broaden access to health care. In other cases, though, shareholders of the buyer may be the biggest winners.
“I don’t think you’re going to see any lowering of health-care costs because of these consolidations. And I think you may see some (cost) increases,” said health-care consultant Bob Severs, who retired in 2015 as CEO of Bakersfield managed-care provider GEMCare.
Hospital survival
He and others drew a distinction with the announcement in January that 156-bed Delano Regional Medical Center has agreed to become part of Adventist Health Central California, pending regulatory approval. They said that deal, in which Roseville-based Adventist said no money would change hands, will help the survival of a rural hospital.
Rather than lend bargaining power — the surrounding communities are largely enrolled in Medi-Cal, which does not negotiate prices with service providers — Adventist says its addition of Delano Regional will deliver more resources and expertise to the community. It added that no significant changes are expected to the employee population or management structure, “simply because DRMC already operates lean and very efficiently.” The hospital is currently operated by the Central California Foundation for Health, which serves primarily the Delano community.
With 38 percent of California hospitals operating in the red, merging with a larger organization may be the only way some medical centers can afford to make required seismic safety upgrades or invest in up-to-date medical technology, said Jan Emerson-Shea, spokesman for the California Hospital Association.
“It’s very difficult anymore for independent hospitals to make it,” she said. “Often when a hospital joins (a larger health system), it’s the only way they can stay open and operating, giving care in their community.”
Other local acquisitions
Another recent example of a local independent joining forces with a larger outside organization is Kern Radiology Imaging System’s pending asset-only acquisition by Los Angeles-based RadNet Inc., a publicly traded company with 341 locations and more than 7,000 employees in California and several states along the East Coast.
The transaction is “really is all about efficiency, and it’s hard to create the kind of efficiency necessary to be profitable without the large economies of scale” that RadNet brings to the table, said Dr. Bernard Maristany, president of Kern Radiology’s affiliated, 20-radiologist medical group.
The problem facing companies like Kern Radiology, he said, is that reimbursements from health-care “payers” — insurers, Medicare and Medi-Cal — have gone down “but the cost of running the business only goes up.” He added RadNet will come away with a substantial share of the Bakersfield market, having already acquired local competitor Truxtun Radiology Medical Group in 2010. RadNet did not respond to repeated requests for comment.
The California has reported all 173 of Kern Radiology’s employees are expected to be laid off as a result of the acquisition. Maristany said Friday all or almost all of them will immediately be rehired.
Physicians Automated Laboratory, another longtime Bakersfield provider of medical services, said in January it had become part of an outfit called WestPac Labs. PAL was bought in 2011 by Austin, Texas-based Sonic Healthcare USA, whose parent company is part of a large international chain of laboratories headquartered in Australia.
Details of the transaction were sketchy. WestPac’s website refers to two sister companies: West Pacific Medical Laboratories, headquartered in Santa Fe Springs, and Central Coast Pathology Laboratory, based in San Luis Obispo. An executive at PAL declined to comment and WestPac did not return requests for comment.
Looking forward
Bakersfield insurance broker Paul Sheldon took a dim view of consolidation in local health care, saying by email such deals are “all about increasing profitability for investors.”
“Although all health-care firms involved in mergers and acquisitions claim that their main motivation is to create greater efficiency and lower costs, such efficiencies often don’t materialize, and, if they do, savings are not passed on to consumers,” he wrote.
A spokesman for the California Association of Health Plans, a trade group representing health insurance companies, said by email that consolidation isn’t always bad. It can create efficiencies and lead to better coordination of health-care services, spokeswoman Mary Ellen Grant wrote.
“However,” she added, “affordability of coverage is also an important factor. Some areas of the state that have provider consolidation have also experienced higher health care costs that lead to higher premiums. Many experts argue that one of the main reasons for higher premiums in Northern California is due to provider consolidation.”
Severs, GEMCare’s former chief executive, said he suspects large companies’ appetite for greater market share and cost efficiencies is behind much of the consolidation in health care. Expect to see more of the same in the future, he said.
“I think those (companies) that have more capital and can move the market ahead faster are going to be looking to gain more market share and probably acquire more entities,” he said. “I think it does go in spurts, but I think we will see this continue.”