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CVS-Aetna Deal Leading a Wave of Change in Hospital Sector

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The mega merger of CVS Health Corp. (CVS - Free Report) with Aetna Inc. (AET - Free Report) announced recently has sent jitters across the hospital sector, which is already suffering from low patient volumes, soaring costs, increasing bad debts, and an uncertain regulatory climate among other issues.

Increasing Encroachment

The deal between a health insurer, Aetna and a pharmacy benefit manager and a pharmacy store company, CVS Health, is expected to eat into the business of hospital companies. The companies aim to bring affordable cure to patients at increased convenience. This implies greater emphasis on value-based care rather than fee for service care.

The players are structuring their offerings in a way that should keep patients away from hospitals. In this regard, they are being provided necessary services at home or an outpatient location. This should shift patient traffic for emergency rooms away from hospitals.

“The overuse of emergency department adds an estimated $38 billion in wasteful spending every year, so tremendous savings can be realized by utilizing local care solutions in a more integrated fashion,” according to Aetna’s CEO Mark Bertolini.

Further competition is being posed by UnitedHealth Group Inc. (UNH - Free Report) , which is voraciously spreading its business in this space via its OptumCare unit by acquiring doctor clinics, urgent care facilities and surgery centers. Last week, UnitedHealth Group’s Optum unit announced that it would pay nearly $5 billion to buy DaVita Healthcare Partners Inc.’s (DVA - Free Report) Medical Group and its clinics and urgent care centers.

The expansion of UnitedHealth and CVS Health in outpatient facilities is likely to create challenges for big names in the hospital industry such as Tenet Healthcare, HCA Holdings and Community Health Systems. The country’s nonprofit hospital industry may also not be spared.

The industry underperformed the S&P 500 index last year, as evident by growth of just 2.8% compared with a rally of 20% by the former.

Recourse Being Taken

Players in the hospital industry are coming together to gain in scale and size to face growing invasion. According to a Wall Street Journal report, hospital operators Ascension Health and Providence St. Joseph Health are mulling to merge which should create the nation’s largest hospital chain.

Two major Midwestern hospital operators, Advocate Health Care and Aurora Health Care, are combining to lead cost-effective operations. Catholic Health Initiatives and Dignity Health are merging, bringing together 139 hospitals and projecting combined revenues of $28.4 billion.

Consolidation is the Name of the Game

Consolidation in the hospital industry is already rampant, driven by the increased need by players to build scale and new capabilities, increase service offerings, and expand geographically to find a solid footing in an uncertain healthcare environment.

According to the latest analysis by Kaufman Hall, a leading provider of strategic and financial consulting services, hospital and health system partnership transactions for 2017 were total 87 as of the end of the third quarter, implying that transactions may exceed 102 deals completed in 2016. Last quarter, 29 transactions were announced, slightly less than 31 deals announced in the second quarter.

With the trend not likely to see any reversal anytime soon, we expect further deals down the line.

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