Meet the new dominant player in one hot healthcare market

HCA Healthcare and University Health didn’t see a way to meaningfully expand their market share in the competitive Atlanta market, leading to a string of recent hospital deals that are poised to benefit Piedmont Healthcare, merger and acquisition experts said.

Piedmont will add seven hospitals to its current 11-hospital footprint via back-to-back transactions, courtesy of HCA and University Health. HCA sold its last Atlanta-area hospital to AdventHealth Thursday.

The profitable Atlanta-area hospitals will increase the not-for-profit health system’s negotiating power with Blue Cross Blue Shield of Georgia, allow it to grow its service lines and spread its fixed costs over a wider asset base, M&A experts said. Meanwhile, HCA and University Health can exit or partner in markets they were unlikely to lead on their own while receiving a return on their investment, they said.

“Piedmont is the one moving most aggressively here. They are really trying to expand their footprint, not just in the Atlanta metro areas, but metro areas of Georgia at large,” said William Custer, the director of the Center for Health Services Research at Georgia State University. “It’s part of their overall strategy to both have market power and the ability to integrate systems to succeed in a performance-based reimbursement system.”

BCBS has had a dominant position in the Atlanta area, Custer added.

The Health Care Cost Institute ranked Atlanta as one of the most competitive markets in the country, coming in as the 108th least concentrated out of 124 U.S. markets. It was primed for some consolidation, said Ian McCarthy, associate professor of economics at Emory University in Atlanta.

“In that sense, I think these events are more about Piedmont aggressively expanding than they are about another system divesting,” he wrote in an email to Modern Healthcare.

Indeed, Piedmont CEO Kevin Brown on Wednesday told Modern Healthcare that they “are not growing just for growth’s sake. We are very deliberate about it and making sure we get the efficiencies out of the growth.”

Piedmont signed a letter of intent Wednesday for University Health to become a regional hub in Augusta, adding three hospitals, three skilled-nursing facilities and nine urgent care centers to its portfolio.

Last week, Piedmont agreed to purchase four HCA hospitals within 90 miles of Atlanta for $950 million. The facilities had an average operating margin of 13.4% in their most recent federal filings, which doubled the 6.7% average operating margin across Piedmont’s 11 acute-care hospitals in 2020, according to a Modern Healthcare analysis of Medicare cost reports.

HCA also sold Redmond Regional Medical Center in Rome, Ga. to AdventHealth for $635 million. The divestitures follow HCA’s plans to shed hospitals where it isn’t No. 1 or 2 in the market as the company builds out its outpatient network. The hospital chain also plans to focus on its acute-care assets in southeast Georgia.

“Having brick-and-mortar hospitals is too costly in the healthcare marketplace,” said John Fanburg, chair of healthcare law at Brach Eichler, noting that more hospitals are adding retail clinics, urgent care facilities and ambulatory surgery centers as reimbursement changes, regulatory tweaks and budding technology drive procedures out of the hospital. “As we enhance technology, you don’t typically need the number of inpatient beds.”

University had said that they were too small to efficiently provide integrated care and that they weren’t sure if they could organically grow fast enough to reach that goal, said Jordan Shields, partner at Juniper Advisory. Piedmont, Wellstar Health System and Emory Healthcare—$4 billion, $3.5 billion and $5.9 billion organizations respectively—have the scale in metro-Atlanta to provide population health services; HCA and University Health do not, he said.

“Hospital care is a declining asset. Outpatient care, care in low-cost settings and care that is closer to home is where the industry is moving. But HCA is looking for markets where they can be acute, ambulatory and home care leaders, and Atlanta isn’t there for them in terms of acute care,” Shields said.

The HCA-Piedmont transaction makes a lot of sense for both parties, he said.

“These are valuable assets. HCA is in a position where they are too small in that area and Piedmont sees real value,” Shields said.