Hospital operators face a buyer’s market for acquisitions as weaker companies struggle with higher costs and a decades-long drop in admissions, the chief executive officer of Tenet Healthcare Corp. said.
CEO Trevor Fetter, head of the nation’s third-biggest hospital company, predicted a wave of smaller health systems closing operations or curtailing services in an interview at Bloomberg headquarters in New York. Tenet itself is looking at targets in Texas, California and Florida where the Dallas-based company already has a strong presence, he said.
“This business has gotten tougher and tougher,” Fetter said, as companies deal with rising expenses for new technology and cuts to government payments. “We can do that across this vast portfolio. I can’t imagine if you’re trying to run a mid-sized, independent hospital how you figure this out.”
Consolidation has become a dominant theme for U.S. hospitals as they struggle with declining volumes. Tenet agreed in June to buy Vanguard Health Systems Inc. and its 28 hospitals for $1.8 billion. Community Health Systems Inc., the second-biggest chain, is spending $3.9 billion for Health Management Associates Inc. More purchases are likely, Fetter said.
“Those opportunities will be abundant,” Fetter, 53, said in the interview. “The question is how to be selective and do it intelligently.”
Tenet, which already runs 77 hospitals and 176 outpatient centers, is seeking acquisitions in areas adjacent to its current markets or where a potential target is among the top two hospitals in its region, Fetter said.
Tenet fell 1 percent to $41.97 at the close of New York trading. The shares have increased 29 percent this year.
Community Health declined 3.6 percent to $41.17, leaving it with a gain of 34 percent this year. The Franklin, Tennessee-based company has “a full pipeline of acquisition prospects,” CEO Wayne Smith said on a call with analysts Oct. 31.
Fetter also said the rocky debut of President Barack Obama’s health-care law has hospitals worried they won’t get the relief they were seeking from bad debts tied to uninsured patients. The federal government’s online insurance market has been hobbled by technical problems, leading to enrollments far short of projections since the site debuted last month.
“Our industry began taking cuts in Medicare payments three years ago” to help fund the insurance expansion, he said. “This is a much rougher process than we had anticipated.”