Not-For-Profit Hospitals, Meet Leverage

The hospital sector is ripe for consolidation, an opportunity private equity firms are licking their chops at. A new study from Moody’s outlines the opportunity for acquisitions of not-for-profit hospitals, indicating a “significant shift” in the hospital industry is underway.

Two recent deals have paved the way: In March, Cerberus Capital Management acquired Caritas Christi Health Care. More recently, Vanguard Health Systems, a hospital operator backed by Blackstone Group, acquired Detroit Medical Center. The deals, which both involve a private equity investor making inroads into a market dominated by not-for-profit hospitals, show an increased appetite for not-for-profit hospitals from private investors. Likewise, they put pressure on what’s left of the not-for-profit hospitals, which now face increased competition from for-profit hospitals.

Not-for-profit hospitals are having a tough time keeping up. According to Moody’s, risks for these companies include reduced access to capital markets, deferral of necessary investments, cost of compliance with Medicare audits and new healthcare reform, and lower economies of scale than competitors. Those facing the most risk are increasingly turning to private equity for help.

But after reading the leverage comparisons provided by Moody’s, I have to wonder if private equity’s help is worth it, given how much leverage typically comes along with it.

Moody’s data shows the median debt rating and debt-to-revenue percentage on the 498 not-for-profit hospitals it rates is significantly more healthy than that of the 17 for-profit hospitals it rates. See the full chart below:

Even though the for-profit operators have more leverage, they are still managing to step up the competition against not-for-profit operators, which Moody’s predicts will lead to increased consolidation.

Download the entire Moody’s report here.