The healthcare industry, which is covered by the Healthcare Select Sector SPDR Fund (XLV), recently witnessed a spurt of megamergers, particularly involving deals in the hospital sub-industry. Community Health Systems’ (CYH) 2013 merger with Health Management Associates Inc. (or HMA) and Tenet Healthcare Corporation’s (THC) merger with Vanguard Health Systems are a couple of examples.
Although there haven’t been any megamergers in 2014, there have been other large transactions, such as LifePoint Hospital, Inc.’s (LPNT) acquisition of Conemaugh Health System and HCA Holdings Inc.’ (HCA) proposed acquisition of a Dallas-based urgent care provider.
Acquisition and synergies
Community Health Systems acquires two to four hospitals each year as a part of its growth strategy. The company acquired HMA in 2013 for $7.6 billion. In all, this deal added 71 hospitals and 11,000 beds to Community Health Systems’ network. The company aims to realize synergies worth $250 million from this transaction within the next two years. Already, the company’s saved $87 million on a year-to-date basis in 2014. It’s expected that the 2014 total will be about $125 million.
Synergies are achieved by reducing duplicate functions at the corporate level, for example, which reduces overhead salary costs. As a larger player with an extensive geographical presence, the company also has greater bargaining power to renegotiate or cancel redundant pricing contracts. It can renegotiate some managed care contracts for better pricing as well. An increased ownership of 24.6% in HealthTrust, the company’s group purchasing organization, also helps Community Health Systems get better prices for the medical supplies it procures.