The health care market proved this year that it is much quicker and more active than the legislative body that tried to reform it.
While the Clinton administration's attempt to reform the industry stalled m Congress, health care companies acquired one another at a record pace, in a drive towards diversification and efficiency.
For banks, the increased activity accounted for much of the big surge in syndicated loan volume this year, as health care and pharmaceutical companies tapped banks to finance some of the biggest mergers in the history of the sector.
Through the end of September, banks in 1994 had loaned more than $23 billion for mergers and acquisitions among hospitals, drag firms, and health maintenance organizations, according to Loan Pricing Corp. That represents more than 9 1/2 times the $2.2 billion loaned to this sector during the same period last year.
Although prospects for health care reform, which was a factor in the drive for efficiency, may have died in last Tuesday's election, experts see the consolidation trend continuing.
Bankers have been so confident of this, that many banks are creating positions on their syndications desks devoted entirely to health care.
First Union Corp. earlier this year named Marijane Boyle, formerly of Banker's Trust, to such a post, and its Charlotte, N.C. neighbor, NationsBank Corp., is expected to create a similar job soon.
Bankers declined to be interviewed on the subject, but experts, while noting some pricing pressure on HMOs, see little risk in concentrating bank loans to the sector.
Two loans accounted for the lion's share of the increased loan volume this year.
Topping the list was American Home Products Corp.'s purchase of American Cyanamid. Initially structured as a $9 billion hostile takeover, the Chemical Bank-led deal became a $10 billion friendly acquisition. This is the second largest bank loan in history for an acquisition, behind only RJRNabisco.
In the pharmaceutical arena, Eli Lilly & Co. purchased PCS Health Systems from McKesson for $4 billion. The loan for that deal also was led by Chemical Bank.
The cash-rich nature of the health care industry often restricts banks to the role of a pinch hitting specialist. Banks are called in only on the bigger deals, where the size of the issue threatens to dilute the acquirer's stock.
Health care companies typically handle smaller deals on their own, through the issue of cash or stock. A definitive agreement signed Friday for the acquisition by Nashville-based Ornda Health Corp. of three hospitals that comprise the St. Luke's Health System in Arizona for $122 million is a good example of smaller consolidations that haven't involved bank loan syndicators.
The ubiquitous consolidations have affected both publicly traded companies and nonprofits.
"The not-for-profits are being squeezed just as hard, but don't have access to the same kinds of capital," said Joel Ray, a health care analyst with Kidder Peabody. Although he expects additional acquisitions, Mr. Ray said the current trend is for the two different corporate structured companies to form working affiliations.
Michael Kaplan, the director of corporate finance ratings for Standard & Poor's Corp., however, thinks not-for-profit could be a major area for consolidation in 1994. "Since such a major portion of the hospital delivery system is in the hands of not-for-profits and since the system has at least 40% too many beds, an ongoing consolidation among the not-for-profits could be very pronounced," he said.
While the not-for-profits look to merge 'or align their businesses with others, the larger hospital chains have already started to establish oligopolies.
Mr. Kaplan said that the Federal Trade Commission, which has been relatively lenient about antitrust issues, may become more circumspect in local markets.
Regulatory concern, however, should not be considered an overwhelming obstacle towards transactions.
While bank representatives did not express a particular concern about the risks in this sector, industry followers have noticed that some current market conditions, particularly for HMOs, mirror those of the 1980s, when several HMOs were highly leveraged.
To increase their market share in a decreasing premium margin environment, many HMOs cut their profits too close to the bone.
'There was severe pricing pressure on premiums throughout the industry in the late 80's," said Kimberly Purvis, an analyst at Donaldson, Lufkin & Jenrette.
The premium increases in 1994 were only half of what they were in the last few years. And by 1995, Ms. Purvis expects that several markets will see decreases in premiums.
She does not think the HMO market is acutely threatened, however.
To run into solvency problems, HMOs would have to cut their premiums much more sharply and experience a loss on their entire book of business, a fate she does not expect will befall any of the major players.
Several banking analysts, meanwhile, applauded the banks for positioning themselves for a continued increase in health care consolidation.