Market forces driven in large part by the Affordable Care Act ("ACA") require hospitals and health systems to build more comprehensive provider networks and to invest more heavily in the information systems necessary to manage care effectively. At the same time, these economic factors are driving down reimbursements from Medicare and other payors. For some hospitals and physician groups, these competing economic challenges may be too much. 

In 2012, at least nine hospitals declared bankruptcy; five more did so in the first half of 2013.[i] Additionally, several hospitals and nursing homes are struggling to satisfy their bond covenants, and some hospitals are offering riskier securities to the marketplace.[ii] Many independent physician practices are also struggling, with bankruptcy filings increasing for primary care physicians, oncologists, and cardiologists.[iii]

These systemic challenges have led to a dramatic increase in merger and acquisition activity within the health care industry. Modern Healthcare reported 229 mergers or acquisitions during the second quarter of 2013, with a total dollar value of nearly $50 billion.[iv]Financially stressed hospitals and physician practices present real opportunities for financially stable hospitals to expand provider networks and compete more effectively in the new era ushered in by the ACA, but distressed acquisitions also carry risks that must—and can—be understood and managed.  

The following chart highlights several important issues that a hospital or health system should consider in deciding whether and how to proceed with the acquisition of a financially distressed entity:

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