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More Hospital Closings on the Horizon

Hospitals have been closing at a rate of about 30 a year, and that pace will likely accelerate over the next 18 months, according to a team of Morgan Stanley analysts.

The team, led by Vikram Malhotra, reviewed data from roughly 6,000 U.S. private and public hospitals and determined that 8% are at risk of closing, while another 10% are considered “weak.” The analysts defined weak hospitals based on criteria for margins for earnings before interest, and other items, occupancy and revenue. The “at risk” group was defined by capital expenditures and efficiency, among others.

Many hospitals, particularly those in rural areas that serve older, poor populations, are operating with high negative margins, according to Spencer Perlman, a healthcare policy analyst with Veda Partners. He says ongoing negative margins will eventually become unsustainable and force hospitals to shut their doors, especially rural hospitals that have little or no negotiating power with managed-care companies.

And while technological improvements allowing more surgeries and imaging to be done outside of the hospital helps patients, it hurts hospital margins. Hospitals are also dealing with severe competitive pressure to attract and retain doctors, and are forced to pay more for experienced providers, noted Bloomberg Intelligence analyst Jason McGorman.

Perlman warned that hospitals are “getting eaten alive from these market trends.”

For most of these hospitals, consolidation is no longer an option, and M&A is unlikely. While this year has been an active period for acquisitions and buyouts—the most recent being Apollo Global Management LLC’s $5.6 billion offer of LifePoint Health Inc.—buyers may hesitate to take on debt-laden operators, according to Morgan Stanley’s Zachary Sopcak.

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Inside The Story

Read More at BloombergConnect With Morgan Stanley’s Malhotra

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