New Canaan, Conn. The first two quarters of 1999 have witnessed a slowdown from last year's record pace of health care merger-and-acquisition activity, says Stephen Monroe, a partner with Irving Levin Associates, a research firm that tracks the industry.

There were 190 public transactions in the second quarter ended June 30, 1999, 5 percent less than the first quarter's 200 acquisitions, the report said. Compared to the 325 transactions in the second quarter of 1998, the number has fallen 42 percent.

The volume of health care industry mergers and acquisitions now appears to have stabilized in the range of 185 to 215 per quarter, according to Monroe.

"Even though the deal volume declined 42 percent against the year-ago quarter, we must remember that the 325 deals announced in the second quarter of 1998 represent an all-time record," said Sanford Steever, editor of the report. "And while the market does not currently have the pizazz to break that record, it continues to promote a healthy, significant flow of deals."

One element stifling the merger and acquisition activity in the health care industry is the Balanced Budget Act of 1997, said Monroe.

"Market resources are now focused on primary providers, such as hospitals and payers, at the expense of ancillary services and long-term care providers, which have suffered financial setbacks as a result of the Balanced Budget Act of 1997 and changes in Medicare reimbursement," he said.

Irving Levin Associates also found that merger and acquisition volume has dropped by nearly 50 percent in the home health and contract therapy sectors over the past 12 months, with institutional pharmacies close behind.

"Some home health care company consolidators have questioned the rationale for buying a home health company when they could pick up the customers for free if the seller goes out of business, which has frequently been the case," said Monroe. "Although presumably not intentional, the changes in Medicare reimbursement that came with the 1997 BBA have caused extreme financial hardship to many providers."