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Healthcare Predictions for 2023: Hard Choices and Working Smarter

Every December, between shopping for gifts and finalizing open enrollment selections, we check in with our expert healthcare friends to learn what forces will shape the industry next year.

We asked four broad questions to veteran advisors across legal, operations, innovation, digital, strategy, patient experience, marketing and more. Big takes: More of the very Hard Choices healthcare leaders are already navigating…and being ever smarter with the limited resources that remain. Welcome to 2023.

Read through it all, or click on the headshots below to skip right to each expert’s insight.

Questions for the Experts

  1. What’s the primary force that will influence healthcare next year?
  2. What big change will result from that force’s activity?
  3. What topics, trends and opportunities are hot for healthcare provider organizations in 2023? What’s cooled off?
  4. How does the public feel about healthcare provider organizations today? Do people trust, appreciate and support their hospitals and health systems?

High Level Themes

We asked intentionally broad questions to give each expert latitude to answer based on their own perspective and professional expertise. The diversity of perspective and nuance among responses was clear. And yet, there was dramatic overlap in the themes highlighted by each panelist. That triangulation – seeing similar answers from, say a transaction attorney and a digital expert – points directly to the themes healthcare providers will want to focus on in the new year. Here are those themes.

Note: In January, we’ll share findings from our 5th national survey of healthcare consumer perceptions, touching on many of the themes identified here.

Primary Forces

Workforce Crisis

The persistent shortage of healthcare workers was a universal theme. The issue is acute across the care continuum, but particularly challenging at the level of primary care – where pent-up demand is highest and the where the patient journey typically starts.

Green circle with a white dollar sign symbol in the middle

Financial Headwinds

Full stop. Lower incomes and shrinking margins, along with reduced investment returns, either lead to every other issue or make solving them difficult.

Results of the Force

Hard Choices

Provider organizations will have to evaluate every investment and partnership. Tradeoffs loom. Health equity and workforce support are necessary – how do resources for those priorities get allocated? It will be a year of frank talk and tough decisions with a fierce need for clear and transparent communication from leadership.

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Smarter, Not Harder

After making hard choices comes taking action on them. Provider organizations can’t cut their way to success. They also need to “actively create what’s next.” That means no favoritism towards legacy solutions and openness to those delivering the highest impact at lower cost. Even if there’s an initial investment in time, money and training.

New Relationships

Or better ones for provider organizations. Whether through M&A, joint ventures or with payers. Though opinions vary on the likely pace of M&A activity in 2023, our panel agrees that mergers, acquisitions and partnerships will continue to make headlines as provider organizations seek the most efficient and sustainable path forward. Financial challenges will also push more productive conversations between providers and payers, perhaps spilling over into collaborative innovation. (One can hope!)

Opportunities

Digital

The challenges present an opportunity for transformation of tools and overarching digital strategies. It’s far more than telehealth – which is necessary and no longer a differentiator. Transformation means everything from saving money by reallocating print resources to digital marketing, to allowing patients greater access to their PHI through technology, to evaluating patient usage of mobile apps and improving ADA accessibility on web properties.

A hand icon holding an orange heart

Health Equity

It’s part of the patient experience, it’s part of supporting the healthcare workforce, it’s part of fulfilling the mission to care for the whole person. And now, it’s also a business and regulatory imperative with ratings and credentialling agencies using equity as a metric.

The Patient Experience

This runs the gamut from the tangible – useable digital tools – to the conceptual – full transparency. Patients are looking for convenience to make accessing healthcare easier and more consumerized, ways to expand the front door of primary care, and clarity about how things work in healthcare and what they cost.

Mental Health

The mental health crisis – for the public and for healthcare workers – had been a topic of conversation for years before soaring into view during the pandemic. The issue of addressing people’s needs in a holistic way so they can live well and be productive – and be happy while doing it –remains in 2023.

Trust

People like and trust those who deliver care. While they value the role of hospitals and health systems – especially since the pandemic – the highest praise goes to caregivers themselves. However, our experts noted that some people don’t – or would prefer not to – think about their local hospital. And there’s also a just-under-the-surface skepticism about transparency and accessibility efforts, as well as lingering suspicion from days of rampant COVID-19 misinformation. That flashes a yellow light to provider organizations, and should compel them to frequently ask themselves the question, “Is what we’re doing operationally and conveying publicly truly representative of a patient’s experience at our system?”

Panelist Answers

Want to learn more about the details of each theme referenced above? Here are the responses provided by each panelist.

Jennifer O’Meara

SENIOR DIGITAL STRATEGIST

Eruptr

What is the primary force that will act on healthcare next year?

Workforce and Inflation. The first thing people do when costs rise is put off caring for their own health. Additionally, with all facets of healthcare struggling to keep up with demand, staffing will continue to be one of the most important challenges to tackle.

What big change will result from that force’s activity?

In terms of staffing, I hope to see better pay and working conditions along with an increase in young people going into the medical fields due to the demand and opportunity for a solid career trajectory. But the U.S. needs to make it a financially viable career path, especially for PCPs, OBs, etc. One major concern regarding staffing is people – who already put off care due to COVID and may be behind in receiving simple wellness checks – not being seen in a timely manner. Additionally, the continued struggle for people to find PCPs who are accepting new patients.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

Transparency for patients regarding health records and costs, especially with institutions potentially charging money for sending messages to doctors via patient portals in the coming year. No more excuses for not being able to provide information about cost of procedures. Make that information readily available to patients via patient portals – especially if you are going to start charging to simply answer a patient’s question.

In terms of what’s cooled off, telehealth – it’s expected and offered by everyone and no longer a differentiator. Now, it’s about how you improve upon the experience and make it easier for patients of all ages to receive care remotely.

How does the public feel about healthcare provider organizations today?

There is certainly increased trust and respect for the work of hospitals, health systems and the medical field in general. But I think patients, aka consumers, are increasingly frustrated by a system that makes it incredibly difficult to find and receive the care they need in a timely manner along with a complete lack of transparency when it comes to costs for procedures and services. The insurance companies blame the health systems, and the health systems blame the insurance companies, and patients and clinical providers are stuck in the middle. This is something marketers need to especially keep in mind when it comes to communications and marketing materials: Is what you’re conveying truly representative of a patient’s experience at your system?

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Jordan Shields

PARTNER

Juniper Advisory

What is the primary force that will act on healthcare next year?

Inflation, workforce challenges and investment losses dominated 2022. Along with recovering from the pandemic’s impacts on operations, these forces are leading well-positioned hospital systems of all sizes to seek increased scale providing operational, financial and clinical efficiency. Hospital transactions, which have been down since 2019, are roaring back in 2023 as organizations prioritize patient care, quality and access over historic governance structures.

What big change will result from that force’s activity?

The fragmentation of the American hospital system bears significant responsibility for its high costs and middling quality. Consolidation leads to more profitable hospital systems with higher quality and better patient outcomes. Scale benefits can take time to materialize, especially when the consolidation is the result of a weak organization that delayed partnering as long as possible, but improved quality will be the result of this trend towards larger, more efficient hospital systems.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

Multi-region transactions will be a hot topic in 2023. For example, as Advocate and Atrium stated in their merger communications, the Midwest and the MidAtlantic are now adjacent healthcare markets. While the scale benefits of hospital transactions can include in-market clinical and referral synergies, those tend to be secondary to the market-independent structural synergies of best practices, corporate finance, population health infrastructure, purchasing and other synergies. However, to fully realize those benefits, organizations typically need to undergo structural and ownership change, indicating that loose affiliations and other “dip-the-toe-in” partnerships are likely to cool off in 2023.

How does the public feel about healthcare provider organizations today?

People are expecting more from their hospital systems. While they trust, appreciate and support their care teams, they are increasingly skeptical of the organizations for which those clinicians work. Layer in front-line labor challenges and patients directly shouldering an increasing share of the healthcare dollar and the frustration becomes palpable. However, the industry remains filled with folks who entered healthcare to help others. Organizations that can build environments where those folks want to work will be successful going forward.

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Mike Cole

Mike Cole

MANAGING DIRECTOR

Alvarez & Marsal

What is the primary force that will act on healthcare next year?

Inflationary pressures (including the cost and access to capital) coupled with skilled labor shortages should be the predominant headwind in 2023. Our practice diligences healthcare services in a broad swath of sectors – big and small – and these trends, unfortunately, continue to worsen as we enter the new year. Perhaps in a distant second is the likely increased regulatory focus that usually accompanies a split Congress.

What big change will result from that force’s activity?

Unfortunately, there is likely to be some distress followed by restructurings – both in and outside of court. Those acquirers whose balance sheet and operations allow are going to have some compelling M&A opportunities.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

The M&A landscape has cooled from a record 2021 and hot 2022 (through Q3). That said, healthcare M&A is nothing if not resilient and, as we know, recession resistant. The march towards value care and innovation through healthcare consumerism are also poised to make some big leaps in 2023 with ‘real’ capital lining up to advance their efforts.

How does the public feel about healthcare provider organizations today?

The public values and trusts their physicians and care teams, including their local hospitals. I think there are other players in the healthcare ecosystem that are less trusted, and there are going to be some questions brought to the forefront about how the pandemic was handled in connection with the aforementioned divided Congress. That could exacerbate the shaky footing.

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Bob Wilson

Bob Wilson

PARTNER

Nelson Mullins

What is the primary force that will act on healthcare next year?

If picking just one thing, it would be a continuing workforce crisis for all our healthcare clients, particularly hospitals and health systems. We simply don’t have enough front-line healthcare providers to meet the demand.

What big change will result from that force’s activity?

The shortage is causing crippling labor costs, and there’s no significant mitigation of this problem on the horizon. In addition to stripping hospital margins, workforce shortages in key areas will likely continue to drive a shift towards access through digital healthcare platforms.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

Again, there should be an uptick in telehealth services and remote patient monitoring. There are some very innovative solutions available that could continue to change the way healthcare is delivered.

Also, expect new rules related to HIPAA and information blocking – healthcare data privacy and security will continue to be huge.

On a different note, it’s tough to ignore what looks to be a continuing crisis in mental health – more people are being impacted, and it’s a continuing need that must be addressed.

Finally, I see a continued trend toward more non-traditional companies getting into healthcare.

How does the public feel about healthcare provider organizations today?

Our client hospitals and health systems have rallied public support well in the COVID era and have burnished their reputations as critical community assets.  This could be one of the major lasting impacts of COVID – additional well-deserved respect is accorded our local healthcare systems and, in particular, our community healthcare providers.

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Emily Evans

Emily Evans

SECTOR HEAD, HEALTH POLICY

Hedgeye Risk Management

What is the primary force that will act on healthcare next year?

Workforce development and labor shortages. It is underappreciated how durable the labor disruption will be. Healthcare has not faced a shortage of resources in 50 years and, as such, has not been forced to make hard choices and/or innovate its way into less dependency on human capital.

What big change will result from that force’s activity?

It will vary between non-profit and for-profit or, perhaps more accurately, between health systems that are prepared for and actively engaged in cost control, including healthcare’s most significant input, labor. The only answer, ultimately, will be innovation – particularly that which saves time. In the near term, there are likely to be reductions in service lines, backlogs of cases and even reduced access. Ongoing labor disputes are also likely.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

The most important trend we see that will aggravate labor and workforce issues is payer conflict. That will probably lead to more health system consolidation, about which the FTC will have fewer arrows in their quiver than they would like. Ultimately, health systems that control their markets will be price setters, and that is the direction many will head.

How does the public feel about healthcare provider organizations today?

The public generally supports their doctors and, to a certain extent, the dominant hospital in their region. However, that trust is eroded by a lack of transparency on price and, often, quality. Payer conflicts with employer plans are going to drive even more people into high deductible plans where price really matters as most people become cash payers.

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Regan Chris

Chris Regan

MANAGING DIRECTOR AND PARTNERSHIPS CO-LEADER

Chartis

Robert York

Rob York

DIRECTOR AND PARTNERSHIPS CO-LEADER

Chartis

What is the primary force that will act on healthcare next year?

Workforce/labor in every way imaginable – cost structure, retention, burnout, training/development, pipeline, staffing models – has to be put at the top of the list right now. This was mentioned in last year’s predictions for 2022 and it carries forward into 2023.

Another force to highlight is the ever-expanding world of partnerships and M&A activity beyond traditional hospital-to-hospital transactions. Hospital transactions are still a big part of the landscape as we move into 2023, but we are seeing a wider variety of joint ventures and other arrangements in areas such as ambulatory access, digital health, high-reliability care, health equity and payer/health plan products. Our clients are investing heavily in partnerships that fortify their presence across the ambulatory ecosystem surrounding their hospitals.

What big change will result from that force’s activity?

One anticipated change from workforce challenges will be the continued evolution of new care delivery arrangements including alternative sites and care models. The advancement of digital and key strategies such as Hospital at Home are part of the solution.

We will continue to see health systems focus on building scale and capabilities outside of the traditional hospital component of the healthcare ecosystem. They will not be short of options and partners in this effort, but the challenging economy and limitations to accessing capital will determine how extensively and quickly many organizations collaborate.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

All of the areas mentioned above will continue to be hot throughout 2023. In addition, health equity, digital health and programs/models that truly integrate care financing and delivery (especially with managed governmental payer lives) will continue to be top of mind in 2023.

In general, opportunities that are capital intensive and have a long time to market or realization of value have cooled off.

How does the public feel about healthcare provider organizations today?

In many ways, the pandemic has fortified the trust that patients have for their providers and health systems. There is considerable admiration for all that providers have done to help us through the pandemic. At the same time, as traditional aspects of inpatient care melt to ambulatory settings and as ambulatory care melts to virtual and at-home settings, the need to expand the health system footprint to offer easy access across the continuum of care is greater than ever.

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Marquise Stillwell

Marquise Stillwell

FOUNDER & PRINCIPAL

Openbox

What is the primary force that will act on healthcare next year?

Digital transformation, which will include affordability and accessibility, particularly with underserved and rural communities.

What big change will result from that force’s activity?

It would help to close the digital divide. If we can start to think about better broadband access for the most vulnerable, we begin to close that divide. This would also allow more access to high-speed internet for educational and entrepreneurial uses.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

The trend of care centers specializing in wellness has cooled off. A lot of them never differentiated themselves enough to make strong strides in the marketplace. My hope is that we get back to basics. I don’t need fancy couches and cappuccinos in the waiting room, I just need good, affordable healthcare.

How does the public feel about healthcare provider organizations today?

There’s a lack of trust. I think COVID really exposed the misalignment of info. We’re at a place now where we don’t necessarily know which source to trust. But we’re now dealing with fear-driven policies that are forcing individuals and families to make tough decisions. We need people-centered policies that support healthy outcomes for all.

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James Cervantes

James Cervantes

SENIOR VICE PRESIDENT

Jarrard Inc.

What is the primary force that will act on healthcare next year?

The workforce is the primary force that will drive healthcare next year. The needs of physicians, nurses and employees should serve as the North Star for all healthcare systems if they want to weather the financial headwinds and be successful. Without a healthy healthcare workforce, there’s no ability to deliver care. There’s no ability to realize and drive innovation. There’s no way to create healthier communities and improve the healthcare system.

What big change will result from that force’s activity?

It’s not one big change that will solve the workforce issue. Rather it will require HR, Operations, Communications and other areas working together to create a culture where people want to stay and where top talent wants to come to work. There’s a real need for health systems to solve for burnout, address recruitment and turnover issues, find ways to unlock the full potential of the resources they have and create a culture that is rooted in inclusivity and belonging. Not to mention, a reimagined strategy for how they communicate and connect with their workforce. These are the changes that need to happen to build a sustainable workforce and will be the most important work for healthcare organizations next year.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

Beyond the workforce, there will be a heightened focus on financial improvement initiatives, including labor and non-labor expenses, patient access and acquisition and health equity. In a sea of strategic priorities, health equity has not been at the top of that list. But with this year’s release of CMS’s framework for health equity and US News & World Report’s unveiling their health equity methodology – not to mention the healthcare disparities and inequities that were illuminated and worsened by the COVID-19 pandemic – it will be interesting to see if health systems finally address this issue and start investing in it.

How does the public feel about healthcare provider organizations today?

Honestly, I don’t think the average patient or consumer pays a lot of attention to their local hospital or health system. Especially if they don’t have ongoing healthcare needs. Sure, they trust their provider. But beyond that, how often are they thinking about and engaging with their clinician’s organization? I would wager very little. I think people also view the healthcare system as wildly inefficient, costly and confusing. If we truly want to improve the health of communities and solve some of the underlying causes of our unhealthy nation, provider organizations need to be collaborating with their communities and addressing social determinants of health. Maybe then, patients and consumers will start to see hospitals and health systems in a more positive, visible light – as a place that helps you be well and takes care of you when you’re sick.

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Kerrin Slattery

Kerrin Slattery

PARTNER

McDermott Will & Emery

What is the primary force that will act on healthcare next year?

“Financial headwinds” will be the primary force and continue to exert outsized pressure on healthcare in 2023. These headwinds, which collectively include things like increased labor costs, inflation, access to capital, reimbursement, and so on, make it challenging for health systems and other industry players to execute on more strategic and innovative strategies.  Notwithstanding that, collective demand for improved performance across the industry remains high, which will require health industry players to evaluate their portfolios, geographies and partnerships to enable improved ability to provide accessible, high-quality care to the patients and communities they serve.

What big change will result from that force’s activity?

With every challenge comes an opportunity, so these financial pressures are motivating organizations to move more quickly on strategies across the care continuum. This pressure will hopefully result in innovations to address a lot of pain points providers are currently experiencing, from labor force to patient experience to cost management. We’ll see a lot of healthcare organizations looking beyond their own four walls to outside collaborators to harness the power of their own data, work more efficiently and develop solutions that “work smarter, not harder.”

What topics, trends and opportunities are hot in 2023. What’s cooled off?

Even as the economy presents challenges, expect healthcare mergers and acquisitions to continue in the year ahead. For those in the position to buy, this opens the door to acquiring distressed assets or consolidating with others. For others, portfolio reassessment will result in divestitures or joint ventures of assets that organizations no longer feel compelled to wholly own and operate.

What has not cooled off is the conversation about workforce wellness, as providers and staff remain stretched. That conversation should continue as there is no substitute for nurses, doctors and those on the front lines in caring for the population, even when that care is becoming more virtual in some instances.

How does the public feel about healthcare provider organizations today?

We’ve certainly learned over the past several years that healthcare workers and healthcare organizations are essential. While patients may have trust in their individual providers and maybe even their local hospital or health system, there is great dissatisfaction with the incredibly complicated puzzle of providers, payers, pharmaceuticals and the sources of healthcare funding. The increased focus on well-care and not sick-care will enable different engagement between consumers and the health care system, which raises the prospect of a healthier health system for all.

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Jesse Neil

Jesse Neil

PARTNER

Waller

What is the primary force that will act on healthcare next year?

Workforce/labor will continue as a singular challenge for healthcare systems and providers. It adversely impacts access to care, quality of care and financial well-being of organizations. Many hospital systems will still not be able to open all their licensed beds due to the inability to staff them.

What big change will result from that force’s activity?

Within the sizeable group of hospitals that already operated at single-digit or negative margins, many will seek to consolidate with other systems or dramatically restructure. I’m optimistic that for hospital systems that have proactive and engaged leadership, this dynamic will lead to innovation in delivery models and technology – perhaps even in collaboration with payers and employers.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

Payers, providers and investors continue to focus on delivery models and technology that allows healthcare to be delivered at home or otherwise outside the hospital or physician office. Consumerism and “bending the cost curve” will drive this trend through 2023 and beyond. Provider organizations will increasingly assume financial risk, and payers will continue to build out provider-side capabilities. Ironically, dedication to outcome-based reimbursement models such as improved clinical outcomes, preventative care targets or reduction in medical errors, seems to have stalled a bit and isn’t perceived as a solution to the near-term existential threats providers face.

How does the public feel about healthcare provider organizations today?

I can honestly report that I have seen unprecedented community support for and goodwill towards their local hospitals, health systems and providers. This is particularly true for hospitals and health systems that are transparent about industry challenges and aggressively engaged to tackle them. In my experience, community stakeholders want to be part of the team and the discussion.

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Expert Quotes

Rex Burgdorfer

Rex Burgdorfer

PARTNER

Juniper Advisory

What is the primary force that will act on healthcare next year?

Our health system M&A clients are most concerned with achieving financial sustainability and addressing quality-of-care issues in the face of organizational stress. These forces have caused a significant increase in parties considering transactions.

What big change will result from that force’s activity?

We sampled ~15 health systems that our team is working with around the country in evaluating M&A opportunities.  Two-thirds are hospitals seeking a larger partner.  One-third are larger systems pursuing growth. 20% are local government-sponsored, 20% faith-based, and 60% secular. Local Governments are the category most likely to undergo change in the coming years.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

The high degree of variance in the regulatory environment from state to state cannot be overstated. Our bankers are working on transactions in 13 states and involve 35 hospitals. The difference in pace and stance toward business in markets like California, Illinois and New York is vastly different from states like Alabama, Georgia, and Kansas. That has a bearing on partnerships motivated by a desire to construct new facilities or pursue vertical integration.

How does the public feel about healthcare provider organizations today?

Many of the independent hospitals we are working with are seeking partnerships that address community relations, transparency and patient experience. The role of foundations has taken on greater importance. Nonprofit acquirors are now more commercially skilled and are utilizing structures that create meaningful proceeds to further support health needs in the community. Some of these resources are filling a void that exists in lower acuity, non-hospital settings.

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Pete Lawson

CEO

Lawson & Associates

What is the primary force that will act on healthcare next year?

Significant operating income losses coupled with declining investment returns will force hospitals and health systems to reduce non-corporate initiatives and staffing.  Over the last few years significant effort has been placed on health equity efforts, so health systems will need to reconcile the costs of those endeavors with increased salary demands by clinicians.

What big change will result from that force’s activity?

Significant and strategic communication resources will be needed for public and internal communications should health systems trim back social initiatives. It’s easier to initiate on these than retreat. Threading the needle will require outside communication assistance.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

Quality parameters will become a priority for antitrust regulators looking at mergers and collaborations. Health systems will need to match quality measurement variables to insurance company models long before requesting mergers. Health systems will also need to reach across the aisle to insurers to start building trust early rather than ending up in what are too often combative negotiations.

How does the public feel about healthcare provider organizations today?

As both a current, long-term patient and a healthcare executive I respect both sides of the equation. Patients trust the health system as long as their care team is supportive. When healthcare workers are negative towards a health system – in public or private – then the public’s opinion will turn. It’s one thing to address public protests, but more difficult to assess and manage are private bedside discussions between caregivers and patients. That’s where the focus needs to be both short and long term.

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Up close headshot of a smiling woman with curly, brunette hair dressed in a blazer in front of a blurred background

Abby McNeil

VICE PRESIDENT & REGIONAL HEALTH SYSTEMS PRACTICE LEAD

Jarrard Inc

What is the primary force that will act on healthcare next year?

Ongoing financial constraints caused by inflation, rising costs of labor, etc.

What big change will result from that force’s activity?

We hunkered down and got through the pandemic but have emerged with seemingly more intractable issues to face. Something has to give: Providers can’t just grind through or cut their way out of financial challenges. Healthcare no longer has the luxury of maintaining the status quo, doubling down on what’s always been done or wasting precious time overly focused on what competitors (or Amazon) are doing. In 2023, healthcare providers should focus as much energy and as many resources as they can muster in creating what’s next, getting clear on what they do best and carving out a brand position and strategies that are laser-focused on who they want to be and leaving behind who they’re not.

We all need to continue investing in the transparent conversations that started in 2020. After all, there’s a reason that the consumer brands that invested in communications in 2020 and 2021 increased in value by an average of 43% during that time.

What topics, trends and opportunities are hot in 2023. What’s cooled off?

What’s hot: Responses to all the tough forces at play, such as…

  1. How to invest increasingly limited resources – I heard a healthcare leader ask, “If I have $1, do I invest it in compensation or wellness/ engagement?”
  2. Patient acquisition – How do providers get more patients who can pay?
  3. Access – Can we actually get patients in the door?
  4. Marcom structure and staffing – How many people do marketing and comms teams need and in what roles? Are they focused on the right priorities?
  5. Health equity, especially now that it’s required. How do providers translate nice, fuzzy statements into actual progress with limited budgets?

How does the public feel about healthcare provider organizations today?

People don’t think about hospitals and health systems unless they have to. People “in the real world” are busy with their own lives, struggles and priorities. Most only think about provider organizations when they need care. They may think about provider organizations as they consider their skyrocketing insurance premiums, but otherwise most would prefer to think about the hospital only when they need it…which they hope is not often.

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Notes from Chicago: Talking Points at the 2022 AHLA Annual Meeting 

Text that reads "American Health Law Association" with their logo on the left over a city backdrop

In-person events continue to bring energy back to the healthcare conference circuit. Last week, a group from Jarrard attended the American Health Law Association 2022 annual meeting. We joined more than 800 other attendees, mostly healthcare attorneys representing both law firms and in-house council for provider organizations. The rooftop receptions and perfect weather were a great follow-on to the Miami conference we attended in May and made for an excellent backdrop to discuss the challenging topics of mergers, partnerships and crises.

Here are a few key themes we heard while reconnecting with friends: 

Lots of activity…but are the buyers there? 

Generally, healthcare deal attorneys indicated that they’re busy. There are a number of deals progressing towards milestones in both the acute and non-acute side of things. Financial pressure is expected to drive activity in the acute care space over the coming quarters. CARES funds have run out. Bond covenants loom on the horizon… The expectation is that more hospitals and health systems who are financially challenged or distressed will be looking for partners. On the private equity side, there’s still quite a bit of dry powder – though if, when and how it’s deployed remains to be seen. 

Looking more closely at activity among hospitals and health systems, sellers need buyers and there’s a question whether all of those seeking a partner or buyer will be able to find one. Potential hang-ups include the fact that financing gets more expensive by the day and that the FTC, DOJ and state AGs are training their powerful microscopes on consolidation – we’ve already seen several deals called off in recent months. 

A search for greener pastures 

Marriages weren’t the only thing that had attendees’ attention. Breakups, too, were a topic of conversation. Observers in the M&A world say organizations are evaluating their current partners to figure out whether they’re still the right relationships. And, whether there are more attractive prospects out there that would be a better fit for the organization going forward. It wouldn’t be a huge surprise to see an uptick in the number of partnerships that unwind. 

A parallel topic among AHLA attendees involved the fit between organizations coming together in out-of-market mergers, a few of which are sprinkled through the list of recent deals. Cultural fit, in particular, was top of mind. Organizations looking to partner across markets need to ensure a thoughtful integration process – an imperative that holds true in both the acute and non-acute space. 

An emphasis on equity 

Health equity was very much a topic of conversation, particularly at the plenary sessions. Erin Richardson, chief of staff in the Office of the CMS Administrator, emphasized the “Biden-Harris administration’s focus on equity” during her keynote address. Our takeaway? Anyone considering a deal must have a message and plan for how a potential partnership will impact health equity. 

With the meeting taking place days after the Supreme Court’s decision to overturn Roe v. Wade, there was an undercurrent running through the conference about possible effects of the decision. Questions centered on what the ruling will do for employee recruitment, particularly for younger workers. Will healthcare workers want to move to states with restrictive abortion laws? Will college, nursing, medical or graduate students want to attend school in one of those states? Speaking of health equity, how might this set us back? And, for companies considering employee benefits allowances that cover travel for services not available in certain states, will the laws even allow it? The potential ripple effects are extensive and inchoate. 

Historic uncertainty 

All told, throughout the conference lingered a feeling also evident during the AHLA Transactions Conference back in May. For the first time, given the competing market forces converging on healthcare, the outlook for the next few quarters is remarkably uncertain. 

The AHLA takeaways gibe neatly with what we’ve been hearing from our clients whom we’re advising on communications and political strategy for a range of partnership projects. With seemingly more sell-side projects in the offing, will the buyers be there to get deals done in an ever-complex and challenging environment? Our advice: Sellers need to explain what they have to offer potential buyers. And, of course, continue to expect a lot of scrutiny for any proposed deal. 

Above all, get out first and control your narrative. 

Questions about the role of communications before, during and after a deal? Give us a call or fill out the form below.

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FTC Goes “Modern” On Mergers

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Note: This piece was originally published over the weekend in our Sunday newsletter. Want content like this delivered to your inbox before it hits our blog? Subscribe here.

2-minute read

The Big Story: FTC, DOJ ask for public input in antitrust ‘overhaul’

In a move entirely consistent with the executive branch’s stated goals on M&A, the feds are ramping up an effort to “bolster merger oversight” and “modernize enforcement.” They’re particularly concerned about vertical integration which, they say, may not lead to the efficiencies often promised. Plus, they’re eyeballing scaling health systems’ smaller acquisitions, as those transactions may “skirt regulatory review.”

What it Means for Your Health System

The FTC isn’t just giving lip service to looking more closely at mergers. They’re also digging deeper during the review process. Regulators are requesting more information from health systems and healthcare companies than usual and they’re soliciting public comment. Both, of course, slow down any given transaction.

That’s sure to raise eyebrows at any health system considering a partnership. And there are many of them talking about it in their board rooms right now. Some put a deal on hold due to the pandemic and are coming back to it. Others weren’t looking to partner until pandemic pressure created the need.

All in all, the ball is rolling downhill for the antitrust crowd. They have their target in sight and they’ll be flooding the comments. It’ll be tough for healthcare organizations to push back, but we at Jarrard Inc. don’t think it’s an impossible task. The goal, for starters, should be to balance the comments in a meaningful way and point out where the critics have the narrative wrong. Here’s what that looks like:

Be ready to engage. Don’t wait for anyone to jump in on your behalf. While there’s certainly value in coordinating with associations, you have a distinct story to tell about your organization and community. Focus there and don’t assume that aggregated advocacy will suffice. And when you do appropriately engage in the public comments process, be proactive, not defensive.

Engage with real stories. The prevailing narrative is that consolidation leads to higher prices, lower quality and reduced access. But what about the real stories about mergers that saved healthcare in communities, saved access and improved patient care? Tell those stories and explain how it will work in your community. Your adversaries are using both academic studies and emotional patient narratives. Numbers backed by real faces on camera are a powerful cocktail. You should do the same.

Be specific. Price, quality and access are the areas that FTC is scrutinizing. Hospitals need to give very specific examples of how their proposed deal would address those concerns. That means avoiding platitudes like “We’re going to transform healthcare,” or “This partnership will ensure care for years to come.” Instead, say, “We are going to ensure high quality care by…” and “We will improve access through…” Similarly, where there may be changes – like L&D services leaving a low-volume rural hospital – explain exactly why it may happen and how you’re going to help expectant mothers. When they speak, your critics give specifics rather than rely on vague allusions. Take the lesson and apply it.

*A note on the cost of care: Everything in society is getting more expensive, and according to our latest consumer survey, the cost of healthcare is one of the public’s top concerns. Price is a line of attack hospital critics bring out at every opportunity. When discussing the effects of a proposed merger, be ready with necessary nuance. Talk about how and why prices won’t go up due to the partnership, why it won’t be the merger that further accelerates the increase. If you are the buyside, be ready to show (or defend) your track record of prior mergers and how cost of care played out. And if increases are going to happen, be upfront about the reasons.

Drive change and educate. Talk frequently about the innovation your organization will continue or pursue thanks to the partnership. Get into the specific things you can do to control costs or improve access. Help the public understand that healthcare overall is working toward better utilization of care. Focus on ways that your organization is investing (or will invest) in getting people the right level of care at the right time. Explain that this doesn’t always mean more services, but rather helping patients avoid overutilizing expensive or unnecessary services. The bonus: This helps people understand how they can make better choices that benefit them.

Start internally. When talking about a merger, ensure your employees and physicians truly understand what it means. Our latest survey found that healthcare workers are somewhat more skeptical of mergers than the public, so it’s critical to allay the fears of those on the inside. Provide crystal-clear messaging about how it will work and how it will and will not affect them. Speak in terms that people can understand and give them opportunities to respond and question. Then do the same publicly.

Always answer the question, “Why is this good for the patient?” Need we say more?

This piece was originally published over the weekend in our Sunday Quick Think newsletter. Fill out the form to get that in your inbox every week.

Cartels or Safe Havens?

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Note: This piece was originally published over the weekend in our Sunday newsletter. Want content like this delivered to your inbox before it hits our blog? Subscribe here.

The Big Story: Biden executive order calls for action on hospital consolidation, price transparency

The President issued an executive order on Friday “telling the Federal Trade Commission to prioritize hospital consolidation in its enforcement efforts. The order will ‘underscore that hospital mergers can be harmful to patients and encourages the Justice Department and FTC to review and revise their merger guidelines to ensure patients are not harmed.’” The AHA and FAH weighed in with overviews and critiques shortly after.

Our Take

(2-minute read)

It’s a Catch-22: Scrutiny of hospital consolidation is increasing in direct proportion to the need for hospitals to find strong partners.

Biden’s executive order follows a cascade of criticism and Senate hearings directed at hospital consolidation – with one outlet going a step or three further and referring to it as “cartelization.”

Yes, the scale of deals is on the rise. A Kaufman Hall study found that the number of deals through Q2 of 2021 is down markedly from previous years, but the size of those deals is “the second highest in recent years.” And yes, some research shows such mergers can drive up prices.

What’s missing from the conversation is that consolidation is happening because the system is broken. It’s broken in myriad ways (seriously, it takes two presidents to let us buy hearing aids without a prescription!?), and we’re stuck until we create something new together.

The current version of the escalating-costs narrative critics are using pins the blame squarely on providers by suggesting – implicitly and sometimes explicitly –  that mergers are driven by greed. The White House fact sheet laying the foundation for the order says that “Hospital consolidation has left many areas, especially rural communities, without good options for convenient and affordable healthcare service.”

It’s a compelling narrative. Our question: Where’s the counter? Who’s telling the story of the real reasons a hospital might want – that is, need – to join a larger system? Or of what might happen if they don’t partner up? There’s a taste of that in the AHA and FAH statements, but more is necessary.

It’s time for hospitals and those who care deeply about access to healthcare to build that narrative. To speak up.

Hospitals can and do pursue mergers, acquisitions and partnerships for a variety of reasons. First among them is so they can continue to fulfill their missions. Over and over, we’ve seen hospitals stay open because of a deal.

Which brings up a related reason for deals. Rural providers often have no other option because the math isn’t working in their favor. The government pays as little as 50 cents on the dollar through Medicare and Medicaid. Plus, there’s a downward push by payers to reimburse at lower rates. That means standalone hospitals – particularly smaller community hospitals where relatively little revenue comes from private reimbursement – often must choose between closing or becoming part of a larger system.

Again, you can’t care for your community if you don’t exist.

So instead of the chatter depicting health systems as predatory, let’s share the stories of community providers seeking a partner for true shelter. To be able to survive. Providers and advocates for access can start engaging in that conversation this way:

  1. Articulate the actual value to consumers of a consolidation or merger. To be clear, this isn’t offering the same tired and vague messaging about “value,” “transformation” and “scale.” It’s a direct, honest story about what will happen if the deal goes forward…and the consequences if it doesn’t.
  2. Prepare for state attorneys general, health insurance companies and others to use the administration’s activity to ramp up opposition to consolidation (which challenges their market share). In other words, your government relations work and relationships with opinion leaders matter more than ever.
  3. Explain how you will deliver on promises made. And then do it.

This executive order appears to be a request for more action, not the action itself. That suggests there will be a waiting period, possibly even a comment period. Don’t let that time go to waste. The conversation has been underway for a while, and it’s being dominated by non-providers. Some are well-intentioned and want to improve the value and delivery of care. Others are market competitors (the self-proclaimed disruptors) and adversaries who view this as a zero-sum game and are campaigning to make providers the fall guy. Hospitals, health systems and others who are focused on access need to stand up. This is a new type of scrutiny. It’s time to respond in new ways.

How to do that? Coming soon.

Don’t Duck. Fight.

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Note: This piece was originally published over the weekend in our Sunday newsletter. Want content like this delivered to your inbox before it hits our blog? Subscribe here or at the link below.

The Big Story: The Healthcare Divide

The healthcare industry was tossed out of the pandemic frying pan and into the media fire this week when NPR and “FRONTLINE” aired The Healthcare Divide, their joint investigation into the growing inequities in American healthcare exposed by COVID-19. More scrutiny came Wednesday when the Senate Judiciary Committee held a hearing on provider consolidation and antitrust issues. Then on Friday the New York Times ran a story about COVID-19 bills.

Our Take

(3-minute read; 10-minute podcast)

Healthcare providers, it’s time to think less like institutions and more like your detractors.

The halo your organization earned through the pandemic is dimming as the negative spotlight shifts back onto institutions providing care. Everyone’s in on the game. Unions are trying to drive a wedge between provider organizations and healthcare workers. The media is collecting hospital bills from readers. Lawmakers are considering how to wield their antitrust powers. Payers are claiming providers are responsible for the high cost of care. And when consumers truly get on board, winter won’t be coming, it’ll be here.

So why aren’t healthcare organizations consistently better at addressing these arguments? Why do responses often sound weak and platitude-rich – like bland, gray word salad? Like they’re ducking the debate?

Fact is, many still aren’t harnessing the power of communications to tell stories in a human way and are thereby yielding their positions as the owners of patient advocacy. Writ large, the provider side of the industry has traditionally operated from a stance of defense and risk management.

But the pandemic showed us a different way; to tell true-grit stories of how they were making the impossible work.

Let’s hold onto that “what works” and make it permanent.

Because all eyes are on provider behavior. Trotting out outdated studies or spreadsheets won’t cut it. That approach doesn’t hold a candle to the other groups bringing in patients harmed by alleged anti-competitive behavior, telling stories of healthcare workers living on food stamps and being sued by their own employer and painting private equity rollups as dirty, get-rich-quick schemes.

Each of those scenarios has taken place at a national level, but similar conversations are happening in local markets. Want to be prepared for when the spotlight turns to your organization? Consider the following.

  • Define the terms. It’s your story, so own it from the start. Use people. Back it with data. Be straightforward. Words like “integration” may help obscure some of the baggage carried by “merger” or “consolidation.” But people need to understand what you’re talking about. Hospital administrators must be masters at simplifying the complexity of business. Lack of clarity leads to frustration and confusion in the long run.
  • Learn the language. What motivates your hospital isn’t always what motivates the PE firm, payer or union who’s sitting across the table from you as you hammer out a partnership. Don’t talk past them. Understand what they’re trying to accomplish, how they think about the industry and the tools/tactics they like to use. Then address the actual issues they’re bringing to the conversation and articulate how you balance operating a company with providing for a critical need.
  • Be specific. Make it a practice to avoid vagaries. You’re better served calling out datasets and concerns specifically. That way, when it comes time for a rebuttal, you’re addressing a real idea rather than muddying the waters and leaving yourself open to interpretation.
  • Don’t keep using the same narratives. People today are responding to things right in front of them – an unexpected hospital bill, changes in the local labor market, mothballing of services at the community hospital. You need to do the same. Stop running with that same old consolidation study. Align yourself with your doctors, nurses and staff and show specifically what you’re doing businesswise to provide support. If you’re called out for negative effects, respond with responsible transparency and humility, not defensiveness.
  • Call out the bad actors. Yes, there are some in every industry niche who don’t have good motives. Don’t sweep that under the rug, because it’ll just mean you get lumped in with them. Some critics, like the Judiciary Committee, are questioning if the PE model is compatible with providing care. If you’re working to show that it is, you need to share the good stories, but be willing to acknowledge when your peers don’t live up to expectations.

Want more? Check out the 10-minute conversation featuring Jarrard Inc.’s David Jarrard and Isaac Squyres:

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Healthcare M&A Predictions, Take Two: Under Biden & Post-COVID-19

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Last July just as the world was about to reopen and fallout from months of lost revenue was about to descend, we polled our extensive network to see what the future held for hospital mergers and acquisitions.

Who would be buying? Who would be selling? How would a previously active M&A landscape change in light of the pandemic? And might the looming election shift power from one side of the aisle to the other, leading to significant regulatory or legislative changes?

You can see what our experts said then.

So, what do they say now?

Glad you asked. Because we did too.

We checked back with several of our prognosticators, along with a few other players in the legal, financial, strategic planning and management consulting sectors, asking them four questions:

As before, we’ve condensed the answers into a few themes, but the full verbatim can be found below the summary.

Asked if the rate of transactions will begin to climb, a slight plurality predicted the pace and volume of transactions will remain at current levels throughout 2021. The rest said they expect to see the pace of transactions ramp up in Q2 or Q3.

Why did our experts pick the timeline they did?

The consensus was that operational hurdles created by the pandemic have subsided or will soon subside, and that atypical events like the distribution of Cares Act relief funds didn’t change “underlying economic pressures.” Moreover, they noted that the endgame to the pandemic seems to be taking shape, as does a path to economic recovery.

As a return to some “normalcy” occurs, it will become apparent who has emerged stronger, who is weaker and which organizations that were struggling and looking for a partner before the pandemic brought life screeching to a halt – might resume a courtship.

These factors and trends were common across the responses we received, with the differences generally being whether people thought they had resolved enough to have already pushed the pace of transactions to a plateau (“the pace we see today is the pace we’ll see this year) or if they’re still getting worked out (Q2/3).

When we asked about top considerations for buyers and sellers, our experts mentioned:

Buyers balancing resources: recovery vs acquisition
Sellers being flexible and setting realistic expectations
Need for care in the deal process to get through regulatory scrutiny
Buyers helping sellers address the state of their workforce
Need for alignment on strategy and purpose behind a deal (not just scale)

When it came to whether or not deals will be harder to do today, the consensus was “yes.” We heard a few common reasons why:

Federal Scrutiny

(Likely) HHS Secretary Xavier Becerra’s name and reputation came up repeatedly.

State/Local Scrutiny

Non-local control and the effect of consolidation on health equity and community good may be a concern.

Value Proposition

New economic realities and getting to underlying valuations may make deals harder.

Purpose

“Scale for the sake of scale” won’t work. Deals need to be strategic and close existing gaps in services/operations.

Transformation

There is a need to pursue deals that will advance technology and value-based care.

COVID-19’s Wake

Sorting out the underlying fundamentals from the noise of relief funds adds layers of complexity.

Whatever predictions do come true, the tone of the comments reveals something quietly significant and hopeful: There will be a renewed focus on non-COVID-19-related work. Providers are turning their attention to what comes next, signaling the pandemic’s last miles and the opening push for the new administration.

Take a look at the full comments below.

Joe Cerreta

Partner

Barry Sagraves

Partner

Are deals going to be harder to do?

Transactions will be harder to complete, though for reasons beyond changing attitudes of federal regulators. While the new administration is likely to neutral to negative toward consolidation, the FTC will continue its historic opposition rather than ratchet it up. Most of the increased difficulty is completing transactions will be the result of a fundamental change in the economics of the hospital industry, with COVID-19 accelerating trends toward value based care and a risk based reimbursement model as well as increasing consumer preferences for outpatient settings and digital interaction. Systems looking to add members will face more uncertainty and risk in transactions. There will be more organizations seeking to join a system than systems seeking new members. Finally, state and local government may be more hostile to consolidation as concerns about health equity and the good of the community add to worries about non-local control.

What are key considerations for buyers and sellers?

Buyers

Buyers will have to effectively balance resources between trying to complete transactions while recovering from the pandemic and meeting the many changes in the industry. Promising appropriate consideration to successfully be selected as the partner of choice and then delivering the promised benefits will be key for overall system success.

Sellers

Those seeking to join a system will need to have realistic expectations. While many partner-seekers will be distressed, those with stronger financial and competitive positions may find fewer and/or less-aggressive suitors. It will be more important than ever that those considering joining a system utilize a flexible, appropriate approach to the market and not unintentionally chase away a high-quality partner with overly cumbersome RFPs, lengthy negotiations or excessive demands.

When will deals pick up?

Q3

Partnership activity (though not necessarily announced transactions) will pick up in the third quarter.  Visibility on vaccines and the course of the pandemic should be more clear, as well as the state of the economy. Buyers should be feeling more certainty and will need to address the underlying needs for growth and scale after a pandemic-induced hiatus.

Ascendient

Dawn Carter

Founder & Senior Partner

Are deals going to be harder to do?

I definitely believe that there will be heightened scrutiny from the Biden administration and the FTC. In addition, buyers will continue to be more discerning in deals they pursue, for their own strategic reasons, as well as to avoid lengthy, expensive efforts that are eventually blocked by the FTC.

What are key considerations for buyers and sellers?

Buyers

Clearly articulating the strategic purpose of the deal and understanding the value the target brings to the organization.

Sellers

Making sure the organization is as financially strong as possible before embarking on a process, as most buyers have very little interest in financially vulnerable organizations.

When will deals pick up?

The pace today is the pace we’ll see.

Things slowed a bit in 2020, particularly as health systems were trying to get their operational “sea legs” for COVID-19.  Despite the ongoing pandemic, those operational hurdles have been dealt with for the most part and there is a lot more normalcy around M&A transactions. The challenges to the pace will continue to be a) a lot of “low-hanging fruit” deals have been done, so those remaining are more difficult for a reason and/or are much larger deals, which then gets to #1 above; b) overall conservative, low-risk position of most buyers.

Bass, Berry & Sims PLC

Angela Humphreys

Chair, Healthcare Practice Group and Co-Chair, Healthcare Private Equity Team

Are deals going to be harder to do?

There certainly will be more considerations at play, including calibrating for a return to pre-COVID volumes, addressing government funding such as Provider Relief Funds, Medicare Advance Payments and PPP loans, and the potential for increased antitrust scrutiny under the Biden administration.  That said, with a bit of pent up demand, 2021 is poised for high deal flow, particularly for companies that have a view towards value based care and the implementation of technology solutions.

What are key considerations for buyers and sellers?

Buyers

Comfort around the long-term sustainability of the business post-COVID.

Sellers

Certainty of valuation.

When will deals pick up?

Q3

Smaller hospitals have been struggling in the wake of COVID-19 due, in part, to a downturn in elective procedures and thin financial reserves.  As a result, they will need to pursue strategic alliances and partnerships to survive. Separately, query whether this will be a year of the mega merger that brings together large competitors to capitalize on synergies from streamlined management and payor and vendor contracting strategies.

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Robert York

Director, Value-Based Care Practice Leader

R. Christopher Regan

Founding Partner, Managing Director

Are deals going to be harder to do?

Increasing regulatory scrutiny and industry impact due to COVID has refocused healthcare executives to increase overall partnership evaluation and diligence efforts. We don’t see deals happening just to make a deal. It is critical to ensure that future partnerships are sustainable and will deliver on the organization’s long-term strategic goals and objectives as well as satisfy any regulatory concerns.  The partnership process from evaluation to close consumes tremendous organizational bandwidth and so it is critical to make sure there is a clear and sustainable business case for a particular partnership upfront before investing significant time and effort.

What are key considerations for buyers and sellers?

Buyers

Healthcare leadership is re-evaluating overall organizational portfolios given the lessons learned from this past year and identifying capabilities and relationships they need to build out operationally, clinically and financially to stabilize and strengthen the organizational position into 2021.  No matter where you sit in the healthcare eco-system it is time to re-evaluate your organization’ position and needs based on the changed external and internal situation and go-forward outlook.

Sellers

Hospitals and health system partnerships have been focused on building up scale and reach for the sake of scale and reach. But, building scale for scale’s sake is no longer a sufficient case for partnership by itself and healthcare leadership is placing a greater focus on partnerships that can diverse revenue/risk profile and materially advance capabilities and close gaps in the current portfolio including physician, ambulatory and other non-hospital based businesses, virtual/ technology enabled care delivery and management and payor and health plan products.

When will deals pick up?

The pace today is the pace we’ll see.

Hospital deals started to pick back up in Q4 2020 and we see that continuing.  Broader healthcare M&A activity outside of hospitals including both virtual/ digital health plays and physician and ambulatory really remained strong and is continuing to do so.  We expect this resurgence of partnership activity to continue through 2021 as healthcare leadership attention shifts from crisis management to mid- to long-term strategy and sustainability; however, the range of options will look different from years past and continue to extend well beyond traditional hospital to hospital deals.

Juniper Advisory

Rex Burgdorfer

Managing Director

Are deals going to be harder to do?

Health care combinations won’t necessarily be harder to do, but partnership processes will likely need to be more robust to meet heightened regulatory scrutiny. The leadership of Vice President Harris and HHS Secretary nominee Becerra may influence policy at the FTC and DOJ. It is also worth noting that State Attorneys General are also playing a more active role in reviewing hospital transactions. 

COVID has, and will continue to, drive transformation in health care. The experience of a global pandemic has accelerated the rate of change in the industry dramatically. As a result, hospitals and health systems are increasingly looking for new ways to work together to serve their communities and ensure their ongoing vitality. There are a few trends we expect to see more of in 2021: 1) number of transactions between large $1+B health systems across geographic boundaries, 2) partnerships between providers and payors and 3) unique structures that bring two health systems very close together operationally but stop short of change of control. 

What are key considerations for buyers and sellers?

There has been a growing focus on regulatory review in M&A transactions.  As the market for corporate control in the hospital industry matures, data like the American Bar Association “Deal Point Study” are settling in on what constitutes ‘market’ value, terms, and conditions.  The wildcard, however, which always seems to arise in the final negotiations of a definitive agreement, is the risk exchange surrounding various government programs and oversight.

For both buyers and sellers, speed and moving partnership processes forward continues to be a main objective. The benefits of partnership and scale have never been more important than during the pandemic response. The sooner hospitals can affiliate, the sooner their institution and their community will see the positive impact.  However, for buyers of distressed hospitals, we are seeing prolonged periods of due diligence as they evaluate their financial positions and risk. 

When will deals pick up?

Q3

Systems that we work have a pent-up demand for forming regional partnerships.  COVID proved to be a significant disruption to hospital operations and strategic plans. The federal Cares Act relief funding was helpful but has not changed the underlying economic pressures causing management teams to believe that better coordination across the sector is needed to improve the efficiency and quality of care.  Once vaccinations are more widespread, and long-term strategic initiatives dusted-off, I think we’ll see a return to ~100 transaction per year.

Are deals going to be harder to do?

The effect of the Biden Administration on transactions is uncertain, but the guess is that we will see a more active FTC going forward.  But I don’t believe that the regulatory environment and any changes implemented under the Biden Administration will be a material impediment to closing deals.  The challenges are going to be around valuation expectations for both buyers and sellers given the last 12 months of operations for hospitals were so impacted by COVID.   An additional uncertainty that will influence the valuation discuss will be any progress on expanding the coverage of the Medicare program.

What are key considerations for buyers and sellers?

Buyers

Buyers will need to evaluate the state of the workforce at a target facility to understand the potential and the length of time for employees to return to “business as usual.”

Sellers

Sellers will want to assess what a Buyer brings to the table that might help the same workforce fatigue issue.

When will deals pick up?

Q2

My prediction is that we will see the pace of hospital transactions increase in Q2, assuming that the recent positive trend in COVID-19 cases continues and more of the population is vaccinated.  Hospital leaders will be able to see the light at the end of the tunnel and turn back to strategic planning.  Also, there will be a number of hospitals/systems that will need to take strategic steps having been financially weakened over the last year.

Are deals going to be harder to do?

Yes, the historic trend of the mega-merger will be under a microscope by the Biden Administration. The Biden Administration has made it clear that it will intensify its review of healthcare mergers and acquisitions and the expectation is that there will be longer periods for review and greater likelihood of second requests by the FTC. In addition, State Attorneys General have become much more aggressive in their review of potential combinations, resulting in increased involvement in the terms of the agreement, particularly focusing on the covenants of purchasers post-closing, including provision of indigent care, limitations on rate increases and attention to social determinants of health. As a result of these factors, Buyers will have to take into account the increased time delays, expenses, potential divestiture of assets and increased commitments to the community in connection with such transactions. That being said, although it is anticipated that Secretary Becerra may indirectly and discreetly play a role in the policies connected with healthcare merger and acquisition review, we anticipate that Becerra’s strong support of the ACA will be a counterbalancing factor, along with continued relaxation of regulations and issuance of waivers at least for the remainder of COVID-19. In addition, buyers have the burden of scoping and quantifying the potential COVID-19 liabilities and the complications to a transaction as buyers try to understand what stimulus funds were received and the restrictions regarding use of the funds and the potential requirement to repay such funds. Finally, there is just the simple fact that healthcare mergers and acquisitions have become increasingly complex, time consuming and expensive. For all of the aforementioned reasons, it will be imperative for the parties to have a clear and strong strategic basis for the transaction, and go in in with eyes wide open to the challenges.

What are key considerations for buyers and sellers?

Buyers

From the perspective of a buyer, it is important to identify the key strategic goals of the transaction and create clear and consistent communication regarding how the transaction will satisfy those goals both within executive leadership and ultimately to the board. Increasingly, we are seeing that if the board is not tracking closely with the executive leadership team in the process, then there is more opportunity for the deal to not advance forward.

Sellers

As has historically been the case, certainty of close is imperative for sellers. As a result, I think that it is important for sellers to proactively take as many issues as possible off the table by being proactive in terms of diligence, transparency in terms of identification and resolution of issues so that the parties can minimize the closing conditions.

When will deals pick up?

Q2

There is significant capital that has been sitting on the sidelines for the better of part of 2020 that is waiting to be deployed.  Now that we have the (i) certainty of the election results, (ii) declines in COVID-19 cases, (iii) positive vaccine projections and (iv) boards and management teams more able to focus on strategic growth, hospitals and health system deal activity is picking up.  We are seeing an increase in activity in the letter of intent/definitive agreement stage already that should lead to deals closing Q2 of 2021.  In addition, we have seen a significant uptick in the hospitals and health systems focused on strategic service lines and vertical integration.  We also anticipate that the regional consolidations will continue to trend in 2021 as they have for the past few years.

Are deals going to be harder to do?

Deals have been difficult to do for a while and it does not seem that will be getting any easier, whether that is due to state Attorney General enforcement, lower HSR filing thresholds and FTC interest, or more discerning financial, operational, cultural and legal due diligence by parties. Having said that, while timelines may get drawn out and deal terms may get modified to accommodate stakeholders and regulators, deals will still close.

What are key considerations for buyers and sellers?

Buyers

Since many hospital M&A transactions are effectuated through “membership substitutions”, one consideration for buyers in such structures is what post-closing operational covenants buyers are willing to commit to the “seller” (and, in effect, the communities served by the seller’s facilities). In prior years, many buyers were willing to commit to continue to operate the facilities, service lines and programs “as is” for a number of years, as well as committing to spend significant funds on capital commitments, IT integration or other meaningful projects at the seller facilities, and those are increasingly difficult commitments for buyers to make.

Sellers

On the flip side of a buyer’s consideration regarding making significant, long-term post-closing commitments, sellers need to consider, in the absence or reduction of such commitments, what is appropriate transaction consideration to “hand over the keys” and still obtain necessary approvals from their board, stakeholders or regulators. As hospitals move away from a focus on bricks and mortar development, and invest in telehealth, value based-care arrangements and innovative care delivery models, sellers will need to consider whether preservation of existing operations is appropriate.

When will deals pick up?

The pace today is the pace we’ll see.

The pace for 2021 is already very active, and such pace is likely to continue throughout the year, as C-suites and boards of hospitals looking to engage in discussions with potential buyers are now more able to commit the necessary time and attention to strategic initiatives. Buyers are also willing to engage in such discussions and are anxious to execute on opportunities that may not have presented themselves but for COVID-19.  In addition to “traditional” M&A, parties are actively discussing alternative transaction structures, including joint operating agreements, joint ventures, clinical collaboration arrangements, adding to the already energetic pace of transactional activity thus far in 2021.

Ponder & Co

Eb LeMaster

Managing Director

Are deals going to be harder to do?

In the context of regulatory scrutiny, there are several compelling reasons for why deals may become more difficult to consummate. As a long tenured member of the California Assembly, a House Representative and California Attorney General, Xavier Becerra, has a strong track record for aggressive antitrust oversight, including his opposition of the proposed deal between Adventist Health and St. Joseph Health and adding stringent conditions to the Cedars-Sinai Medical Center merger with Huntington Memorial Hospital. Moreover, spurred by the challenges of the pandemic in an already challenging operating environment, we expect the stakes of regulatory intervention to continue to rise as providers seek in-market or adjacent-market acquisitions. Notable deals that received FTC intervention, or are under regulatory review, include Prisma’s acquisition of three LifePoint hospitals in South Carolina and Methodist Le Bonheur’s attempted acquisition of Tenet’s Memphis assets. As providers continue to evaluate their strategic options and expand out from regional hubs or divest non-core assets to in-region competitors, we expect this trend of increasing regulatory scrutiny to continue. Consequently, to help mitigate protracted deal processes due to regulatory intervention and significant legal expense, we are already seeing buyers, more intentional on the front end of due diligence, proactively engage anti-trust counsels and economic advisors, to assess the merits of a deal from a regulatory perspective.

What are key considerations for buyers and sellers?

Assessing the likely breadth and intensity of buyer interest prior to marketing is more important than ever during the pandemic. In some cases, buyers are focusing almost exclusively on pre-pandemic financial/operating trends and results while in other cases, they are factoring in the impact of the pandemic, adjusting run rate cash flow downward and adjusting target results for governmental financial support. New Hanover Regional Medical Center, for example, was able to hold the line on its $1.5 billion pre-pandemic valuation from Novant Health, certainly benefitting from the significant interest from a range of for-profit and not-for-profit partners in the event terms changed. Other sellers with less interest from the market have not been so fortunate as transactions have been repriced or commitments changed. Ultimately, this is as much an art as it is a science, and the outcome is heavily dependent on the breadth and depth of partner interest.

When will deals pick up?

The pace today is the pace we’ll see.

We expect the average quarterly volume in 2021 to be similar to the levels of 2020. On the one hand, Q4 2020 announced volume was strong with 28 announced transactions, the highest single quarterly total since Q1 of 2018. Also, there is a healthy backlog of more than a dozen systems in partnership discussions and under LOIs towards affiliation from the latter part of 2020. However, the pandemic will continue to hold down transaction volumes as healthcare systems and hospitals have been given short-term breathing room through pandemic government support payments and as volumes continue to ramp up ahead of original expectations despite the continued pandemic. Many health systems are using this time to recalibrate financial projections for the remainder of 2021 and continue to study strategic options. Also, the top driver of consolidation–significant negative governmental reimbursement change—is highly unlikely in the near-term in light of the pandemic and related pressures on health systems.

Are deals going to be harder to do?

Historically, Democratic administrations have applied more regulation to transactions. So, we believe we can expect that there will be more scrutiny particularly of larger transactions. Xavier Becerra and Kamala Harris were very engaged in looking at anti-competitive behavior when they were in the Attorney General’s office in California, so it would not surprise me if larger transactions got additional scrutiny from the FTC. For example, this article cites Becerra’s antitrust litigation against Sutter Health.

What are key considerations for buyers and sellers?

Buyers

Buyers need to consider and make sure that the grants and loans provided to facilities in 2020 are not masking systemic financial issues and considering the impact repayment of those amounts may have on the cash flow of the hospitals. Using CHS as an example, the government appears willing to spread repayments out over quite a long period of time.

Sellers

Sellers will need to move quickly. Transactions that take 9-12 months are more costly and increase the likelihood the deal won’t get done. It also weighs on your employees and could lead to attrition. Sometimes you can’t avoid it, getting AG approvals and the like, but if you can, getting a deal closed quickly will save everyone money and make for a happier workforce.

When will deals pick up?

Q2

I think second quarter due to more vaccinations, more return to normalcy, and more pent-up demand. 2020 was a surprising year for M&A activity, but I remain bullish on transactions. I think the pandemic has strengthened some systems and weakened others which is a natural setting for more M&A transactions.

Historically, Democratic administrations have applied more regulation to transactions. So, we believe we can expect that there will be more scrutiny particularly of larger transactions. Xavier Becerra and Kamala Harris were very engaged in looking at anti-competitive behavior when they were in the Attorney General’s office in California, so it would not surprise me if larger transactions got additional scrutiny from the FTC. For example, this article cites Becerra’s antitrust litigation against Sutter Health.

Buyers

Buyers need to consider and make sure that the grants and loans provided to facilities in 2020 are not masking systemic financial issues and considering the impact repayment of those amounts may have on the cash flow of the hospitals. Using CHS as an example, the government appears willing to spread repayments out over quite a long period of time.

Sellers

Sellers will need to move quickly. Transactions that take 9-12 months are more costly and increase the likelihood the deal won’t get done. It also weighs on your employees and could lead to attrition. Sometimes you can’t avoid it, getting AG approvals and the like, but if you can, getting a deal closed quickly will save everyone money and make for a happier workforce.

Q2

I think second quarter due to more vaccinations, more return to normalcy, and more pent-up demand. 2020 was a surprising year for M&A activity, but I remain bullish on transactions. I think the pandemic has strengthened some systems and weakened others which is a natural setting for more M&A transactions.