Kaiser Permanente on Wednesday announced it is acquiring Geisinger Health, and Geisinger will operate independently under a new subsidiary of Kaiser called Risant Health.
Deal details
The combination of the two companies will need to be reviewed by federal and state agencies, but if approved, the two companies will have more than $100 billion in combined annual revenue.
Geisinger will operate independently as part of Risant Health, which will be headquartered in Washington, D.C. and will be led by Geisinger president and CEO Jaewon Ryu. The health systems said they intend to acquire four or five more hospital systems to fold into Risant in an effort to reach $30 billion to $35 billion in total revenue over the next five years.
In an interview, Ryu and Kaiser chair and CEO Greg Adams said Risant will specifically target hospital systems already working to move into value-based care.
According to Adams, Risant Health “is a way to really ensure that not-for-profit, value-based community health is not only alive but is thriving in this country.”
“If we can take much of what is in our value-based care platform and extend that to these leading community health systems, then we extend our mission,” Adams said. “We reach more people, we drive greater affordability for health care in this country.”
Why we’re ‘cautiously optimistic’ about this acquisition
Just when you thought healthcare couldn’t get more interesting, Kaiser and Geisinger announce their union through newly established Risant Health. At first pass, it is hard to see a downside with this deal — and that’s something that raises my “spidey-senses.”
Kaiser and Geisinger are coming together through a vehicle that could allow them to clear an increasingly skeptical Federal Trade Commission. It affords two health systems — both in comparatively weaker financial positions than before the pandemic — the ability to get bigger through the merger. Its pitch is decidedly hospital- (and in the future provider) led, with Geisinger retaining its brand and elevating its CEO to the head of Risant. It also gives Geisinger and future partners the latitude to pursue their own payer relationships.
In addition, it is ostensibly a play to increase providers’ control over the nature and pace of value-based care (VBC) adoption. In its press release, Kaiser acknowledges that its closed network model of care management hasn’t scaled well to other markets. And Geisinger, with its own health plan and a track-record of developing its own VBC incentives, is no neophyte and brings a clear wealth of expertise.
Without a doubt, the offer to future partners is compelling: “Come for the size and stay for the value-based care.” But like all things in life, it’s all in the details. And that’s where my “spidey-sense” kicks in.
Partnership and affiliation models alone do not make the hard work of VBC easier. While this emerging group could become a valuable, provider-led clearing house for VBC concepts, applying them in communities remains a stubborn challenge that requires individual work and leadership.
The true test of the concept will come when the first new partner joins. How they decide to participate and whether the model has the right mix of scale and flexibility is what I’ll be watching closely. The overall objective and success measure of this endeavor remains somewhat opaque, but I would say that the concept has real legs here. Right now, I’m leaning toward “cautiously optimistic.”
Physician staffing firm Envision Healthcare filed for Chapter 11 bankruptcy this week, but will “continue operating its business as usual” so that the company can “provide patients with the high-quality care they require.”
Envision Healthcare files for Chapter 11 bankruptcy
On Monday, Envision Healthcare filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas. Following the filing, all of the company’s debt — except for a revolving credit facility for working capital — will be cancelled, totaling around $5.6 billion.
In a news release, Envision said several events have placed significant pressure on its finances since it was acquired by private equity (PE) firm KKR for $10 billion in 2018.
“The lingering impacts from COVID-19 on volume and labor costs, the delays resulting from tactics and recalcitrance by Envision’s largest insurance payors, and the ongoing regulatory uncertainty caused by the flawed implementation of the No Surprises Act have proven too much,” said Paul Keglevic, Envision’s chief restructuring officer.
Throughout the pandemic, healthcare staffing firms struggled to find enough workers to meet patient demand, especially in the highly competitive contract labor market, Modern Healthcare reports.
While Envision said it filed for bankruptcy because it is not generating enough revenue to cover its expenses and debt, it currently has $665 million of cash in the bank. According to the filing, the company expects those funds to help it exit bankruptcy faster.
“The decision to file these chapter 11 cases now, while the debtors have ample cash on hand, will ensure that the company can continue to provide patients with the high-quality care they require,” Keglevic said in the filings.
The company has entered a Restructuring Support Agreement (RSA), with plans to operate normally during the restructuring. Pending court approval, Envision said it will tap into cash collateral from ongoing operations to cover costs, “including supplier obligations and employee wages, salaries, and benefits during the restructuring process.”
“This will enable the company to continue operating its business as usual throughout the process and provide support to critical partners, including clinicians, hospitals, vendors and suppliers,” the company said.
Under the RSA, the company will divide its primary businesses, AMSURG and Envision Physician Services, which will be owned by their respective lenders.
Does Envision’s bankruptcy spell trouble for other PE investments?
Envision isn’t like other medical group PE investments
As we discussed in a previous expert insight, PE investments in physician practices aren’t a monolith. Many different types of medical groups receive investments, and PE firms have a range of healthcare sector experience and business practices.
Envision is an example of an outlier in all of these areas. First, their physician services are all hospital-based, with a heavy emphasis on emergency medicine — this contrasts with the predominant wave of physician practice investment in ambulatory practices. KKR only has one other physician practice investment, and their healthcare portfolio is rather limited.
Most importantly, Envision’s business model was reliant on exploiting questionable business practices and loopholes, which were heavily impacted by the No Surprises Act.
So, this bankruptcy isn’t an indictment of PE investment in physician groups. It just shows that healthcare organizations are not immune to being caught on their bad business practices — though PE, which is already struggling in the court of public opinion, won’t be helped by Envision’s demise.
What Envision’s bankruptcy means
Envision’s bankruptcy shines a light on trends we’ve been watching with hospital-based medicine that make financial solvency challenging: the strain of uninsured patients on revenue, workforce shortages driving up labor costs, and COVID-related volume impacts, to name a few.
What’s different with the average health system compared to Envision? While clearly rife with inefficiencies, health systems have mechanisms to self-correct.
Envision’s business model was not an innovation on care design or delivery.
It was a model taking advantage of pricing distortions and patients who are not in a position to shop for emergency care. That model inherently has limited running room.
On the physician practice front, Envision’s bankruptcy highlights the challenging business environment PE firms choose to enter when they invest in physician practices. Medical groups are a low-margin business, and the running room on cost savings has a low ceiling.
While many of the highest profile PE investments in physician groups come from firms with a long track record in the physician space, it remains to be seen whether the return on their investments will be high enough to satisfy investors.
The spotlight on large, heavily resourced healthcare organizations is not going away anytime soon. In fact, as consolidation continues, new investors enter the forefront, and organizations diversify the type of assets they acquire, that spotlight is only getting brighter.
Starting June 1, UnitedHealthcare will require physicians to submit prior authorization requests for certain types of colonoscopies. While routine screening colonoscopies will remain exempt, United beneficiaries requiring surveillance or diagnostic colonoscopies—which are performed on patients at greater risk of developing colon cancer or those already exhibiting worrisome symptoms—will need advance approval for the procedures to be covered by the payer. A UnitedHealthcare spokesperson said that this policy change is due to concerns that colonoscopy overutilization generates unnecessary medical risks and higher healthcare spending for patients.
The American College of Gastroenterology released a statement criticizing the new policy on the grounds that prior authorization requirements create harmful delays for patients and are a significant source of provider burnout.
The Gist: So much for the planned rollback of prior authorizations that UnitedHealthcare recently touted.
While the insurer is not wrong in saying that some studies have documented overutilization of colonoscopies,
prior authorization is a blunt tool that takes care decision making out of practicing providers’ hands, redirecting that power (along with more profit) to the payer.
To process prior authorization requests in a timely manner, insurers now commonly rely on AI algorithms, which are an imperfect solution. For patients exhibiting signs of colon cancer,improper denials and delayed approvals for colonoscopies could have life-threatening implications.
On Wednesday, CVS revealed plans to phase out its clinical trials unit by December 2024. The company launched the business line in 2021, building off its successful participation engaging CVS patrons in COVID vaccine and treatment studies.
With 40 percent of Americans living near a CVS pharmacy, the company had hoped to facilitate the decentralization of the clinical trials business, recruiting patients who lived in markets without academic medical centers, with goals to engage 10M patients across 150 research sites. However, to date it has only enrolled 33K participants, just over 10 percent of its COVID vaccine volunteer patient cohort.
The Gist: While CVS appears to be focusing on its faster-growing Medicare Advantage and provider businesses, following its expensive acquisitions of Oak Street Health and Signify Health, the promise for decentralized clinical research remains.
Traditional clinical trials often suffer from low participation; recruiting from more diverse populations would improve enrollment and could enhance the quality of research conducted.
Decentralization is also a win for patients, providing access to clinical trials for lower-income patients who may have difficulty regularly traveling to academic centers. Other players, ranging from startups to retail giants like Walmart and Walgreens, remain active in this space. While we hope they may bring new models to market, they will likely evaluate their programs against similar business decisions and profit objectives.
We caught up recently with a healthcare leader who had spent time in Atlanta in a previous role, and the conversation turned to last year’s closure of Atlanta Medical Center.
One major impact: the closure immediately left the Atlanta metro region, home to over 6M people, with only one Level 1 trauma center (a second Level 1 center opened an hour north of the city in February). “It’s devastating for the community to lose those services,” he shared, “but I also get why the health system made that choice, given how hard the economy has hit hospitals.” When all health systems are feeling the worst margin pressures in more than a decade, most would be reticent to step in and launch a new trauma program, which despite bringing prestige, is often a money-loser.
The conversation got us thinking about whether healthcare needs a new approach to securing essential services needed by the community which aren’t well supported by the payment system.
Our current model largely relies on nonprofit systems to meet the community need as a tenet of that status. But as one CMO shared, “If there’s more than one system in the market, we toss the responsibility back and forth like a hot potato.”
His solution: there needs to be top-down redesign of urgently needed critical services like trauma and behavioral health, as well as highly specialized services like transplant and pediatric subspecialty care, which he considered oversupplied in his market, with multiple subscale programs.
His hope was that health systems could cross competitive lines and collaborate to think about a rational approach to “regional healthcare master planning”, along with a new funding model.
It’s a tall order, he continued, but if health systems can’t find a solution on their own, they leave themselves open to government intervention that might mandate a solution—or further questions of the value communities are receiving from supporting nonprofit status.
As care continues to shift to lower cost ambulatory surgery centers (ASCs), the graphic above looks at recent growth and consolidation in the ASC market.
From 2012 to 2022, the five largest operators increased their collective ownership of ASC facilities from 17 to 21 percent, and were responsible for over 50 percent of total facility growth in that period.
While physicians still fully own over half of the nation’s ASCs, the national chains tend to run larger, multispecialty facilities responsible for an outsized proportion of procedures and revenue.
The likes of Tenet, Optum, and HCA are betting big on ASCs, banking on projections that the market will grow by over 60 percent in the next seven years.
(Though AmSurg’s parent company, Envision Healthcare, filed for bankruptcy, AmSurg is buying Envision’s remaining ASCs to retain its significant foothold in the market.)
While many high-revenue specialties, notably orthopedics and gastroenterology, have already seen a significant shift to ASCs, cardiology is one of the most promising service lines for ASC growth, with some predicting that a third of cardiology procedures will be performed in ambulatory settings in the next few years.
The shift of surgeries from hospitals to ASCs is daunting for health systems, who stand to lose half or more of the revenue from each case—if they’re able keep the procedure within the system.
In the meantime, low-cost ASC operators will continue to add new facilities that deliver high margins to fuel their growth.
this article traces how the once-darling Babylon Health became an “unmitigated disaster”, for which the UK’s National Health Services (NHS) has paid a significant price.
Babylon used its vision for a privatized NHS with slashed wait times and AI-powered treatment to boost its public offering, via a special-purpose acquisition company, with a $4.2B valuation in June 2021. Many of its promises have been revealed to be overly ambitious, if not doomed from the start, with its AI-powered diagnostics and funding model proving especially flawed.
A pivot to managed care in the US failed to stem a tide of mounting losses, and the company announced plans to go private last week.
The Gist: There are myriad lessons from the demise of Babylon, a marquis example of a “digital-first” healthcare startup that burned through capital and crashed with the end of the era of cheap money:
virtual care isn’t a magic wand to reduce wait times, and healthcare startups (and their investors) should think as much about the path to profitability as they do about rapid growth.
While Babylon did have its finger on the pulse of promising technologies, it applied them irresponsibly: for patients, inaccurate AI diagnoses could be worse than no care at all.
Amid the current AI frenzy, healthcare would benefit from more “slow AI”, developed with clinical and scientific collaboration and rigorous academic study design and testing, over “fast AI”, with pressure to generate returns for private investors pushing entrepreneurs to rapidly develop and deploy technology.
A surge in the uninsured population from Medicaid redetermination could swamp some health systems that struggled to stay afloat during the pandemic. But experts say it could also translate into a financial boost for networks, if enough individuals find new sources of coverage.
Why it matters:
Even the temporary loss of coverage as states unwind their COVID-era Medicaid enrollment requirements means more people will go without checkups and other primary care, increasing the likelihood they’ll wait until they’re sick to seek help.
A key question is how many of the disenrolled will find new arrangements through workplace insurance or subsidized Affordable Care Act plans, both of which pay providers at higher rates than Medicaid.
Driving the news:
More than 170,000 people lost their Medicaid coverage in four states in April, and it’s not clear from state data how many of those people found new arrangements, reapplied successfully for Medicaid or remain uninsured.
An estimated 17 million children and adults could lose Medicaid coverage this year, after pandemic-era protections are rolled back, per a recent KFF survey.
Trinity Health, an 88-hospital health system operating in 26 states, estimates that Medicaid redetermination could result in a loss of $70 million to $90 million if disenrolled people don’t find other arrangements and the system has to provide them with charity care.
“It’s painful to watch; it’s not good for people and for our communities and those who are most vulnerable,” Dan Roth, chief clinical officer at Trinity Health, told Axios.
Emergency departments could fill up quickly if enough people who delay care wait for a health crisis to get help, said Ben Finder, director of policy research and analysis at the American Hospital Association.
He said other patients could cut pills in half or otherwise make medications last longer, “which can create cascading problems for folks.”
What we’re watching:
Redeterminations could change the payer mix in a revenue-positive way if patients go from Medicaid to employer-sponsored or ACA plans.
One Urban Institute report estimates that as many as 10.5 million patients could shift from Medicaid to employer-sponsored coverage or a marketplace plan.
This could boost payments to hospitals significantly, per Duane Wright, a Bloomberg Intelligence analyst, since commercial payment rates for hospital services are on average 223% higher than Medicare payments.
Zoom in:
Providers might be the first ones to inform patients who don’t know that their coverage has been terminated when they come in seeking care.
Health systems can create special teams to proactively reach out to Medicaid patients before they even come to the hospital, said Karen Shields, chief client engagement officer at Gainwell and former deputy director at the Centers for Medicare and Medicaid Services.
“There is a moral and financial imperative for us to be good at this,” Shields told Axios.
The bottom line:
Most health systems have bounced back from a shaky 2022. But redeterminations, combined with inflation, supply chain problems and staffing shortages, could prove too much, especially during the colder months when respiratory viruses proliferate.
“Everyone is holding their breath watching for how this unfolds in each state,” Finder told Axios.
With companies fighting for financial know-how, a spotlight is beginning to shine on leaders who can bring the skill sets and expertise firms need in the moment.
Demand for interim leaders shot up significantly during the past 12 months, a report by Business Talent Group, a Heidrick & Struggles company, found, rising 116% year-over-year. Requests for on-demand finance chiefs in particular saw a considerable spike, increasing by 103% YoY, boosted by both continued economic uncertainty and the growing complexities of the CFO role.
The rising demand for interim CFOs is also partly due to growing awareness of the availability of such short-term expertise, said Sandra Pinnavaia, Chief Innovation Officer for BTG.
“Companies, as they get more comfortable and aware of the fact that there is this on-demand talent world, it allows them to contemplate different kinds of changes and uses than before,” Pinnavaia said. “So I do think there’s an underlying driver here, that is in a sense, supply creates demand.”
The interim CFO’s appeal
For companies, interims can help firms navigate through tricky periods or transitions. Requests for interim CFOs made up half of all interim C-suite requests, according to the BTG report. Companies are specifically searching for financial leadership skilled in financial controls, accounting and audit. Demand for such expertise rose 76% YoY.
For finance leaders, the higher demand coincides with gains in the compensation and benefits that accompany the role, said Jack McCullough, President of the CFO Leadership Council.
There’s better money available for CFOs who do this type of contract or interim work, leading to more executives interested in these types of jobs, McCullough said in an interview. For example, some part-time CFOs have begun to receive stock options, he said, referring to a CFO who received the benefit at three startups.
Taking an interim role can also be a refreshing change for finance leaders who want to apply their skills in new areas, according to Diane Buckley, managing partner of Forte Financial Consulting LLC. Buckley, a veteran of Big Four accounting firm Ernst & Young, was drawn to interim and fractional CFO work because it afforded her the option to share her skills with growing companies and “really be impactful day one,” she said.
“It was like, ‘I can bring value to smaller companies that may not at this point in their growth warrant a full-time CFO, but I can bring that skill set to them,’” she said in an interview.
On the supply side, shifting workforce trends may be prompting more companies to take a second look at what they need from their leadership.
Talent shortages across the accounting and finance space mean companies may be facing a year-long period to find a qualified CFO, making it more necessary to put in an interim “even if it’s not the ideal person,” McCullough said.
Meanwhile, the pandemic has also left a lasting mark: BTG clients have tapped more interims because “they have been forced over the last few years, to redefine their whole way of working,” Pinnavaia said.
“Now obviously we have a huge spectrum — there are companies that are back full-time, in-person every day, and there are companies that have really changed their business model and they’re not in-person at all,” she said. “But I think that has loosened up the aperture for what would be an acceptable solution” when it comes to leadership, she said.
The right talent at the right time
Hiring on-demand talent also allows companies to find a leader who can meet their needs in the moment — and since many interims come into a company to solve a particular problem or meet a specific goal, one’s skills are “kind of by definition matched to what the issues are,” said Reed Malleck, CFO of Ratio Therapeutics.
CFOs often need to operate in “four dimensions,” he said in an interview, including accounting, operational skills, investor relations and the ability to participate in the execution of strategy for the business.
“If you’re a permanent CFO, you have to cover all of those, even though you might be really good at only one of them,” according to Malleck, an experienced interim executive who took on several such roles as an engagement partner with executive talent firm Tatum, a Randstad company. “But as an interim person, it’s more targeted, like, ‘we need a guy who’s really good at operations. We need this thing to be fixed.’”
Being able to slot one’s skills perfectly into the situation can be a huge benefit for CFOs, many of whom are dealing with expanding job creep. While becoming an interim is not necessarily less stressful than a permanent CFO position, “in a way, you get relief when you get to the point where you fix everything, and when you’re in a permanent role that never happens,” Malleck said. “When you’re in a permanent role, there’s always something new that’s a new problem.”
With CFOs taking on more responsibility for areas like digital transformation, keeping up with the books and juggling other operational needs across the organization, “the CFO is blamed for this and blamed for that … increasingly, people get burnt out or there’s a loss of trust,” he said.
“Hundreds of analysts are looking at your stock and your performance, the market and the competitors and the technology and you have to explain things not once a quarter, but like five times a day,” Malleck said.
Succession planning is vital
Another often unexplored benefit of on-demand talent is as a source of expertise for future company leaders. A shortage of talent in the finance and accounting fields is worsening, with potential accountants lured away by shinier fields such as technology.
As a result, building a pipeline for executives with CFO skills is crucial.
Moreover, CFOs who were at the top financial seat the last time the U.S. saw serious inflation in the 1980s have long since retired, McCullough said. Finance leaders today face a “steep learning curve.”
“CFOs, through no fault of their own, they haven’t had to develop the skills” necessary to navigate current economic turmoil, he said.
Many CFOs with decades of experience are also either looking to retire, or seeking promotion rather than lateral opportunities, said Shawn Cole, president of boutique executive search firm Cowen Partners.
The jump from the CFO to the CEO seat is “way more commonplace” today than it was just a few decades ago, Cole said in an interview, opening up more opportunities for finance heads. Promoting internal candidates to an interim chair can be an easier and more affordable way for certain companies — faced with both a dearth of qualified external candidates and shaky succession planning — to fill the seat while they hunt for a long-term replacement, he said.
“For the last decade or so, businesses have been in like a boom or bust kind of scenario,” Cole said. “And so I think there’s just this lack of investment in a future generation.”
Whether an internal or external interim hire, the executive should also be a welcome and engaged part of the search for a long-term candidate, Cole said. It is part of their fiduciary obligations to a company and its shareholders to “do the necessary due diligence to make an informed hire.”
While internal interims can be an affordable choice, there can also be drawbacks: the “most damning issue” being when an internal interim pick is acting both as interim CFO as well as retaining the responsibilities of their original role at the company, Cole said.
“So what they wind up being is CFO in name only and they still are fulfilling the role of financial reporting or something like that,” he said.
Interims and on-demand talent will probably play a greater role in a company as time goes on, Pinnavaia said. She pointed to clients who might think they need an interim CFO, for example, but who are really searching for an expert or CFO who is able to do a specific project with the existing leadership team. In such a scenario, hiring an interim controller or another executive on-demand with the right finance skills would be the best way forward, she said.
“I’m very excited about this as an innovation in how business gets done,” she said. “It is a way of applying … real time alignment of skill and capacity against particular challenges or opportunities in the business.”
While Congressional leaders play chicken with the debt ceiling this week, antipathy toward hospitals is mounting.
To be fair, hospitals are not alone: drug companies and PBMs share the distinction while health insurers, device companies, medical groups and long-term care providers enjoy less attention…for now.
Hospitals are soft targets. They’re also vulnerable.
They operate in a sector that’s labor intense, capital intense and highly regulated by federal, state and local governments. They’re high profile: many advertise regionally/nationally, all claim unparalleled clinical excellence and unfair treatment by health insurers.
Hospitals operate locally, so storylines like these get attention
In Minnesota, Mississippi and Pennsylvania, hospitals are in court alleging under-payments and/or adverse coverage policies by dominant insurers in their markets.
In NC, the state treasurer and others are challenging a unanimous State Senate vote last week granting the UNC Health System a waiver from antitrust concerns as it builds out its system.
In CA, nurses are striking for higher wages, improved work conditions in 5 HCA hospitals.
And in Nashville today, private equity-owned Envision will declare bankruptcy throwing its emergency room staffing contracts with hospitals into limbo.
The future for hospitals is unclear
Inpatient demand is shrinking/shifting. Outpatient, virtual, and in-home services demand is growing. Discontent among workers and employed physicians is palpable. Labor and supply chain costs wipe-out operating margins and price sensitivity among consumers and employers is soaring. Most are trying to survive any way they can. Some won’t.
Per Syntellis’ latest analysis, the tide may be turning:
Total hospital expenses rose for an 11th consecutive month, but growth in labor expenses slowed for the first three months of 2023; Total Expense rose 4.7% YOY for the month while Total Non-Labor Expense rose 5.5% YOY due to higher costs for drugs, supplies, and purchased services. Total Labor Expense was up 1.8% YOY — a slight uptick after YOY labor expense increases eased to less than 1% in January and February.
Hospital margins remained extremely narrow but inched back into the black for the first time in 15 months as revenue growth outpaced expense increases. The median, actual year-to-date Operating Margin was 0.4% for March, up from -1.1% in February.
Surgery expenses increased despite lower volumes, while levels of patient care remained relatively steady.
But no one knows for sure how long a full recovery will take, how debt ceiling negotiations will impact payments by Medicaid or Medicare or how court and antitrust actions by the DOJ will impact hospitals in the future.
What we know with a fair amount of confidence is this:
Bigger organizations in each sector—hospitals, drug & device manufacturers, medical groups, and health insurers—will have advantages others don’t.
Private equity will play a bigger role in the delivery and financing of care through strategic investments that drive low cost, high value alternatives for consumers and employers.
Regulators will enact selective price controls in targeted domains of the health system.
Large self-insured employers will be the primary catalyst for transformative changes.
Inpatient demand will shrink and tertiary services will be centralized in regulated hubs.
Structural remedies—convergence of social services and health systems, integration of financing and delivering care and direct alignment of insurer and provider incentives—will be key features of systemness choices to consumers and purchasing groups.
Most hospital boards of directors, especially not-for-profit organizations, are not prepared to calibrate the pace of these changes nor active in developing scenario possibilities for their future. That’s the place to start.
Post-pandemic recovery is not a technology-empowered 2.0 version of hospital operations: it is a fundamentally different business model based on new assumptions and bold leadership.
HENRY KOTULA 