Since 2022, S&P Global Ratings has tracked an increase in violations of debt agreements as macro economic pressures and low operating margins challenge providers.
Dive Brief:
The number of nonprofit health systems violating their financial agreements with lenders or investors has increased since 2022 as providers struggle to meet debt obligations amid challenging operating conditions, according to a new report from credit agency S&P Global Ratings.
This year, nonprofits will continue to be at heightened risk of violating covenant agreements, or conditions of debt that are put in place by lenders. Recently, the most common violations among nonprofits have been debt service coverage — the amount of days-cash-on-hand to debt ratios — as the sector continues to weather high expenses and weak revenues.
Most nonprofits have recently received extra time to remedy finances in the form of waivers or forbearance agreements, but other systems have merged with more financially stable organizations to meet lending agreements, according to the report.
Dive Insight:
Financial covenant violations among nonprofits began to increase at the onset of the COVID-19 pandemic.
In the early stages of the pandemic, violations were often tied to one-time pressures on operating income, such as mandatory stoppages of services.
However, violations have since evolved and now reflect nonprofits’ struggles with ongoing labor shortages and inflationary pressures, according to the report.
Providers in the speculative rating category were more likely to have violated financial covenants over the past two years and accounted for 60% of violations in S&P’s rated universe.
M&A Volume Up in Q1 2024 vs. Q1 2023: $10 billion Target Revenues
The number of hospital and health system M&A deals announced in the first quarter of 2024 was significantly higher than in the same period in 2023: 18 announced transactions with $10 billion in total revenues for the targets vs. 12 deals in Q1 2023 with a total of $3.4 billion in revenues for the targets. The 81 deals announced in the last 12 months is the highest it has been over the last few years, building upon the recent momentum of hospital and health system mergers, acquisitions, and divestitures across the country.
Other observations by the Cain Brothers M&A team:
Significant number of for-profit conversions to not-for-profit (e.g., divestitures by Tenet and HCA)
Significant number of divestitures by national systems to regional health systems
Accelerated closing timeline for 3 deals in CA: closed in 30-60 days — prior to new hospital merger review process going into effect April 1, 2024 in CA
Q1 2024 total volume of 18 transactions with $10 billion in revenues for targets vs. $3.4 billion for Q1 2023 This quarter saw transformative deals that may reshape how healthcare is delivered, reflecting creative partnerships that continue to form in a changing healthcare environment. Academic medical centers continue to make investments in assets of high strategic value to expand their clinical, teaching, and research capabilities. Large regional systems were quite active, with large cross regional mergers and smaller strategic acquisitions. With the Consumer Price Index (CPI) holding steady with the previous quarter, alleviation of supply cost pressures will benefit health system financials and allow them to deploy more capital.
In early January, General Catalyst’s healthcare investment subsidiary, Health Assurance Transformation Corporation (“HATCo”), announced its intent to acquire Summa Health, one of the largest integrated health delivery systems in Ohio. This announcement made waves in the healthcare industry, not just because of the size of the acquisition, but because it is the first major health system investment for newly formed HATCo. General Catalyst, a venture capital firm formed in 2000, is known for its investments in global companies including Airbnb, Warby Parker, Snap, and Kayak. General Catalyst launched HATCo in October 2023 as a vehicle to enable health systems to enhance technological health capabilities, improve financial results, and assist in meeting the shift to value based care, creating a sustainable and quality-driven healthcare model for providers and patients.
Under the terms of the deal, Summa Health will become a subsidiary of HATCo and transition from a not-for-profit to a for-profit corporation. A community foundation will be formed to continue to invest in the social determinants of health to enhance community outcomes in the Akron-Canton region. With its first acquisition, HATCo aims to become a chassis for future acquisitions and growth for General Catalyst. The deal is expected to close by the end of 2024.
Academic medical centers were active acquirers in the first quarter of 2024. On the West Coast, two University of California systems announced acquisitions from for-profit operators. In January, UCLA Health announced it is the process to acquire West Hills Hospital and Medical Center from HCA. The 260-bed hospital is located in the San Fernando Valley, north of Los Angeles, and will be UCLA’s first acute care hospital in the area. In February, UC Irvine Health signed a definitive agreement to acquire Tenet’s Pacific Coast Network, which include four hospitals in Los Angeles and Orange counties (see below for transaction multiples). The acquisition greatly expands UCI Health’s presence and inpatient bed capacity to complement their flagship UCI Medical Center in Orange. These deals come off the heels of two other University of California deals announced in 2023; UC San Diego Health’s acquisition of Alvarado Hospital from Prime Healthcare, and UCSF’s announcement to acquire two San Francisco hospitals from Dignity Health, further demonstrating the UC system’s mandate to grow and provide greater access to care in California.
Further east, the University of Minnesota announced in February its intent to reacquire the University of Minnesota Medical Center from Fairview Health. The University of Minnesota Regents voted to support a nonbinding letter of intent with Fairview that would provide the ability for the University’s eventual ownership of the medical center by 2027. The University of Minnesota previously sold the medical center to Fairview in 1997.
In January, Penn Medicine announced it intends to acquire Doylestown Health, a single-hospital system in Bucks County, PA. The seventh hospital for Penn Medicine, the acquisition of Doylestown Health follows a trend of expansion for Penn Medicine, with the acquisition of Chester County Hospital, Lancaster General Health, and Princeton Health all within the past 10 years. The transactions by academic health systems this quarter continue to follow the trend of AMC expansion through development of new entry points into their care network, investments in community health, and developing the ability to expand their teaching and research capabilities.
In addition to the sale of its Pacific Coast Network to UC Irvine Health, Tenet also sold Sierra Vista Regional Medical Center and Twin Cities Community Hospital to Adventist Health in California. The two hospitals, located in San Luis Obispo County in Central California, were sold to Adventist Health for approximately $550 million, implying a Revenue and EBITDA multiple of 1.6x and 14.5x, respectively. The Pacific Coast Network transaction to UCI Health announced in February came with a $975 million price tag, reflecting a 1.0x multiple of revenue and 13.7x multiple of EBITDA. These transactions follow trends of Tenet’s strategic divestitures in high value deals and reflect a broader trend of acquisitions of targets of high strategic value to health systems. It is worth noting that part of the reason for higher multiples in these California transactions is that buying is still cheaper than the high cost to build.
Regional expansion continued this quarter in the Northeast with Nuvance Health’s announcement in February that it will be joining Northwell Health. With seven hospitals in Nuvance and the largest in the State of New York with Northwell, the organizations would merge to form an integrated healthcare delivery system of 28 hospitals, 15,000 physicians, and over 1,000 care sites. In July 2023, Nuvance received a credit downgrade from Moody’s driven by weakened operating performance and reduced liquidity. As stated by both organizations, the merger also allows Northwell to expand into Connecticut while making significant investments in Nuvance’s existing clinical care footprint.
On the other hand, a number of regional mergers in recent years have been called off, including this quarter with the cancellation of the proposed merger between Essential Health and Marshfield Clinic. Previously announced in July 2023, the health systems formally ended merger discussions in January, determining that the affiliation was not the right path for the organizations. Marshfield previously paused merger discussions with Gundersen Health System in 2019.
There were also a number of single hospital acquisitions and tuck-in transactions for larger systems. Below are highlights of a few other notable transactions announced this quarter:
In February, St. Louis- based Mercy announced its plans to acquire Via Christi Hospital, its related physicians and other ancillary healthcare locations from Ascension. 152-bed Via Christi hospital will be Mercy’s third hospital in Kansas, as Mercy continues to grow westward. In 2023, Mercy acquired SoutheastHEALTH followed by its acquisition of Hermann Area District Hospital.
In January, Northern New Jersey health systems, CarePoint Health and Hudson Regional Hospital announced they are seeking to form a new combined entity that will merge the for-profit and not-for-profit hospitals together. Hudson Health System will be the new namesake of the four hospital system. Under the proposed agreement, two of the four hospitals will remain not-for-profit safety net hospitals. The unique arrangement comes after the New Jersey Department of Health confirmed that CarePoint was in financial distress and began to work with local government leaders on a solution. CarePoint executive leaders confirmed the arrangement with Hudson Regional will improve the organization’s operational and financial strength.
Also in New Jersey, Atlantic Health System announced in January its intent to merge with Saint Peter’s Healthcare. Atlantic Health, located in Morristown, NJ, is a seven-hospital health system with locations across New Jersey and Pennsylvania. Saint Peter’s Healthcare is a catholic not-forprofit system with a 478-bed flagship hospital in New Brunswick, NJ. The announcement follows a 2022 judgment by the FTC to block a proposed merger between Saint Peter’s Healthcare and RWJBarnabas Health, citing the deal would cause anti-competitive concerns with merging New Brunswick’s only two hospitals.
WellSpan Health signed a definitive agreement to acquire Evangelical Community Hospital, a 131-bed acute care hospital in Lewisburg, PA. With the pending acquisition, the hospital will become WellSpan Evangelical Hospital and will continue to serve the Central Susquehanna Valley. WellSpan is an eight-hospital system, serving six counties in Pennsylvania and two counties in Maryland. The deal is expected to close in July.
Each quarter, health system acquirers typically cite the need to grow and the desire to enchance clinical outcomes as motivating factors for deal activity. On the other hand, as we are seeing play out in real time, financial challenges area key driver of M&A for sellers.California-based Pipeline Health faces financial challenges as it retrenches its existing portfolio. In late 2023, Pipeline exited the Texas market driven by unsustainable financial losses. This example highlights the need for health systems to match mission-driven growth objectives with the reality of a harsh and volitile operating environment.
Portfolio rationalization,AMCs with the capital to make big bets, and inter-regional consolidations are major trends that will continue into 2024. With an election looming and an uncertain healthcare and regulatory landscape, affiliation opportunities will need to be thoughtful and metric driven.
Hospitals’ business models are being upended by fundamental changes within the health care system, including one that presents a pretty existential challenge: People have far more options to get their care elsewhere these days.
Why it matters:
Health systems’ responses to major demographic, social and technological change have been controversial among policymakers and economists concerned about the impact on costs and competition.
Communities depend on having at least some emergency services available, making the survival of hospitals’ core services crucial.
But without adaptation — which is already underway in some cases — hospitals may be facing deep red balance sheets in the not-too-distant future, leading to facility closures and shutteredservices.
The big picture:
Many hospitals have recovered from the sector’s post-pandemic financial slump, which was driven primarily by staffing costs and inflation. But systemic, long-term trends will continue to challenge their traditional business model.
Many of the services that are shifting toward outpatient settings — like oncology, diagnostics and orthopedic care — are the ones that typically make hospitals the most money and effectively subsidize less profitable departments.
When hospitals lose these higher-margin services, “you’re starving the system that needs profits to provide services that we all might need, but particularly uninsured or underinsured people might need,” said UCLA professor Jill Horwitz.
And hospitals have long claimed that much higher commercial insurance rates make up for what they say are inadequate government rates.
But as the population ages and moves out of employer-sponsored health plans, fewer people will have commercial insurance, forcing hospitals to either cut costs or find new sources of revenue.
By the numbers:
Consulting firms are projecting a bleak decade for health systems.
Oliver Wyman recently predicted that under the status quo, hospitals will need to reduce their expenses by 15-20% by 2030 “to stay viable.”
Boston Consulting Group last year projected that health systems’ annual financial shortfall will total more than $200 billion by 2027, and their operating margins will have dropped by 10 percentage points.
To break even in 2027, a “typical” health system would need payment rate increases of between 5-8% annually — twice the rate growth over the last decade, according to BCG. If the load is borne solely by private insurers, hospitals will need a 10-16% year-over-year increase.
Between the lines:
This is the lens through which to view health systems’ spree of mergers and acquisitions, which have increasingly drawn criticism from policymakers, regulators and economists as being anticompetitive.
For better orworse, when hospitals have a larger market share, they are in a better position to negotiate and bring in more patients, and they can dilute some of the financial pain of poorer-performing facilities.
And when they acquire physician practices or other outpatient clinics, they’re still getting paid for delivering care even when patients aren’t receiving it in a traditional hospital setting.
“I think the hospitals have sort of said … ‘We can keep doing things the same way and we can just merge and get higher markups,'” said Yale economist Zack Cooper. “That push to consolidate is saying, ‘Let’s not move forward, let’s dig in.'”
Yes, but:
A big bonus of outpatient care is that it’s supposed to be cheaper. But when hospitals charge more for care than an independent physician’s office would have, or they tack on facility fees, costs don’t go down.
“They’ve protected their portfolio, and that’s added to the cost of health care,” said Johns Hopkins professor Gerard Anderson.
The other side:
Hospitals are typically on the losing end of negotiations with insurers right now, thanks to how large insurers have become, and are “in an extremely difficult competitive position,” said Ken Kaufman, co-founder of consulting agency Kaufman Hall.
Criticizing their mergers and acquisitions as anticompetitive is a “complete misunderstanding of the situation,” he said, and moving toward a new care model will take “an incredible amount of resources.”
Reality check:
Hospitals account for 30% of the country’s massive health spending tab, and they’ll have to be at the forefront of any real efforts to contain costs.
They’re also anchors in their communities and are powerful lobbyists, which helps explain why Congress has struggled to modestly reduce what Medicare pays hospital outpatient departments.
On Monday, national supermarket giant Kroger announced that it had reached a definitive agreement to sell its specialty pharmacy business to insurer Elevance Health, which plans to fold the business into its CarelonRx pharmacy benefit manager (PBM) division. Kroger’s in-store retail pharmacies and walk-in clinics are not included in the deal, which could close in the second half of 2024. Kroger’s specialty pharmacy is the sixth largest by revenue, serving two percent of the US market. The planned sale comes as Kroger pursues a merger with rival supermarket chain Albertsons, which also operates a specialty pharmacy, although the Federal Trade Commission (FTC) recently announced that it’s challenging that merger.
The Gist: With total pharmacy spend up 25 percent since 2019, including a 34 percent growth for specialty drugs, Elevance is capitalizing on a booming market by pushing into pharmacy services, following last year’s acquisition of BioPlus, another specialty pharmacy.
Administering high-cost drugs to patients with rare or complex diseases, specialty pharmacies now account for more than half of all prescription drug spending despite making up only around two percent of total prescription volumes.
Last week, Congress avoided a partial federal shutdown by passing a stop-gap spending bill and now faces March 8 and March 22 deadlines for authorizations including key healthcare programs.
This week, lawmakers’ political antenna will be directed at Super Tuesday GOP Presidential Primary results which prognosticators predict sets the stage for the Biden-Trump re-match in November. And President Biden will deliver his 3rd State of the Union Address Thursday in which he is certain to tout the economy’s post-pandemic strength and recovery.
The common denominator of these activities in Congress is their short-term focus: a longer-term view about the direction of the country, its priorities and its funding is not on its radar anytime soon.
The healthcare system, which is nation’s biggest employer and 17.3% of its GDP, suffers from neglect as a result of chronic near-sightedness by its elected officials. A retrospective about its funding should prompt Congress to prepare otherwise.
U.S. Healthcare Spending 2000-2022
Year-over-year changes in U.S. healthcare spending reflect shifting demand for services and their underlying costs, changes in the healthiness of the population and the regulatory framework in which the U.S. health system operates to receive payments. Fluctuations are apparent year-to-year, but a multiyear retrospective on health spending is necessary to a longer-term view of its future.
The period from 2000 to 2022 (the last year for which U.S. spending data is available) spans two economic downturns (2008–2010 and 2020–2021); four presidencies; shifts in the composition of Congress, the Supreme Court, state legislatures and governors’ offices; and the passage of two major healthcare laws (the Medicare Modernization Act of 2003 and the Affordable Care Act of 2010).
During this span of time, there were notable changes in healthcare spending:
In 2000, national health expenditures were $1.4 trillion (13.3% of gross domestic product); in 2022, they were $4.5 trillion (17.3% of the GDP)—a 4.1% increase overall, a 321% increase in nominal spending and a 30% increase in the relative percentage of the nation’s GDP devoted to healthcare. No other sector in the economy has increased as much.
In the same period, the population increased 17% from 282 million to 333 million, per capita healthcare spending increased 178% from $4,845 to $13,493 due primarily to inflation-impacted higher unit costs for , facilities, technologies and specialty provider costs and increased utilization by consumers due to escalating chronic diseases.
There were notable changes where dollars were spent: Hospitals remained relatively unchanged (from $415 billion/30.4% of total spending to $1.355 trillion/31.4%), physician services shrank (from $288.2 billion/21.1% to $884.8/19.6%) and prescription drugs were unchanged (from $122.3 billion/8.95% to $405.9 billion/9.0%).
And significant changes in funding Out-of-pocket shrank from 14.2% ($193.6 billion in 2020) to (10.5% ($471 billion) in 2020, private insurance shrank from $441 billion/32.3% to $1.289 trillion/29%, Medicare spending grew from $224.8 billion/16.5% to $944.3billion/21%; Medicaid and the Children’s Health Insurance Program spending grew from $203.4 billion/14.9% to $7805.7billion/18%; and Department of Veterans Affairs healthcare spending grew from $19.1 billion/1.4% to $98 billion/2.2%.
Looking ahead (2022-2031), CMS forecasts average National Health Expenditures (NHE) will grow at 5.4% per year outpacing average GDP growth (4.6%) and resulting in an increase in the health spending share of Gross Domestic Product (GDP) from 17.3% in 2021 to 19.6% in 2031.
The agency’s actuaries assume
“The insured share of the population is projected to reach a historic high of 92.3% in 2022… Medicaid enrollment will decline from its 2022 peak of 90.4M to 81.1M by 2025 as states disenroll beneficiaries no longer eligible for coverage. By 2031, the insured share of the population is projected to be 90.5 percent. The Inflation Reduction Act (IRA) is projected to result in lower out-of-pocket spending on prescription drugs for 2024 and beyond as Medicare beneficiaries incur savings associated with several provisions from the legislation including the $2,000 annual out-of-pocket spending cap and lower gross prices resulting from negotiations with manufacturers.”
My take:
The reality is this: no one knows for sure what the U.S. health economy will be in 2025 much less 2035 and beyond. There are too many moving parts, too much invested capital seeking near-term profits, too many compensation packages tied to near-term profits, too many unknowns like the impact of artificial intelligence and court decisions about consolidation and too much political risk for state and federal politicians to change anything.
One trend stands out in the data from 2000-2022: The healthcare economy is increasingly dependent on indirect funding by taxpayers and less dependent on direct payments by users.
In the last 22 years, local, state and federal government programs like Medicare, Medicaid and others have become the major sources of funding to the system while direct payments by consumers and employers, vis-à-vis premium out-of-pocket costs, increased nominally but not at the same rate as government programs. And total spending has increased more than the overall economy (GDP), household wages and costs of living almost every year.
Thus, given the trends, five questions must be addressed in the context of the system’s long-term solvency and effectiveness looking to 2031 and beyond:
Should its total spending and public funding be capped?
Should the allocation of funds be better adapted to innovations in technology and clinical evidence?
Should the financing and delivery of health services be integrated to enhance the effectiveness and efficiency of the system?
Should its structure be a dual public-private system akin to public-private designations in education?
Should consumers play a more direct role in its oversight and funding?
Answers will not be forthcoming in Campaign 2024 despite the growing significance of healthcare in the minds of voters. But they require attention now despite political neglect.
PS: The month of February might be remembered as the month two stalwarts in the industry faced troubles:
United HealthGroup, the biggest health insurer, saw fallout from a cyberattack against its recently acquired (2/22) insurance transaction processor by ALPHV/Blackcat, creating havoc for the 6000 hospitals, 1 million physicians, and 39,000 pharmacies seeking payments and/or authorizations. Then, news circulated about the DOJ’s investigation about its anti-competitive behavior with respect to the 90,000 physicians it employs. Its stock price ended the week at 489.53, down from 507.14 February 1.
And HCA, the biggest hospital operator, faced continued fallout from lawsuits for its handling of Mission Health (Asheville) where last Tuesday, a North Carolina federal court refused to dismiss a lawsuit accusing it of scheming to restrict competition and artificially drive-up costs for health plans. closed at 311.59 last week, down from 314.66 February 1.
Inflation moderated as economists forecasted last month, according to the Federal Reserve’s favored inflation metric, bringing welcome news for investors, home buyers and consumers alike looking for interest rate cuts.
KEY FACTS
Americans spent 2.4% more in January than they did in January 2023, according to the personal consumption expenditures (PCE) price index released Thursday morning by the Bureau of Economic Analysis.
That meets consensus economist estimates of 2.4% annual PCE inflation and comes in lower than last month’s 2.6%.
It’s the lowest PCE reading since March 2021.
Core PCE inflation, which tracks expenditures for goods and services other than the less sticky food and services inputs, was 2.8% in January, in line with forecasts of 2.8%.
It’s similarly the lowest core PCE reading since March 2021 and checks in significantly lower than January 2023’s 4.7% inflation.
KEY BACKGROUND
Core PCE inflation, which is Fed Chairman Jerome Powell’s inflation measure of choice, is still well above the Fed’s long-term 2% target.
Earlier this month, PCE’s sister consumer price index (CPI)revealed far worse CPI inflation than economists projected, sending the S&P 500 stock index to its biggest loss in almost 12 months as sticky inflation would likely cause the Fed to delay the much-anticipated rate cuts until more tangible progress toward 2% inflation is apparent. CPI measures the average prices nationwide of a predetermined basket of goods and services, while PCE measures how much Americans actually spend monthly, earning the latter policymakers’ affection as it arguably paints a better picture of the health of Americans’ wallets.
The series of hotter than anticipated inflation data has dramatically pushed back expectations of when and by how much the Fed will slash rates in 2024. Higher inflation typically keeps rates higher for longer, making loans such as mortgages more expensive, exemplified by mortgage rates more than doubling over the last two years to their highest levels since the turn of the century.
The futures market currently prices in June as the most likely date of the first cut and 75 basis points of cuts as the most likely outcome, according to the CME Group’s FedWatch Tool, much softer than a month ago’s implied forecasts of the first reduction coming in May and 125 basis points of cuts.
This week’s graphic highlights data from Kaufman Hall’s recently released 2023 Hospital and Health System M&A Report on the current dynamics in health system mergers and acquisitions (M&A) activity.
After a slowdown during the pandemic, 2023 saw an uptick in M&A activity with 65 announced transactions, the most since 2020. Continuing the trend of the past two years, the number of announced “mega mergers,” in which the smaller party had at least $1B in annual revenue, represented more than a tenth of total announced transactions.
However, the average size of mergers fell in 2023, as financial distress emerged as a key driver of M&A activity. The percent of mergers involving a financially distressed party spiked to nearly 28 percent in 2023, almost double the level seen in prior years.
CARES Act funding had buoyed some health systems’ balance sheets through the pandemic, but with the end of federal aid, more systems needed to seek shelter through scale.
With the median hospital operating margin still barely hitting two percent, we anticipate this heightened level M&A activity to continue in 2024 as health systems search for stronger partners that can help them stabilize financially.
Companies grappling with liquidity concerns are looking to cut costs and streamline operations, according to a new survey.
Dive Brief:
Over three-quarters of healthcare chief financial officers expect to see profitability increases in 2024, according to a recent survey from advisory firm BDO USA. However, to become profitable, many organizations say they will have to reduce investments in underperforming service lines, or pursue mergers and acquisitions.
More than 40% of respondents said theywill decrease investments in primary care and behavioral health services in 2024, citing disruptions from retail players. They will shift funds to home care, ambulatory services and telehealth that provide higher returns, according to the report.
Nearly three-quarters of healthcare CFOs plan to pursue some type of M&A deal in the year ahead, despite possible regulatory threats.
Dive Insight:
Though inflationary pressures have eased since the height of the COVID-19 pandemic, healthcare CFOs remain cognizant of managing costs amid liquidity concerns, according to the report.
The firmpolled 100 healthcare CFOs serving hospitals, medical groups, outpatient services, academic centers and home health providers with revenues from $250 million to $3 billion or more in October 2023.
Just over a third of organizations surveyed carried more than 60 days of cash on hand. In comparison, a recent analysis from KFF found that financially strong health systems carried at least 150 days of cash on hand in 2022.
Liquidity is a concern for CFOs given high rates of bond and loan covenant violations over the past year. More than half of organizations violated such agreements in 2023, while 41% are concerned they will in 2024, according to the report.
To remain solvent, 44% of CFOs expect to have more strategic conversations about their economic resiliency in 2024, exploring external partnerships, options for service line adjustments and investments in workforce and technology optimization.
Most organizations are interested in exploring sales, according to the report. Financially struggling organizations are among the most likely to consider deals. Nearly one in three organizations that violated their bond or loan covenants in 2023 are planning a carve-out or divestiture this year. Organizations with less than 30 days of cash on hand are also likely to consider carve-outs.
Organizations will also turn to automation to cut costs. Ninety-eight percent of organizations surveyed had pilotedgenerative AI tools in a bid to alleviate resource and cost constraints, according to the consultancy.
“Healthcare leaders believe AI will be essential to helping clinicians operate at the top of their licenses, focusing their time on patient care and interaction over administrative or repetitive tasks,” authors wrote. Nearly one in three CFOs plan to leverage automation and AI in the next 12 months.
However, CFOs are keeping an eye on the risks. As more data flows through their organizations, they are increasingly concerned about cybersecurity. More than half of executives surveyed said data breaches are a bigger risk in 2024 compared to 2023.
Earlier this month, we released our year-end report on hospital and health system M&A activity in 2023. As a follow-up to that report, here are our thoughts on the five most interesting transactions announced in the past year.[1]
The creation of Risant Health and its planned acquisition of Geisinger Health. This was the transaction that created the most buzz in 2023, promising the formation of a platform—supported by Kaiser Permanente—dedicated to the advancement of value-based care. Risant Health will be created by the Kaiser Foundation Hospitals and will acquire Geisinger as its first member. It will seek to add additional systems to the platform once the acquisition of Geisinger has been finalized.
Novant Health’s acquisition of three hospitals from Tenet Healthcare. This transaction represented several of the 2023 M&A trends highlighted in our year-end report. It offers an example of for-profit health system portfolio realignment: Tenet announced that the proceeds of the sale—a pre-tax book gain of approximately $1.6 billion—will be used primarily for debt retirement. It also offers an example of regional market development, as Novant continues to expand its network in North and South Carolina. And with a valuation of the deal at 16 times adjusted EBITDA—based on the $2.4 billion sale price and $150 million adjusted EBITDA reported in the press release—this transaction reflects the value of investing in high-growth markets: in this case, coastal South Carolina.
Henry Ford Health System’s joint venture with Ascension. Offering another example of regional market development, this transaction, when finalized, would also provide an example of how secular and faith-based organizations can work together in partnership. The press release announcing the transaction noted that both organizations “are committed to working to maintain the Catholic identity of the Ascension Michigan facilities included in the transaction.”
The combination of BJC Health System and Saint Luke’s Health System. This transaction, announced in May 2023, closed on January 1, 2024, and provides an example of the cross-market transactions that have emerged as a significant trend in hospital and health system M&A. Also—given the relatively close geographic alignment of the two systems—it provides another example of regional market development. It is the largest of the regional development transactions called out in our year-end report: others included the Novant/Tenet transaction described above, as well as the combination of Froedtert Health and ThedaCare in eastern Wisconsin and Vandalia Health’s development of a statewide network in West Virginia.[2]
Centura Health’s acquisition of Steward Health’s Utah care sites. In another example of a for-profit system divesting its interest in a geographic market, Steward Health announced the sale of its Utah care sites—including five hospitals and more than 35 medical group clinics—to Centura Health, which is part of CommonSpirit Health. CommonSpirit will own the assets, which will be managed by Centura Health. For Centura, the transaction offers an opportunity to enter the growing Utah market, which has demographics similar to its home base in Colorado.
We are early in the year, but 2024 has started with a bang: the announced acquisition of Summa Health, based in Akron, Ohio, by General Catalyst’s Healthcare Assurance Transformation Corporation (HATCo).[3]The acquisition, when completed, would launch HATCo on its path to fulfill one of the three goals set forth during the October 2023 announcement of its formation: “acquiring and operating a health system for the long term where we can demonstrate the blueprint of [healthcare] transformation for the rest of the industry.”
Last week, venture capital firm General Catalyst announced its plan to acquire Summa Health, an Akron, OH-based integrated delivery system with three hospitals, a large medical group, a health plan, and an annual revenue of around $2B. The terms of the deal were not disclosed, though General Catalyst previously indicated it aimed to spend $1-3B to acquire a health system.
Pending regulatory approval, Summa will convert to a for-profit entity and become a fully owned subsidiary of General Catalyst’s recently launched Health Assurance Transformation Corporation (HATCo).
HATCo, under the leadership of former Intermountain Health CEO Marc Harrison, was founded with the intention of acquiring a health system to serve as a blueprint for General Catalyst’s vision of healthcare transformation.
The Gist:While there’s a dearth of evidence for what kind of health system makes a good venture capital investment, Summa’s concentrated footprint of integrated delivery assets, robust Medicare Advantage plan, and position in an aging, yet competitive, market certainly seem attractive given HATCo’s stated goals.
If it closes, the partnership will provide Summa with an influx of capital and General Catalyst with a “proving ground” for both its vision of healthcare transformation and its portfolio of technology solutions. But while it’s one thing to get Summa’s board to sign on, General Catalyst will now have to reckon with other important stakeholders.
Summa’s physicians will be the gatekeepers of change at the local level, and their buy-in will be required for any continued push toward value-based care or successful product roll-out.
And, behind the scenes, General Catalyst will have to convince its investors that this longer-term play to rethink care delivery will offer financial returns worth the wait.
HENRY KOTULA 