Post-Acute Sector M&A: Currently Under a Yellow Flag

Nothing kills the momentum and excitement of race day more than the yellow flag and deployed safety car. Unsafe track conditions, usually caused by an accident, debris on the track or a stopped
vehicle, can cause the marshals to slow down the race. Momentum moderates and
adrenaline wanes. Drivers are forbidden from overtaking, and victory is temporarily out of
sight for all but the lead car. As I watched the Indy 500, 24 Hours at Le Mans and a
handful of Formula One grand prix over the last several weeks, it struck me that postacute sector M&A (home health, hospice, Medicaid PCS, pediatric PDN/therapy) is currently racing under yellow flag conditions. Temporary, but nonetheless frustrating for all constituents involved.

The post-acute sector’s two record setting years in terms of transaction activity, valuation
multiples and quality of companies acquired, 2020 and 2021, now appear to be in the
rearview mirror. In their stead is a sluggish 2022, with companies staying in their lanes,
focused inwardly on operations and trying to regain levels of growth and profitability of
prior years. It should come as no surprise that sector activity has slowed: (i) the supply of
actionable platforms is materially lower than in the prior two years; (ii) the COVID spawned labor market continues to create one of the most challenging operating
environments in recent memory; (iii) home health reimbursement faces a potentially
challenging outlook when the CY 2023 HH PPS rule is finalized in the Fall; and (iv) buyers
are less willing to give credit for COVID-related EBITDA adjustments.

Lower Inventory of Actionable Platforms
Many of the most actionable privately-held and sponsor-owned platforms transacted at a
kinetic pace in 2019, 2020 and 2021. As a result, the number of available platforms is
relatively low, and the sector is currently in a holding pattern, where businesses are (i)
focused on operating in a challenging environment, (ii) too early in their hold period, or (iii)
waiting for financial performance to improve, before coming to market. There is a large
and growing backlog of businesses that we expect to come to market when overall
conditions improve, potentially as early as Q4 2022. But in the meantime, the market is
generally in wait and see mode.

Labor Market’s Impact on Performance
Q4 2021 was one of the most challenging quarters for post-acute operators, particularly
hospice, as the Omicron variant wreaked havoc on staffing and admissions volumes.
Despite strong referral volumes and demand for post-acute services, the inability to

sufficiently hire and retain clinical staff has had a material impact on monthly sequential growth and TTM performance. For many, Q1 2022 was only marginally better, and for some, Q2 2022 continues to present challenges, although, anecdotally, the clinical labor market appears to be improving and may even accelerate due to the looming recession. As a result, companies are deciding, or being forced, to delay sale processes as they attempt to replace poor financial performance in Q4 2021 and Q1 2022 with improved 2H 2022 growth and profitability.

Pending CY 2023 Home Health PPS Rule
Based on the proposed rule released last week, CMS estimates that Medicare payments to home health agencies in CY 2023 would decrease in the aggregate by -4.2%, or -$810 million compared to CY 2022. Without getting too technical and comprehensive, this decrease reflects the effects of the proposed 2.9% home health payment update percentage ($560 million increase), an estimated 6.9% decrease that reflects the effects of the proposed prospective, permanent behavioral assumption adjustment of -7.69% ($1.33 billion decrease), and an estimated 0.2% decrease that reflects the effects of a
proposed update to the fixed-dollar loss ratio (FDL) used in determining outlier payments ($40 million decrease). Prospective home health sellers will most likely wait for better clarity on the final rule before coming to market.

Market Push Back on COVID-Related EBITDA Adjustments
Buyers and lenders have materially increased their scrutiny of COVID-related volume adjustments to EBITDA. Early in the pandemic, the market was quite willing to pay sellers for normalized volumes and financial performance, as if “COVID had not happened.” 27 months later, the market is taking a harder line. “What if” earnings credit is no longer being given wholesale. The market has taken the position that labor staffing challenges and higher labor wage expense are here to stay (for now), and, unless a seller has clearly demonstrated a trend to the contrary, little to no valuation / leverage credit
will be given for such adjustments. As a result, prospective sellers must increasingly rely on actual earnings to ensure the achievement of valuation expectations.

Returning to our racing analogy, post-acute sector M&A is currently under a yellow flag. And while yellow flag conditions produce little to no racing action, and can last for many laps, they are still only temporary. Drivers and their teams can use the time to their advantage – to “box” or “pit” in order to change tires, refuel or tweak the car – so that they are ready to drop the hammer once the yellow flag is lifted. This is exactly what the higher quality post-acute platforms are doing. Some of the most exciting action in a race comes once the safety car exits the track and green flag racing resumes. Given the strong near- and long-term demographic and sector trends supporting the post-acute sector, and the almost unlimited demand for high quality post-acute platforms, there is little doubt that M&A activity will resume with a vengeance.

Two more hospital mergers scrapped after federal antitrust scrutiny

Steward Health Care is abandoning its proposal to sell five Utah hospitals to HCA Healthcare, and New Jersey-based RWJBarnabas Health dropped its plan to purchase New Brunswick, NJ-based Saint Peter’s Healthcare System. These pivots come just weeks after the Federal Trade Commission (FTC) filed suits to block the transactions, saying they would reduce market competition. The FTC said in a statement that these deals “should never have been proposed in the first place,” and “…the FTC will not hesitate to take action in enforcing the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation.” 

The Gist: These latest mergers follow the fate of the proposed Lifespan and Care New England merger in Rhode Island, and the New Jersey-based Hackensack Meridian Health and Englewood Health merger, which were both abandoned after FTC challenges earlier this year.

Antitrust observers find these recent challenges unsurprising, as all were horizontal, intra-market deals of the kind that commonly raise antitrust concerns. What will be more telling is whether antitrust regulators can successfully mount challenges of cross-market mergers, or vertical mergers between hospitals, physicians, and insurers. 

Philanthropist backs antitrust lawsuits against large health systems

 Consumers and employers recently filed lawsuits against Hartford HealthCare, HCA Healthcare, and Advocate Aurora Health, accusing the health systems of using their market power to increase prices through anticompetitive contracting practices. New reporting from the Wall Street Journal finds that all three suits are receiving funding from billionaire John Arnold, through his charitable foundation Arnold Ventures, which has sponsored several efforts to reduce healthcare spending. While the health systems say that the claims are baseless, the law firm leading the suits, Fairmark Partners, says that it’s attempting to enforce antitrust laws through the courts.

The Gist: Amid the Biden administration’s increased scrutiny of health system anticompetitive behavior, state governments and philanthropic groups are also taking a more active role in challenging hospital deals and contracting practices. 

While these groups have targeted hospital prices because they’re a significant source of increased healthcare spending, these lawsuits do little to address the perverse underlying incentives that push hospitals to seek higher prices from commercial patients, to cross-subsidize what they view as insufficient pricing from public payers.

ChristianaCare to buy shuttered hospital from Tower Health

Wilmington, Del.-based ChristianaCare plans to buy a shuttered hospital from West Reading, Pa.-based Tower Health.

The deal includes Jennersville Hospital in West Grove, Pa., two office buildings and a 24-acre parcel of land, according to a June 15 ChristianaCare news release. It does not include any personnel or practices that are currently operating.

The hospital will have the new name of ChristianaCare West Grove Campus. The deal is expected to close in 30 to 60 days.

Jennersville Hospital closed Dec. 31. Tower Health was supposed to sell the hospital, along with Coatesville, Pa.-based Brandywine Hospital, to Texas turnaround firm Canyon Atlantic Partners Jan. 1, but pulled out of the deal, stating that Canyon Atlantic was unable to demonstrate it could effectively take ownership.

A judge later ordered Tower Health to restart the sale, but Canyon Atlantic eventually ended the bid, saying it ran out of time to save the hospitals.

ChristianaCare also signed a letter of intent in February to acquire Springfield, Pa.-based Crozer Health from Los Angeles-based Prospect Medical Holdings.

RWJBarnabas scraps deal to acquire St. Peter’s

RWJBarnabas Health on Tuesday called off its attempt to acquire St. Peter’s Healthcare System in New Brunswick, N.J., days after the Federal Trade Commission sued to block the proposed transaction.

Hospitals scooping up physician practices increases health care prices

This week’s contributor is Aditi Sen, the Director of Research and Policy at the Health Care Cost Institute. Her work uses HCCI’s unique data resources to conduct analyses that inform policy to promote a sustainable, accessible and high-value health care system.

High health care prices in the U.S. make it hard for people to access care, difficult for employers to provide insurance, and challenging for policymakers to balance health care spending with other budgetary priorities. That’s why it’s important to understand what drives prices higher and identify policies to keep prices from getting so high.

In a new paper in Health Affairs, Vilsa Curto, Anna Sinaiko and Meredith Rosenthal examined whether hospital and health systems’ acquisition of and contracting with physician practices – two forms of what is often called vertical integration – has led to higher prices for physician services. The researchers combined four sets of data from Massachusetts from 2013-2017 for their analysis.

They found that: 

  • The percent of physicians who joined health systems grew meaningfully: The percent of primary care physicians who remained independent dropped from 42% in 2013 to 31.5% in 2017, and the percent of independent specialists fell from 26% to 17%.
  • Over this same period, prices for physician services rose. Price increases were especially large – 12% for primary care physicians and 6% for specialists – when physicians joined health systems that had a high share of admissions in their area. 

This study stands out for several reasons. First, it shows vertical integration drives up health care prices. Second, the authors highlight actions states can and are considering taking to monitor and curb vertical integration, including antitrust enforcement and enacting laws to promote competition.

Finally, the Massachusetts data allow the public to better appreciate what’s happening across the state. Many earlier studies on health care consolidation have been limited to a subset of insurers, physicians or patients. Massachusetts is a leader when it comes to creating and sharing its data thanks to its all-payer claims database, which pulls together all the health care bills from private insurers and public programs like Medicare and Medicaid in the state. This critical information helps to illuminate patterns of care and prices and connect them to issues like consolidation and competition. Neither the federal government nor most states track how vertical integration mergers influence health care prices.

As these findings demonstrate, acquisitions and other forms of vertical integration impact what people pay for health care services. Given that prices in this sector continue to climb, this paper underscores the need for more state and national data to understand the downstream effects on all of us who use and participate in the U.S. health care system.

The FTC says it’s getting tougher on hospital consolidation. Antitrust experts aren’t buying it

FTC Chairwoman Lina Khan

Two lawsuits against hospital mergers announced the same day may look like the FTC under Chair Lina Khan (pictured) is flexing its muscle to restrain deals that raise prices. But those complaints are “more smoke than fire,” Ken Field, a former FTC lawyer and current co-chair of Jones Day’s global health care practice, told STAT’s Tara Bannow.

The real target shouldn’t be the mergers in Utah and New Jersey between hospitals, antitrust experts said, but something called vertical mergers, in which hospitals buy up physician groups. After such deals, doctors spent $73 million more on 10 common imaging and lab tests over four years, a 2021 Health Affairs study found.

An FTC spokesperson didn’t comment on the agency’s strategy with respect to hospital consolidation. 

Oracle completes its $28B Cerner acquisition

Kansas City, MO-based electronic health record (EHR) company Cerner is now a business unit within Oracle, the Austin, TX-based software behemoth. Oracle, which already sells some software to insurers, hospitals, and public health departments, called Cerner the company’s “anchor asset”, and hopes to use it to expand its healthcare presence. Oracle co-founder and board chair Larry Ellison unveiled lofty plans to create a national health records database, but he didn’t detail how the company would get access to health records from non-Cerner systems, as interoperability standards haven’t been fully implemented.

The Gist: In addition to the challenge of entering the complex EHR and healthcare data market, Oracle now faces the challenge of rebuilding Cerner’s growth, and its clients’ confidence. Cerner lags Epic in terms of hospital market share: Epic holds about a third of the US hospital market, compared to Cerner’s 24 percent. Epic gained an additional 74 hospitals last year, compared to Cerner’s five.

Anecdotally, we know of several long-term Cerner health system clients who are either in the middle of, or planning for, a transition to Epic, which is seen by health system leaders as the superior EMR option. (In the words of one executive, “No CEO ever got fired for choosing Epic.”) If a stronger Cerner product emerges as a result of the acquisition, it could help to stem this tide. 

Oracle, Cerner plan to build national medical records database as Larry Ellison pitches bold vision for healthcare

Oracle’s chairman Larry Ellison outlined a bold vision Thursday for the database giant to use the combined tech power of Oracle and Cerner to make access to medical records more seamless.

Days after closing its $28.3 billion acquisition of electronic health record company Cerner, Ellison said Oracle plans to build a national health record database that would pull data from thousands of hospital-centric EHRs.

In a virtual briefing Thursday, Ellison highlighted many long-standing problems with interoperability in healthcare. “Your electronic health data is scattered across a dozen or separate databases. One for every provider you’ve ever visited. This patient data fragmentation and EHR fragmentation causes tremendous problems,” he said.

“We’re going to solve this problem by putting a unified national health records database on top of all of these thousands of separate hospital databases. So we’re building a system where the health records all American citizens’ health records not only exist at the hospital level but also are in a unified national health records database.”

The concept of the national health records database, which would hold anonymized data, Ellison said, is to help doctors and clinicians have faster access to patient records when providing care. Anonymized health data in that national database could also be used to build artificial intelligence models to help diagnose diseases such as cancer.

Better information is the key to transforming healthcare,” he said. “Better information will allow doctors to deliver better patient outcomes. Better information will allow public health officials to develop much better public health policy and it will fundamentally lower healthcare costs overall.”

Oracle also plans to modernize Cerner’s Millennium EHR platform with updated features such as voice interface, more telehealth capabilities and disease-specific AI models, Ellison said.

He highlighted a partnership between health tech company Ronin, a clinical decision support solution, and MD Anderson to create a disease-specific AI model that monitors cancer patients as they work through their treatments.

“The people at Oracle are not going to be developing these AI models. But our platform, Cerner Millennium, is an open system and allows medical professionals at MD Anderson, who are experts in treating cancer, to add these AI modules to help other doctors treat cancer patients,” Ellison said.

The purchase of Cerner, which marks Oracle’s biggest acquisition, gives the database giant a stronger foothold in healthcare. Ellison said the company’s enterprise resource planning (ERP) and HR software already is widely used in healthcare. 

But the company will face the same long-standing barriers to sharing health data that have stymied other interoperability efforts. There also could be pushback from the industry to any effort by a tech giant to build a nationalized health database.

In March 2020, the federal government released rules laying the groundwork to give patients easier access to their digital health records through their smartphones. The regulation, which went into effect in April 2021, requires health IT vendors, providers and health information exchanges to enable patients to access and download their health records with third-party apps. Under the rule, providers can’t inhibit the access, exchange or use of health information unless the data fall within eight exceptions.

Interoperability experts point out there are already efforts underway to create a more unified database of health records, such Cerner competitor Epic’s Cosmos, which is a de-identified patient database combining the company’s EHR data of over 122 million patients.

Former U.K. Prime Minister Tony Blair is backing Ellison’s vision for building a unified health database. Blair, who leads the nonprofit Tony Blair Institute for Global Change, partners with Oracle to use its cloud technology to tackle health issues.

Speaking at the virtual event, Blair said a unified health records system will “empower citizens and provide clinicians and other care providers with immediate access to their health history and treatment without chasing it down from disparate sources.”

David Feinberg, M.D., who took the reins as Cerner CEO just four months before the acquisition was announced in December, said he was excited about the potential for Oracle and Cerner to advance data sharing.

“We’re bringing world-class technology coupled with a deep and long history of understanding how healthcare works. I don’t think anyone’s ever done that,” said Feinberg, now president and CEO of Oracle Cerner.