Category Archives: Mergers & Acquisitions

Private equity sees ripe opportunity in healthcare this year

Posted on by • Posted in Health Policy, Horizontal Integration, Market Consolidation, Market Power, Mergers & Acquisitions, Private Equity, Undercapitalized, Venture Capital, Vertical Integration • Leave a comment

https://www.healthcaredive.com/news/private-equity-sees-ripe-opportunity-in-healthcare-this-year/548831/

Private equity investment in healthcare has ballooned over the past decade, and experts say 2019 is poised to be another robust year, with potential ripe targets in orthopaedics and mental health and addiction treatment.

Private equity deals in healthcare in the U.S. more than doubled over the past 10 years, according to financial data firm Pitchbook. In 2008 there were 325 deals (including buyers and sellers) and in 2018 that number swelled to 788, a record number of deals representing more than $100 billion in total value.

One of the largest recent deals was private-equity firm KKR’s nearly $10 billion purchase of Envision Healthcare last year, according to Preqin. Envision provides physician services to hospitals and operates hundreds of surgery centers across the country. Another big deal was the public-to-private takeover of athenahealth by Evergreen Coast Capital and Veritas Capital for $5.7 billion in 2018.

“It looks as though 2018 was a record year for the industry, and overall the trend in deal-making has been one of strong growth — this would suggest that 2019 could be another record year unless we see a change in the underlying conditions,” Preqin spokesman William Clarke told Healthcare Dive.

The Envision deal was among the biggest leveraged buyouts ever at more than $4 billion in debt, according to Pitchbook. The practice is criticized in several respects, including that many are financed by loading a company up with mounds of debt.​

Globally, healthcare accounts for about 13% of all private equity buy-out deals, according Preqin, an industry research firm.

The deals come amid a frenzy of consolidation, both vertical and horizontal, in the healthcare industry as hospitals and insurers try to scale up to insulate themselves from a number of headwinds and disruptors such as Amazon and Apple.

M&A began to accelerate after the Affordable Care Act, as many hospitals aligned themselves with physician groups, looking for greater reach into a market. But private equity firms “provide an attractive alternative to the traditional hospital-physician alignment models,” according to a recent report from the Investment Funds team at the law firm BakerHostetler.

Private equity investors are increasingly seeking deals in areas that are highly fragmented or areas that still operate in silos and are undercapitalized, Ben Isgur, health research institute leader at PwC, told Healthcare Dive. Fragmented areas provide an opportunity for private equity firms to come in and align a number of practices on the same platform, which increases size and scale to improve leverage in negotiations with payers.

Potential highly fragmented targets include orthopaedic practices, which are likely to see a number of private equity investments over the next few years, as well as gastroenterology and urology, according to BakerHostetler.

For example, “Only 30 orthopaedic practices in the country have more than 20 physicians in a single practice,” the report notes. Private equity firms’ attraction to these practices may have increased last year after CMS changed the rules to allow total knee replacements to be performed in outpatient settings. Previously, the agency only allowed total knee replacements to be performed on Medicare beneficiaries in an inpatient-only setting.

Orthopaedics, gastroenterology and urology also are ripe with lucrative ancillary services such as surgery and imaging centers and have high use thanks to an aging population, the report notes. There are more than 5,700 ambulatory surgery centers across the U.S. that perform more than 20 million surgeries every year, according to the Ambulatory Surgery Center Association. Medicare alone spent $4.3 billion on ASC services in 2016, according to the Medicare Payment Advisory Commission.

Investing in healthcare is also enticing for private equity investors as they seek to balance their investments. The healthcare sector is likely more insulated from a recession due to the aging population and demand for services, along with the projected increase in healthcare spending, according to a research report from PwC.

Another area experts are keeping an eye on for potential deals is in mental health, Isgur said.

“There is a huge need for these services and many of the providers are in small practices. The opportunity is to consolidate and capitalize and then build shared services around technology and back-office functions to create more value,” Isgur said.

Private equity investment in healthcare is not new; but like politics, healthcare is still very local, he said.

By 2008, private equity was already active in a number of areas including long-term care facilities, hospice, ambulatory surgery centers, acute care hospitals and clinical labs, according to a previous Health Affairs report.

Buying to sell

Private equity by its nature comes with controversy, with a business model based on buying for the purpose of selling for a one-time windfall profit for wealthy investors and for taking on big debt to finance the deals.

That leaves workers and patients last, critics say, and the sector’s forays into nursing homes brought those fears to the surface.

For years, unions have been critical of private equity firms in general. The American Medical Association, the nation’s prominent doctors group, is probing private equity investments into medical practices and its influence on healthcare. The report will likely be available in June, according to an AMA spokesperson.

The health of nursing home patients was put in jeopardy at facilities run by ManorCare, one of the largest nursing home operators in the country, according to a Washington Post investigation. ManorCare struggled financially when it was helmed by private-equity firm Carlyle Group and ended up filing for bankruptcy last year, nearly a decade after it was acquired by Carlyle Group.

A spate of nursing home acquisitions by private equity firms led to concerns about quality of care issues. Private equity bought up 1,900 nursing homes over the course of a decade, from 1998 to 2008, according to a GAO report from the time.

Isgur noted the controversy, pointing to the proliferation of freestanding emergency rooms in some states.

Some freestanding ERs are backed by private equity firms and may be closer and more convenient for consumers, but that convenience comes at a hefty cost. One insurer, UnitedHealth Group, has warned about that, too.

 

 

 

 

New Jersey health systems complete merger

Posted on by • Posted in Definitive Agreement, Due Diligence, Health System, Hospital, Mergers & Acquisitions • Leave a comment

https://www.beckershospitalreview.com/hospital-transactions-and-valuation/new-jersey-health-systems-complete-merger.html

Image result for virtua health headquarters

Marlton, N.J.-based Virtua Health completed its acquisition of Camden, N.J.-based Lourdes Health System July 1, creating an organization with 280 care locations and more than 13,000 employees.

Virtua said the transaction will reshape healthcare in south New Jersey by combining the care Virtua provides with the specialized care Lourdes provides — particularly in cardiovascular surgery, complex neurosurgery and transplant services areas.

“The value we place on the patient experience and performance improvement — coupled with our commitment to quality and community involvement — will make a tremendous impact on the health and well-being of the patients we serve,” Dennis W. Pullin, president and CEO of Virtua, said in a news release.

The acquisition has been a monthslong process. Talks started when Carbondale, Pa.-based Maxis Health — the parent company of Lourdes and a subsidiary of Livonia, Mich.-based Trinity Health—  entered into a nonbinding agreement March 8, 2018, to sell Lourdes to Virtua. The boards of Maxis and Virtua signed a definitive agreement to proceed with the deal in June 2018. Last month — after regulatory review from New Jersey and federal agencies — New Jersey Superior Court Judge Paula Dow approved the transaction, according to Virtua.

Through the acquisition, Virtua has taken ownership of Our Lady of Lourdes Medical Center in Camden, Lourdes Medical Center of Burlington County, Lourdes Medical Associates and Lourdes Cardiology Services.

The combined organization has more than 100 buildings and 2,850 clinicians.

 

 

Has Community Health Systems Finally Bottomed Out?

Posted on by • Posted in Bankruptcy, Community Health Systems (CHS), Community Hospital, Competition, Divestitures, Executive Team Turnover, Fee for Service Reimbursement, Health System, Hospital, Hospital Bankruptcy, Market Consolidation, Market Power, Mergers & Acquisitions, Operational Competence, Rural Health, Rural Hospital • Leave a comment

https://www.healthleadersmedia.com/strategy/has-community-health-systems-finally-bottomed-out

After selling more than 80 hospitals in three years, leaders of the large for-profit hospital operator are suggesting the worst may be behind them.

KEY TAKEAWAYS

The troubled operator of rural hospitals is focusing now on growth-oriented markets.

The latest round of questions and accusations adds to the tumultuous past five years.

Some analysts say CHS isn’t poised for where the market is headed: outpatient services and value-based care.

Times have been tough for Community Health Systems Chairman and CEO Wayne T. Smith, who is voicing an optimistic message this year as the hospital operator continues to navigate choppy waters.

Smith and fellow CHS senior executives told investors this month that the company expects to complete its massive and long-running divestiture plan by the end of 2019, having already shed 81 hospitals from its portfolio in the three preceding years. The company, based in Franklin, Tennessee, operated 106 hospitals across 18 states as of the end of the first quarter.

While the divestitures give CHS cash to pay down its debt, they are also part of a strategic effort to align CHS operations with the geographic areas where the company sees the greatest growth potential, Smith said.

“This has allowed the company to shift more of our resources to more sustainable markets, ones with better population growth, better economic growth, and lower unemployment, which provides us an opportunity for sustainable growth,” Smith said during the first-quarter earnings call this month.

“As we complete additional divestitures, we expect our same-store metrics to further improve,” he added. “This will lead to not only additional debt reduction but also better cash flow performance and lower leverage ratios.”

Executive Vice President and Chief Financial Officer Thomas J. Aaron echoed that message at the Goldman Sachs Leveraged Finance Conference this month. While CHS was truly a rural hospital company 15 years ago, Aaron said the post-selloff organization is investing strategically in markets where it anticipates growth.

“We’d rather compete in a growing pie than have more market share in a pie that’s shrinking,” Aaron said.

“We feel like we’re well-positioned,” he said.

But the positive forecast is a bit of a tough sell, especially when you consider how bad the past five years have been:

  • Questionable HMA Acquisition: In 2014, CHS completed its $7.6 billion acquisition of Florida-based hospital operator Health Management Associates, Inc. (HMA), in what is widely viewed in hindsight as a bad move. In addition to a $260 million settlement with the U.S. Department of Justice, a subsidiary of HMA pleaded guilty to criminal fraud last year for alleged misconduct that predated the acquisition by CHS—allegations that Smith knew about before the deal was final. “We were aware of the issues they had,” Aaron said this month. “We went ahead and closed on the transaction, confident that we could get the cost synergy, and we felt like they had some great assets.”
  • Major Stock Market Woes: In 2015, the price of CHS shares peaked at nearly $53 apiece, according to New York Stock Exchange data. But by the end of that year, shares had lost more than half of that value. Share prices continued to slide the following year and haven’t made a meaningful recovery since. They have been trading below $5 so far this year.
  • Lackluster Quorum Spin-off: In 2016, CHS spun off 38 hospitals to form Quorum Health Corporation. The spin-off severely underperformed expectations, and investors began asking questions. Quorum formally responded to those investors with a letter that acknowledged several reasons to question the “operational competence” of CHS leaders who backed the spin-off. A related dispute between Quorum and CHS ended in arbitration earlier this year.
  • Ongoing Hospital Divestitures: In 2017, CHS sold 30 hospitals, followed by another 13 hospitals in 2018, Aaron said. So far this year, CHS has announced the sale of at least seven more: one in Tennessee, two in Florida, and four in South Carolina. A spokesperson for CHS did not respond to HealthLeaders‘ request for additional information and comment.
  • Recurring Bankruptcy Questions: Industry analysts have wondered for years whether bankruptcy may be on the horizon for CHS. Those questions were renewed again this month when Ryan Heslop, a portfolio manager for Firefly Value Partners LP, took a short position against the company and said a CHS bankruptcy is likely in the next few years, as Reuters reported. About that same time, Smith invested more than $3 million in CHS stock, according to two Securities and Exchange Commission filings. (Smith, 73, who has been CEO for 22 years, now directly and indirectly controls about 2.8% of the company, as the Nashville Post reported.)
  • Call for CEO’s Ouster: With the release of a report this month titled “Other People’s Money,” the National Nurses United (NNU) group accused Smith of squandering CHS’ assets and called for him to be removed. “The fact that Smith remains at CHS’ helm, given a series of fatal calculations that set the company on a downward spiral, is a real wonder,” the NNU report states. Shareholders, however, voted overwhelmingly in favor of keeping Smith as a director and significantly increasing his incentive plan compensation, according to SEC filings.

Despite the light-at-the-end-of-the-tunnel rhetoric coming from CHS executives, there’s still real concern the company could come undone. That’s because CHS’ problems run deeper than its balance sheets, says Mark Cherry, MFA, a principal analyst at Market Access Insights for Decision Resources Group.

“Given the national trend toward provider consolidation, CHS might not remain intact even if it were financially healthy,” Cherry tells HealthLeaders in an email, adding that CHS seems to be unsuited for the industry’s ongoing shifts toward value-based payments and outpatient care delivery.

“There are only a few markets, like Scranton, Knoxville, and Northwest Arkansas, where CHS has enough presence to act as a stand-alone health system that can influence physician and patient behaviors,” Cherry says.

The structural problem is rooted in a bad strategic bet a decade ago, Cherry says.

“As markets and regions were coalescing around large integrated delivery networks focused on value-based care, CHS continued to invest in suburban facilities and demand high fee-for-service reimbursement,” Cherry says.

“Whereas operating a couple of suburban hospitals within a larger market once gave CHS access to better insured patients and leverage against payers who wanted to offer broad provider networks, the post-ACA landscape does not have as wide a uninsured discrepancy between urban and suburban areas,” he adds, “and payers are shifting to high-performance narrow networks, allowing them to cut CHS facilities out entirely if they are unwilling to compromise.”

 

 

 

Healthcare mergers and acquisitions require sensible data sharing strategies, and a solid analytics framework

Posted on by • Posted in Conceptual Data Model, Data Consistency, Data Governance, Data Ownership, Data Quality, Data Sharing, Data Workflow, Electronic Health Record (EHR), Executive Sponsorship, Health System, Hospital, KPI Dashboards, Mergers & Acquisitions, Performance Metrics • Leave a comment

https://www.healthcarefinancenews.com/news/healthcare-mergers-and-acquisitions-require-sensible-data-sharing-strategies-and-solid?mkt_tok=eyJpIjoiTmpJME5qVTNOVEU1TXpRdyIsInQiOiJDdUIxQ1NKdng1b0FkQ1wvQlwvNFBTc1JIbmVwYUZOeUhCZ3VlNlZzdmhNbkhBQlhnXC9JeTI4c2NDeE80REk0YWJ1Nk1jSzl4QjFDbjFMTkxKdmVCblY1RUlSYTIwUmlhSEJ6VXpkOUZZdytUWDhaV1poaEljcVh5ZFdEOUdVZlQzZyJ9

While it’s important for disparate EHRs to communicate with one another, organizations need a better handle on analytics and dashboards.

Mergers and acquisitions in healthcare have been going along at a pretty good clip for a number of years now. The volume of deals remains high, and with larger entities primed to scoop up some of their smaller, struggling peers, the trend seems poised to continue.

There’s an issue that consolidating organizations consistently run into, however: data sharing.

Specifically, many organizations that have initiated merger activity fail to consider that not only will the consolidation necessitate integrating multiple electronic health records, but other ancillary systems as well.

These organizations need to produce the analytics that are required to manage what’s essentially a new business, and that starts with the development of some sort of analytics blueprint early on in the merger activity.

As two or more forces join into one, it’s important to have the analytics blueprint in place so leaderships knows which dashboards are going to be needed for success.

“There used to be a trend where everyone was converted onto the same EHR platform,” said John Walton, solutions architect for IT consulting company CTG. “I guess the thought is that if everyone is converted, the problem will go away. Now … they end up in a situation where they can’t produce the kind of dashboards that are needed.”

THE FRAMEWORK

A key component of an effective analytics blueprint is a conceptual data model — basically a visual representation of what domains are needed for the dashboards.

“It sounds difficult to produce, but if it takes more than four to six weeks to produce something like that, you’re overthinking it,” said Walton. “But that’s then starting point. The key component is that analytics framework.”

Failure to have a framework in place can result in the newly merged entity losing out in terms of revenue and productivity. And once the problem becomes manifest, there’s often a lot of manual effort that goes into serving, for example, the financial dashboards that are so needed by CFOs. A lot of the manual effort goes into putting the data into Excel spreadsheets, which only puts a Band-Aid on the problem.

“The framework essentially provides pre-built routines to extract data from multiple data sources, as well as from financial systems,” said Walton. “It also provides, for lack of a better term, the data plumbing to enterprise standards, and most importantly there’s an analytic layer. The endgame is that the dashboards need to sit on top of an analytics layer that is easy to do analytics on. What it contains is pre-computed performance indicators based on approved business rules with multiple levels of aggregation.”

An effective framework, as with so many other things, begins with C-suite leadership. Having executive sponsorship, or at least an understanding of the issue at an executive level, can translate into a vision for how to integrate the data and provide the analytics that are needed to successfully manage the business.

PLANNING PROACTIVELY

Walton once observed a national organization that acquired another entity, and after two years the CEO still didn’t have any executive dashboards — which means a lack of visibility into the performance metrics. The CEO hen issued what was effectively a mandate to the acquiring organization: Get this done within three months, or else.

Thus began a flurry of activity to et the dashboard situation straightened out, which is not where an organization wants to be. Proactive planning is essential, yet Walton doesn’t see a lot of that in healthcare.

“I’ve never seen an organization proactively plan for this,” he said. “That doesn’t mean it’s not happening, but in my experience I haven’t seen it.”

In the meantime, mergers and acquisitions keep happening. Even if merging organizations become aware of the problem and factor that into their decision-making there’s another issue to consider.

“Another extremely significant problem is data quality and information consistency,” said Walton. “That problem really is not universally dealt with, in healthcare or for that matter other industries. It’s almost like they’ve learned to live with it. It’s almost like we need a call to arms or something. You’re almost certainly going to have the need for an analytics framework that will apply the data to your standards.”

The data in question could encompass missing or clinically inappropriate data. Quality, in this case, has to do with the cleanliness of the data. In terms of consistency, a good example would be something like average length of stay. There’s an opportunity to ensure that the right data ownership and stewardship is in place.

Importantly, it’s primarily a business solution. It’s possible that one of the merging entities has a data governance strategy, but all too often that strategy was launched by the IT department — which is not where an organization wants to be, said Walton, because it’s primarily a business problem rather than one that’s purely technical.

“Data governance is a very well-known concept, but people struggle with its actual implementation for a number of reasons,” he said. “One, there’s a technical aspect of it, which centers around how we identify data quality issues. What kinds of tools are they going to use to address data quality issues?

“Then there’s establishing ownership of the data, and who are the subject matter experts. And there’s a workflow aspect that most organizations fail to deal with.”

It all starts with the framework. Only then can merging organizations get an appropriate handle on its data and analytics landscape.

 

 

 

More Aggressive Review of Hospital Mergers Needed, Says FTC Commissioner

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https://www.healthleadersmedia.com/strategy/more-aggressive-review-hospital-mergers-needed-says-ftc-commissioner?spMailingID=15662786&spUserID=MTg2ODM1MDE3NTU1S0&spJobID=1641165714&spReportId=MTY0MTE2NTcxNAS2

The problems include ‘a legal shield’ enjoyed by nonprofit hospitals, and the solutions include more retrospective analysis of close calls, says Rebecca Kelly Slaughter.

KEY TAKEAWAYS

The FTC is prohibited from enforcing antitrust laws against nonprofits, which poses a challenge, Slaughter said.

The commission should conduct another round of retrospective study on closed healthcare mergers, she said.

Commissioners should be ‘as aggressive as possible’ moving forward to preserve healthcare competition, she added.

Federal Trade Commissioner Rebecca Kelly Slaughter told a liberal think tank Tuesday that antitrust regulators should take a more assertive approach to protect competitive forces among healthcare providers.

Slaughter, a Democrat appointed to the FTC by President Trump and confirmed last year, made the remarks in a speech at the Center for American Progress in Washington, D.C., where she took issue with what she described as “a legal shield for anticompetitive conduct” at nonprofit hospitals.

The FTC is allowed to review all hospital mergers, but it cannot enforce antitrust laws against nonprofits, including more than 45% of U.S. hospitals, she said.

“So, for example, if a non-profit hospital merger itself is not anticompetitive, but the newly merged entity engages in anticompetitive practices, the FTC is stuck on the sidelines,” Slaughter said in her prepared remarks.

“In effect, this means that all of the healthcare industry expertise that the FTC has worked for decades to, and continues to, develop cannot be deployed alongside the DOJ and state enforcers to stop anticompetitive practices by roughly half of all hospitals nationwide,” she added. “This is a significant lost opportunity.”

Slaughter called for greater scrutiny of horizontal and vertical mergers alike both in the future and in the past.

“I believe that the FTC should conduct a new round of retrospectives of healthcare provider mergers,” Slaughter said.

Studying the past has led the FTC to some of its biggest improvements in understanding market forces, as was the case with former Chairman Timothy J. Muris’ retrospective analysis of hospital mergers in the early 2000s, Slaughter said.

Moving forward, Slaughter said, the FTC should take another look at recently cleared “close-call hospital mergers” and those that were shielded from antitrust scrutiny by state laws despite posing significant concerns. This is consistent, she said, with a statement the FTC issued last fall when it decided not to challenge a proposed affiliation involving CareGroup Inc., Lahey Health System Inc., Seacoast Regional Health System, and others.

The FTC should also consider taking another look at vertical integration among healthcare providers, such as transactions involving hospitals and physician groups, she said.

“[W]e should be as aggressive as possible in challenging the mergers we encounter today, especially where the proposed consolidation involves new structural arrangements rather than traditional horizontal concerns,” Slaughter added. “It is important for parties considering mergers to know we will not shy away from challenging, for example, anticompetitive vertical organizations.”

“I am sensitive to the concern that we might lose litigation,” she added, “but our obligation is to identify the right outcome and fight for it.”

 

 

 

House Subcommittee Takes Dim View of Healthcare Consolidation

Posted on by • Posted in Competition, Federal Trade Commission, Health System, High Prices, Hospital, Market Consolidation, Market Power, Mergers & Acquisitions • Tagged , , , , , , , , , , • Leave a comment

https://www.healthleadersmedia.com/strategy/house-subcommittee-takes-dim-view-healthcare-consolidation

Lawmakers and witnesses alike cited the ill-effects of hospital mergers and acquisitions in a long list of industry behavior they find troubling.

KEY TAKEAWAYS

An economics and health policy professor from Carnegie Mellon suggested lawmakers should give the FTC more power to review nonprofit mergers.

Lawmakers from both sides of the aisle expressed dissatisfaction with the healthcare industry’s consolidation trend and voiced support for legislative action.

A hearing of the House Judiciary Committee’s antitrust subcommittee would not have been a comfortable place Thursday for any healthcare executive touting the benefits of a planned merger or acquisition.

Lawmakers and witnesses took turns criticizing rampant consolidation among hospitals and other healthcare companies. While the public is often told these deals will lead to improved efficiency and higher quality care, those purported benefits frequently fail to materialize, they said.

Since the hearing grouped payer and provider consolidation with anticompetitive concerns about the pharmaceutical industry—an area that both major parties have expressed interest in addressing through congressional action—the discussion could signal how lawmakers will approach any legislation to address the problems they perceive.

Rep. Doug Collins, a Republican from Georgia and the committee’s ranking member, said hospital consolidation has had an especially detrimental impact on rural communities in his state.

“These communities often already have few options for quality care, so as hospital consolidation has increased over the past 10 years, rural communities like my own have been hurt the most,” Collins said.

“At times, these mergers and acquisitions can help rural communities by keeping facilities open, but often they result in full or partial closures and shifting patients from nearby facilities to those hours away,” he added.

Some problems caused by consolidation, such as increased travel times for emergency services, can “literally mean the difference in life and death,” Collins said.

Jerry Nadler, a Democrat from New York and the committee’s chairman, said there’s no question that the recent spate of mergers has contributed to the industry’s problems.

“It is well documented that hospital mergers can lead to higher prices and lower quality of care,” Nadler said.

Martin Gaynor, PhD, an economics and health policy professor at Carnegie Mellon University and a founder of the Health Care Cost Institute, said in his testimony that there have been nearly 1,600 hospital mergers in the past 20 years, leading most regions to be dominated by one large health system apiece.

“This massive consolidation in healthcare has not delivered for Americans. It has not given us better care or enhanced efficiency,” Gaynor said. “On the contrary, extensive research evidence shows us that consolidation between close competitors results in higher prices, and patient quality of care suffers for lack of competition.”

Since hospitals that have fewer competitors can better negotiate favorable payment terms, this consolidated landscape “poses a serious challenge for payment reform,” he added.

“Our healthcare system is based on markets. That system is only going to work as well as the markets that underpin it,” Gaynor said. “Unfortunately, these markets do not function as well as they could or should.”

Gaynor recommended several possible policy changes, including an end to policies that make it harder for new competitors to enter a market and compete and an expanded authority for the Federal Trade Commission to review potentially anticompetitive conduct by nonprofit entities. He also said lawmakers should consider imposing FTC reporting requirements for even small transactions to enhance the tracking capabilities of enforcement agencies.

To support his claims, in his written testimony, Gaynor pointed to research he completed with Farzad Mostashari of Aledade Inc. and Paul B. Ginsburg of The Brookings Institution.