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

Posted on by • Posted in Caution, Health Policy, Home Health, Market Consolidation, Market Power, Mergers & Acquisitions, Post Acute, Yellow Flag • Leave a comment

Click to access Industry_Insights_6.22.22.pdf

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.

6 WAYS TO REDUCE FINANCIAL DISTRESS IN HEALTHCARE

Posted on by • Posted in Bond Covenant Violations, Budget Forecasting, CFO, Consumer Needs, Consumer Preferences, Cost Management, Cost Reduction, Financial Distress, Health System, Hospital, Hospital Industry, Inflation, Labor Shortages, Labor Spend Management, Patient Volume • Leave a comment
https://www.linkedin.com/pulse/6-ways-reduce-financial-distress-healthcare-steven-shill/?trk=eml-email_series_follow_newsletter_01-hero-1-title_link&midToken=AQHcpzuK5TbmJA&fromEmail=fromEmail&ut=1JLkrraEZcgak1

Welcome to the second installment of Pulse on Healthcare. This month’s issue takes a look at the issues causing financial distress for healthcare organizations, and how CFOs can take action to relieve it.

According to the 2022 BDO Healthcare CFO Outlook Survey, 63% of healthcare organizations are thriving, but 34% are just surviving. And while healthcare CFOs have an optimistic outlook—82% expect to be thriving in one year—they’ll need to make changes this year if they’re going to reach their revenue goals. To prevent and solve for financial distress, CFOs need to review and address the underlying causes. Otherwise, they might find themselves falling short of expectations in the year ahead.

Here are six ways for CFOs to address financial distress:

1.      Staffing shortages: 40% of healthcare CFOs say retaining key talent will be a top workforce challenge in 2022.

How can you avoid a labor shortage? Think about increasing wages for your frontline staff, especially your nurses. You could also reconsider the benefits you’re offering and ask yourself what offerings would be attractive for your frontline staff. For example, whether you offer free childcare could mean the difference between your staff staying and walking out for another employment opportunity. Additionally, consider enhancing or simplifying processes through technology to relieve some strain from day-to-day tasks.

2.      Budget forecasting: Almost half (45%) of healthcare organizations will undergo a strategic cost reduction exercise in 2022 to meet their profitability goals.

 How else can you cut costs? One option is to adopt a zero-based approach to budgeting this year. This allows you to build your budget from the ground up and find new areas to adjust costs to free up resources. Consider some non-traditional cost reduction areas, like telecommunication or select janitorial expenses, which are overlooked year after year. Cost savings in these areas can be substantial and quick to implement.    

3.      Bond covenant violations: 42% of healthcare CFOs have defaulted on their bond or loan covenants in the past 12 months. Interestingly, 25% say they have not defaulted but are concerned they will default in the next year.

 How can you avoid violations? The first step to take is to meet with your financial advisors, especially if you are worried you’re going to default on your bond or loan covenants. You want to get their counsel before you default so you can prepare your organization and mitigate the damage. Ideally, they can help you avoid a default altogether.

4.      Supply chain strains: 84% of healthcare CFOs say supply chain disruption is a risk in 2022.

How can you mitigate these risks? Supply chain shortages are a ubiquitous problem across industries right now, but not all of the issues are within your control. Focus on what is, including assessing your supply chain costs and seeing where you can find the same or similar products for lower prices. Identifying alternative suppliers may end up saving you a lot of frustration, especially if your regular suppliers run into disruptions.

5.      Increased cost of resources: 39% of healthcare CFOs are concerned about rising material costs and expect it will pose a significant threat to their supply chain.

How can you alleviate these concerns? Price increases for the resources you purchase — including medical supplies, drugs, technology and more — could deplete your financial reserves and strain your liquidity, exacerbating your financial difficulties. You may be able to switch from physician-preferred products to other, most cost-effective products for the time being. Switching medical suppliers may even save you money in the long run. Involving clinical leadership in the process can keep physicians informed of the choices you are making and the motivation behind them.

6.      Patient volume: 39% of healthcare CFOs are making investments to improve the patient experience.

How can you satisfy your patient stakeholders? As hospitals and physician practices get closer to the new normal of care, patients are returning to procedures and check-ins they put off at the height of the pandemic. Patients want a comfortable experience that will keep them coming back, including a safe and clean atmosphere at in-person offices.

They also want access to frictionless telehealth and patient portals for those who don’t want to or can’t travel to receive care. Revisit your “Digital Front Door Strategy” and consider ways to improve and streamline it. These investments can also go toward improving health equity strategies to ensure everyone across communities is receiving the same level of care.

Ex-healthcare CFO sentenced for role in fraud scheme

Posted on by • Posted in CFO, Dept of Justice (DOJ), Fraud, Fraud and Abuse, Hospital, Hospital Industry, Kickbacks, Prison Sentence • Leave a comment
https://www.beckershospitalreview.com/legal-regulatory-issues/ex-healthcare-cfo-sentenced-for-role-in-fraud-scheme.html?origin=CFOE&utm_source=CFOE&utm_medium=email&utm_content=newsletter&oly_enc_id=1727F7626990D7P

The former CFO of Pacific Hospital’s physician management arm was sentenced to 15 months in prison June 24 for a tax offense related to a kickback scheme, according to the Justice Department. 

The sentencing came about four years after George Hammer was charged. In 2018, he pleaded guilty to one count of filing a false tax return. 

Mr. Hammer allegedly supported a kickback scheme that resulted in the submission of more than $500 million in bills for kickbacks for surgeries. He allegedly supported the kickback scheme by facilitating payments to people receiving kickbacks and bribes pursuant to sham contracts that were used to conceal illicit payments, according to the Justice Department. 

The Department of Justice notes that Mr. Hammer was a salaried employee and did not profit directly from the kickbacks and bribes. 

Twenty-two defendants, including the owner of Pacific Hospital in Long Beach, Calif., have been convicted for participating in the scheme.

Two more hospital mergers scrapped after federal antitrust scrutiny

Posted on by • Posted in Antitrust, Competition, Federal Trade Commission (FTC), Health Policy, Health System, Horizontal Consolidation, Horizontal Integration, Horizontal Merger, Hospital, Hospital Industry, Market Consolidation, Market Power, Mergers & Acquisitions, Vertical Consolidation, Vertical Integration, Vertical Merger • Leave a comment

https://mailchi.mp/3390763e65bb/the-weekly-gist-june-24-2022?e=d1e747d2d8

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. 

Is healthcare still recession-proof?

Posted on by • Posted in Cost Sharing, Demand for Non-Emergent Surgery, Demand for Outpatient, Financial Distress, Financial Pressure, Health Insurance Benefit Design, Health Insurance Coverage Adequacy, Health Insurance Industry, Health System, High Deductible Health Plans, Hospital, Hospital Industry, Inflation, Post-Deductible Spending, Pre-Deductible Spending, Recession Proof, State of the Union, Tight Labor Market • Leave a comment

https://mailchi.mp/3390763e65bb/the-weekly-gist-june-24-2022?e=d1e747d2d8

A recent conversation with a health system CFO made us realize that a long-standing nugget of received healthcare wisdom might no longer be true. For as long as we can remember, economic observers have said that healthcare is “recession-proof”—one of those sectors of the economy that suffers least during a downturn. The idea was that people still get sick, and still need care, no matter how bad the economy gets. But this CFO shared that her system was beginning to see a slowdown in demand for non-emergent surgeries, and more sluggish outpatient volume generally.

Her hypothesis: rising inflation is putting increased pressure on household budgets, and is beginning to force consumers into tougher tradeoffs between paying for daily necessities and seeking care for health concerns. This is having a more pronounced effect than during past recessions, because we’ve shifted so much financial risk onto individuals via high deductibles and cost-sharing over the past decade.

There’s a double whammy for providers: because the current inflation problems are happening in the first half of year, most consumers are nowhere near hitting their deductibles, leading this CFO to forecast softer volumes for at least the next several months, until the usual “post-deductible spending spree” kicks in.

Combined with the tight labor market, which has increased operating costs between 15 and 20 percent, this inflation-driven drop in demand may have hospitals and health systems experiencing their own dose of recession—contrary to the old chestnut.

Younger hospital nurses leaving the profession altogether

Posted on by • Posted in Health System, Hospital, Hospital Industry, Nurse Agency Staffing, Nurse Overtime, Nurse Retention, Nurse Staffing, Nurses, Nurses Shortage, Registered Nurse (RN), RN Workforce, Talent Acquisition Strategy, Talent Imperative, Talent Management • Leave a comment

https://mailchi.mp/3390763e65bb/the-weekly-gist-june-24-2022?e=d1e747d2d8

The prevailing opinion earlier this year was that the hospital registered nurse (RN) shortage was being driven by older nurses retiring early or leaving hospital employment for less-demanding care settings during the pandemic. However, recent data shown in the graphic below paint a different picture. 

Hospital RNs with over ten years of tenure actually turned over at lower rates in 2021, compared to 2019. Meanwhile, the turnover rate for nurses with less tenure (who are typically younger) increased in 2021. While less-tenured nurses have always turned over at higher rates, we are seeing a new uptick in younger RNs leaving the profession. 

The size of the total RN workforce decreased by 1.8 percent between 2019 and 2021—and the decline was twice as steep for hospital-employed RNs. Younger RNs disproportionately drove this decline: nurses under age 35 left the nursing workforce at four times the rate of those over age 50. 

A recent survey suggests younger RNs are less likely to feel their well-being is supported by their organization, and more likely to define themselves as “emotionally unhealthy.” To keep younger nurses in the profession, hospitals must increase the support available to them. Investments might include expanding preceptorship and mentorship programs, many of which were cut during the pandemic, and increasing behavioral health support and job flexibility.