Health-Care Transactions Update: Deals Significantly Up in Third Quarter

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Stay ahead of developments in federal and state health care law, regulation and transactions with timely, expert news and analysis.

July, August, and September have been the most active deal months in 2017 so far, with over 299 recorded deals. That can be contrasted with the same quarter in 2016, during which only 167 deals were recorded, making it the slowest quarter that year.

The three most active sectors in summer 2017 were long-term care, health-care information technology, and physician practices, as strategic and financial buyers continued to actively shop for assets. The much-discussed market uncertainty—stemming from the political environment, regulatory uncertainty, and other factors—doesn’t seem to be hindering transaction activity.

Long-Term Care Has Been Most Active

Long-term care, including home health, continues to outpace the industry, with 215 transactions year to date. The sector remains attractive for many investors looking to position their portfolios for future growth, predominantly due to demand fundamentals such as an aging U.S. population and shifting preferences of seniors.

It is estimated that 10,000 U.S. residents turn 65 each day, adding to an already sizable population demographic that historically utilizes the vast majority of health-care spending. In particular, as the U.S. health-care system increasingly places emphasis on efficient outcomes and lowering cost of care, long-term care will offer a critical value proposition as an effective means of reducing the number of acute-care hospital visits and maintaining the overall health of seniors.

Of note in the third quarter was BlueMountain’s $700 million purchase of skilled nursing and assisted living assets from Kindred Healthcare. Continued interest and heightened activity are expected in this sector.

Physicians Have More Buyer Options for Transactions

Historically, large independent physician networks looking to partner with either a strategic or financial sponsor were limited in their options—mainly larger physician groups and local health systems. The landscape has quickly evolved as more organizations are seeing the value in controlling large patient populations.

Private equity buyers and insurance giants are increasingly interested in physician groups and are willing to purchase partial or complete interests at a premium. In the third quarter, Ares Capital invested $1.45 billion in DuPage Medical Group, a multi-specialty practice in Illinois previously owned by the private equity group Summit Partners.

Financial sponsors see an opportunity to leverage size and scale through acquisition and de novo growth, to increase patient populations and capture added revenues in a changing reimbursement environment. In April, Optum, a subsidiary of UnitedHealth Group, purchased American Health Network, a 300-physician practice in Indiana for $184 million. The insurer’s strategy is to control the delivery and cost of health care in all settings outside of the hospital.

Strategic buyers such as hospitals continue to actively recruit independent physicians, but are increasingly disadvantaged when forced to compete with the deep pockets of private equity investors and large insurers. Further compounding the problem for hospitals are the fair market value requirements that, by regulation, limit physician compensation options.

The single specialty provider space has experienced some of the highest activity in all of health-care services. With over 100 single specialty practices completing or announcing a transaction so far in 2017, independent physician groups are viewing an active mergers and acquisitions marketplace as an opportunity to secure future growth and viability.

A growing shift away from a hospital setting has increased the negotiating power of private practitioners and many are turning to private equity partners as a way to further increase their geographic footprint through aggressive growth strategies.

More and more groups are expected to pursue partnership and sale options as physicians continue to witness these large transaction values.

Size Is Attractive for Hospital Buyers

Bigger isn’t always better, but when it comes to hospital transactions, there is a market for sizable assets. In this quarter, Ascension Health, the country’s largest health system, emerged as the buyer of the struggling Presence Health in the Chicago area.

Despite Presence’s poor operations, it was able to align with a financially strong provider because it offered immediate scale in the Chicago market. With this transaction, Ascension, through its Amita Health joint venture with Adventist, vaulted up the market-share list from number four (8.1 percent) to number one (18.8 percent), according to Presence Health’s 2016 official statement. Acquiring and maintaining strong market share will continue to be a significant driver of financial success, thus the opportunity to immediately acquire scale through an acquisition will always be attractive.

Health-Care IT Remains Active

For many years, experts have thought that technology would be the key to driving value (high quality at a low cost). The activity in this space demonstrates the truth of that belief as there have been 133 transactions year to date. Notably, large private equity players have been active.

Clayton, Dubilier & Rice Inc., a private equity firm, acquired Carestream Dental in the third quarter, purchasing the dental imaging and practice management company with an eye toward growth, and expecting to leverage the technological expertise to grow the business.

Final Thoughts

While the summer months remained active, we believe the market will stay strong through the end of the year. Activity spawns more activity, and sellers are undoubtedly attracted to the high valuation multiples offered by buyers with tremendous access to capital and few investment options more attractive than health care.

Courage: Critical Leadership Characteristic

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Our new year is bringing ample challenges to the healthcare industry, from strategies to deal with the Affordable Care Act, to the realities that deficit reduction will require additional cuts in Medicare reimbursement to providers.

Congress is still in denial about the biggest problem with deficit spending – Medicare, but healthcare executives should not draw any hope that they will somehow escape the pain.

Cuts in payments inevitably will spark conflict on a national basis, as various healthcare groups bicker over how to divide the smaller financial pie.  These “who wins and who loses financial conflicts” will almost certainly “trickle down” to local relationships between hospitals, physicians, and other providers.  When money is involved, there will always be tension, and tension will lead to conflict.

This tension, and the conflicts that surface, will be the second biggest contributor to CEO turnover during the next five years, after the Baby Boomer retirement effect.  Today, annual hospital CEO turnover is about 17 percent.  I predict that will escalate to more than 20 percent in that five-year timeframe.

As I considered these probable developments, I began to rethink my beliefs regarding the competencies and ideal characteristics of the senior leaders who run hospitals.

As I thought about this over the holidays, I realized that the leadership characteristic that kept moving to the top of my list was courage.  Yes, communication and relationship management, industry knowledge and business skills are all critical, as is integrity, but I think courage is very important.

These next several years will produce unprecedented change.  This change, in addition to concerns about finances, will produce enormous unrest as we redefine how healthcare must be delivered.  Hard choices, very hard choices, will be the norm.

These tumultuous times will require leaders who are smart, who possess a deep understanding of healthcare operations who are proven performers, and who are excellent communicators.  But more importantly, these men and women must have the courage, the courage to promote innovation and change.  They must possess the courage to do the right thing when, career-wise, it would be easier to take the easy way out.

Storm Harvey could financially hurt already strained Houston hospitals

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Structural improvements over the last decade to Houston hospitals have helped them so far to avoid devastation like Hurricane Katrina in New Orleans in 2005, but the pounding it is receiving from Tropical Storm Harvey is expected to financially hobble many already strained Texas medical centers.

The storm has forced hospitals to cancel surgeries, evacuate patients and contend with food and supply shortages. Even bigger challenges are expected in coming months when people who have lost homes and jobs avoid medical treatment or seek charitable care.

“A lot of hospitals already were burdened by uncompensated care…they were already struggling, and this will make things much harder,” said Vivian Ho, a healthcare economist at Rice University.

Rice has been temporarily closed because of the slow-moving storm that has killed at least 11 people since Friday and paralyzed Houston, the fourth most-populous city in the United States with a U.S.-census estimated 2.3 million.

Houston’s healthcare industry includes some of the most prestigious institutions in the country and has grown to accommodate a rising population in recent years.

But uncertainty about changes to U.S. health insurance policy, the region’s shrinking energy sector and Texas’ high percentage of uninsured have forced several Houston hospitals to cut thousands of jobs this year and post millions of dollars in losses, even before the storm.

Investment bank Jefferies warned in an Aug. 28 note that Harvey could have a significant impact on Texas healthcare providers, especially HCA Healthcare Inc, which has “11 percent of its beds in the areas impacted by severe weather.”

Texas Hospital Association spokesman Lance Lunsford said medical centers made significant improvements after buildings were damaged by Tropical Storm Allison in 2001.

Harvey broke rainfall records for the continental United States, with one site south of Houston recording 49.2 inches (1.25 meters) of precipitation.

Flooding prompted MD Anderson on Monday to cancel appointments and surgeries until Wednesday at the earliest, St. Luke’s Hospital closed one of its branches, and flooding at Ben Taub Hospital shut its food service.

MD Anderson on Monday told employees not part of its storm “ride out” team to stay home.

Roads around the cancer center’s main hospital were impassible, and a doctor posted photos of flooding that reached into the hospital lobby.

MD Anderson’s economic impact to the area is about $35 billion, according to its web site. Its 21 hospitals and affiliated institutions employ more than 106,000 people.

Fitch: Failed ACA replacement efforts add to healthcare sector uncertainty

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As ACA repeal and replace efforts stall, significant uncertainty remains surrounding how federal policy will affect nonprofit healthcare organizations, leading to a negative sector outlook for healthcare, according to Fitch Ratings.

The uncertainty and negative outlook comes as the Trump administration looks for ways to weaken the ACA even if the health reform law is not repealed.

Nonprofit hospitals experienced declines in uncompensated care under the ACA because of an increase in healthcare coverage due to Medicaid expansion, rollout of healthcare exchanges and allowing children to stay on their parent’s health insurance plan until age 26.

While repeal efforts cause uncertainty for hospitals, current discussions regarding a bipartisan healthcare bill could be beneficial for nonprofit hospitals. A bipartisan effort could potentially reduce the insurance premium price hikes, according to Fitch.

Providence plans aggressive cost-cutting, layoffs, amid health care high anxiety

Providence Health & Services, Oregon’s largest private-sector employer, is preparing an aggressive cost-cutting campaign that will include layoffs.

The move is clearest sign to date that hospitals face a difficult, uncertain future.

Providence saw its financial position deteriorate markedly in 2016, posting an operating loss of more than $255 million, filings show. Though its annual revenue topped $22 billion and, as a non-profit, it pays no income taxes, Providence is looking to cut costs across its seven-state network, multiple sources say. David Underriner, chief executive of the medical provider’s Oregon operation, would not disclose numbers or locations, but did say, “there will be an impact on people.”

Providence has already cut back in Oregon. Last year, it closed its open-heart surgery program at Providence Portland Medical Center and consolidated that work at St. Vincent’s Medical Center on the city’s westside, Underriner said.

Providence is not alone. St. Charles Health System in Bend has also scaled back spending as its own bottom line suffered in 2016. Oregon Health & Sciences University in Southwest Portland announced a hiring freeze in March.

The new financial weakness comes at a time of high anxiety in health care. A bill to foist a new multi-million-dollar provider tax on hospitals—which would help fund the state’s contribution to Medicaid — was signed into law this week. In Washington, D.C., meanwhile, Senate Republicans continue their efforts to repeal the Affordable Care Act, a move that Providence’s Underriner and many other hospital executives oppose.