The move comes after the agency indicated it may intervene in more acquisitions going forward.
In its latest enforcement of antitrust and competition policies, the Federal Trade Commission (FTC) has sued to halt John Muir Health's agreement to acquire San Ramon Regional Medical Center from Tenet Healthcare.
The agency's motion to block the deal, along with recent changes it made to its policy statements and merger guidelines, signal that M&A activity could be more scrutinized heading into 2024, potentially impacting the plans of health systems.
In the case of John Muir's deal, the FTC and the California attorney general's office jointly filed an administrative complaint in federal district court, with the FTC also seeking a temporary restraining order and preliminary injunction.
John Muir entered into the agreement with Tenet in January to acquire the latter's 51% stake in San Ramon Regional for $142.5 million, adding to its already-held 49% interest since 2013.
The FTC argued that with the deal, John Muir would control three hospitals in California's I-680 corridor that provide inpatient general acute care, allowing them to control more than 50% of the market. The lack of competition could lead to lower quality of care and higher prices.
"San Ramon Regional Medical Center has played an important role in ensuring Californians in the I-680 corridor have access to quality, affordable care for critical health care services, such as cardiac surgery and childbirth," Henry Liu, director of the FTC's Bureau of Competition, said in a statement. "John Muir's acquisition of San Ramon Medical would increase already high health care costs in the area and threaten to stall quality improvements that help advance care for all patients."
In response, John Muir stated it was disappointed by the FTC's decision and is assessing next steps, including challenging the decision in court.
"We believe the proposed acquisition would benefit our community, caregivers and patients, as well as John Muir Health, San Ramon Regional Medical Center, and Pleasanton Diagnostic Imaging," Mike Thomas, president and CEO of John Muir Health, said in a statement.
Increased scrutiny is here
The FTC had already been laying the groundwork for more challenges for M&A deals.
In the summer, the agency proposed changes to the premerger notification form and instructions, as well as the premerger notification rules implementing the Hart-Scott-Rodino Act. The FTC said the changes would enable it to "more effectively and efficiently screen transactions for potential competition issues with the initial waiting period, which is typically 30 days."
Then, the FTC announced the withdrawalof two policy statements related to healthcare market antitrust enforcement, which provided guidelines for consolidation. The FTC said the statements are "outdated and no longer reflect market realities."
It's clear the FTC is tightening its restrictions on mergers and putting deals under the microscope. How that will affect M&A activity is yet to be seen, but according to a recent HealthLeaders Mergers, Acquisitions, and Partnerships survey, 47% of healthcare executives said that state and federal regulations are affecting their M&A plans.
When asked if the regulatory climate is having the type of influence, Randy Davis, vice president and CIO at CGH Medical Center, told HealthLeaders: "From the perspective of a successful M&A plan, I would wholeheartedly agree with that. But from the perspective of, 'Is it driving M&A?' No, not at all. The regulatory climate does not, in and of itself, push M&A because those regulations are a given."
Where hospital transactions may have protection from increased FTC scrutiny is in states with certificate of public advantage (COPA) laws. For example, LCMC Health's recently secured a major win over regulatory requirements when a U.S. district judge ruled in favor of its purchase of three Tulane University hospitals from HCA Healthcare.
The ruling backed the power of state COPAs, which allow deals to avoid federal approval if they receive oversight from the state, which was present in LCMC's deal from the Louisiana Department of Justice. However, only 19 states currently have some version of COPA law.
Brendan Carr will succeed Kenneth Davis, who has been in the role for two decades.
Mount Sinai Health System has announced its succession plan at CEO by announcing Brendan Carr as the next leader of the New York City-based system.
Carr will take over from Kenneth Davis early next year, while the latter will transition to executive vice chairman of Mount Sinai's Boards of Trustees after serving as its CEO and predecessor since 2003. The move allows the system to chart its path forward under new leadership as it strives for financial stability.
Carr is currently a professor of emergency medicine for Icahn School of Medicine at Mount Sinai and chair of emergency medicine at the system. He joined Mount Sinai in February 2020 as its head of emergency medicine, following previous stints on the faculty at the Perelman School of Medicine at the University of Pennsylvania and as an associate dean of the Sidney Kimmel Medical College at Thomas Jefferson University. He also served the U.S. Department of Health and Human Services across multiple roles.
"Dr. Carr is a visionary leader and physician who will chart an exciting course for the Health System," Richard A. Friedman and James S. Tisch, co-chairmen of the Mount Sinai's Boards of Trustees, said in a statement. "We are certain that he will propel Mount Sinai to further success in our mission to provide compassionate patient care through unrivaled education, research, and outreach in the many diverse communities we serve."
Davis was expected to continue his CEO tenure through the end of 2024 after the system announced an update in September 2021, but the appointment of Carr ahead of schedule signals a change of direction for Mount Sinai.
Friedman and Tisch said: "We want to once again thank Dr. Davis for his remarkable and transformative tenure leading Mount Sinai for more than 20 years, and are delighted that we will continue to benefit from his wisdom in his new role."
Mount Sinai's decision to make the change may have been influenced by its financial challenge. In September, the system announced plans to close its Beth Israel facility in July 2024 due to mounting losses of $1 billion within the past decade. With patient volume dwindling, Mount Sinani said the Beth Israel campus is set to lose $150 million a year.
Fitch Ratings, meanwhile, downgraded the system this month from an 'A' to an 'A-', citing a weak 1.1% EBITDA margin through the first six months of the year and diminishing liquidity metrics.
"The weaker performance is being driven by ongoing challenges including elevated labor and supply cost, inadequate reimbursement to cover inflationary pressures, and increasing transfers to non-obligated entities," Fitch wrote.
Fitch also expects Mount Sinai's operating losses to grow before the end of the fiscal year.
The health system titan outlined its plans to continue growing during its first investor day in 20 years.
HCA Healthcare, already the largest health system in the country, is set to pursue a significant expansion to further solidify its hold in the market.
The hospital operator laid out its plans in its first investor day in 20 years, reflective of the organization's aim to go from "strength to strength," CEO Sam Hazen said. Those plans include investing billions of dollars to expand its service lines, increasing its market share in healthcare services from 27% to 29% by 2030, and targeting adjusted EBITDA growth of between 4% and 6% over the next five years.
HCA has $5.3 billion allocated for projects across the next two years, with about half ($2.7 billion) going to expansion and renovation, while $2 billion is earmarked for a roughly even spend on new inpatient and outpatient facilities, chief operating officer Jon Foster said.
Where the operator is focusing its growth efforts is in existing markets, such as Austin, Denver, and Nashville, where it is headquartered.
"We believe that where you compete is just as important as how you compete and we believe we are competing in the right markets," Hazen said.
On the inpatient side, HCA already holds the most or second-most market share in about 80% of markets, Foster said. The operator revealed it will continue investing in emergency services in the hopes of tightening its grasp, with 51 emergency departments under development after more than 100 were added in the last decade, said Richard Hammett, president of HCA's Atlantic Group.
For outpatient settings, Foster relayed that HCA wants to increase its locations from the 12 it currently has, to 20 within the next few years.
"For us, to be successful, we have to build networks that have local scale, they have to have local scope of services in facilities, and we have to integrate them into a cohesive network," Hazen said.
What HCA's leadership didn't touch on in its investor day was the operator's specific plans to combat the rising physician professional fees, which hampered the earnings of some of the biggest for-profit health systems in the third quarter.
Though HCA reported $1.08 billion in profit for the quarter—a slight dip from the $1.13 billion it brought in over the same period last year—it also saw its professional fee expense for contracted providers grow 20% year over year, CFO Bill Rutherford said on an investor call.
HCA's recent joint venture with physician staffing firm Valesco was meant to be an effective solution to mitigating costs, but the operator revealed that the partnership will lose the company around $50 million per quarter going forward.
While Rutherford said efforts are under way to salvage the partnership by reducing the cost structure, adjusting programming, and working with payers on reimbursement, HCA's finances may be hindered on two fronts for the foreseeable future—the losses from Valesco and the inflating physician professional fee.
The planned expansions, however, should allow the health system giant to maintain its position in the healthcare landscape.
This year saw leaders take over hospitals with an emphasis on strengthening their workforce.
It’s not an easy time to be taking over as a CEO at a hospital or health system.
A challenging climate though is causing organizations to churn over leadership and longtime CEOs to exit, creating opportunities for fresh faces in new places.
Here’s a look back at how four hospital CEOs took the reins this year and what their mindset was going into their new position.
Airica Steed
The CEO of Cleveland-based MetroHealth became the first woman, Black person, and nurse to take charge of the nonprofit health system near the turn of the calendar.
Steed was also thrust into the role after previous president and CEO, Akram Boutros, was fired for allegedly authorizing himself bonuses without disclosing it, meaning her transition was steeper than usual for a new CEO.
"I have hit the ground sprinting on rollerskates," Steed told HealthLeaders. "It's obviously not the norm in terms of a normal transition, but I'm still encouraged and motivated by it."
Tiffany Miller
At Yoakum Community Hospital, the succession of power was much smoother as Karen Barber ended a 30-year tenure with her retirement, paving the way for Miller to take over in January.
With Yoakum being a rural, 23-bed critical access hospital, Miller identified keeping the workforce strong as a major paint point.
"One of the biggest focus areas for Yoakum is the recruitment and retention of qualified staff; that starts with the culture of our hospital, especially given the current environment of higher labor costs," she told HealthLeaders. "It's about creating an environment where people not only want to be, but they also want to stay."
Joe Perras
Another rural hospital, Cheshire Medial Centner in New Hampshire, saw Perras selected to serve as president and CEO in the summer.
Perras inherited a difficult situation, with Cheshire having ended fiscal year 2022 with a -4.2% margin, $10.8 million in loss, and staff salaries $8 million over budget. Speaking with HealthLeaders, Perras shared how he planned to get the hospital out of the red through rural-specific strategies focused on recruitment and retention.
"There's no plan B for Cheshire County; we are the largest provider of healthcare for our county and serve as a regional referral center," Perras said. "We need to make sure that we shore up our finances, our clinical work, our service lines so that we can keep fulfilling this incredibly critical role for the region."
Michael Charlton
Elsewhere, New Jersey-based AtlantiCare Health System appointed Charlton as president and CEO after he served as a member of the AtlantiCare board of directors for more than 14 years, including six years as board chair.
Echoing what other incoming CEOs this year have said, Charlton highlighted workforce challenges as his and the health system's biggest focus in a conversation on the HealthLeaders podcast.
"We like to say here, 'what's your number one priority' and it's 'workforce, workforce, workforce,'" Charlton said.
As the healthcare industry heads into 2024, the new batch of CEOs will continue to have their hands full while a new wave of leaders enter the scene.
"The pressures have just gotten overwhelming," says one health system CEO.
Healthcare in a post-COVID world has been susceptible to workforce turnover and burnout, but that reality is also hitting those at the CEO level.
For hospitals and health systems, gradually improving but still tight margins are causing organizations to alter their strategy, resulting in churning over of leadership. Meanwhile, longtime CEOs are choosing to step aside and either enter a new chapter of their career or head into retirement.
Whether it's through consolidation, elimination, replacement, or resignation, the faces at the helm of hospitals and health systems are changing.
Through the first nine months of this year, 125 CEO changes took place at hospitals, according to a report from executive coaching firm Challenger, Gray & Christmas. That mark is a 67% increase from the 75 changes that happened over the same period in 2022.
In September alone, hospitals had 24 CEO changes—the second-highest number across the 29 industries and sectors measured in the report, trailing only government/non-profit (28).
What's causing these levels of CEO turnover in healthcare? The steady stream of economic and operational hurdles, said Michael Charlton, new president and CEO of AtlantiCare Health System, on the HealthLeaderspodcast.
"I think there's intrinsic factors when it comes to the CEO level," Charlton said. "Obviously you have the regulatory burden, you have the price pressures, you have the denials and the pre-authorization… there's a multitude of challenges."
Charlton is stepping into the role vacated by Lori Herndon, who retired in June to end a 40-year career at AtlantiCare. As both an incoming CEO and one that replaced a retiring veteran, Charlton is aware of how the current stressors are affecting entrenched leaders and creating opportunities for new ones.
The Challenger, Gray & Christmas report found that 318 CEOs across all industries retired this year, which made up 22% of all exits—slightly down from the 24% of CEO retirements last year.
"Sometimes when the deck is stacked against you in such a continuous manner, it gets hard to remember the purpose of why you're doing what you're doing every day," Charlton said.
"With all the pressures that the CEO faces, if there's an opportunity to transition out because we've had a very successful career over a long period of time and you feel that somebody is in a better position to serve the organization, that's a lot of it. The pressures have just gotten overwhelming."
How hospitals can respond
Refreshing leadership can often be beneficial for organizations, but having stability and continuity, especially at a time when turnover is high, can be a steadying force.
For example, Tampa General Hospital recently agreed to a 10-year contract extension with president and CEO John Couris after six years of service. The agreement created one of the only 10-year CEO contracts in healthcare.
"What they were thinking is how do we lock down a CEO that is probably at the apex of his career?" Couris said. "How do we create consistency, continuity, and stability in the organization? How do we create as much stability for the next decade as possible, given the fact that there's a lot of movement in the industry?"
Not every hospital can necessarily offer that kind of commitment, but there’s no reason why organizations can’t have a succession plan in place, whether that’s in preparation for a planned exit or to mitigate an unexpected change.
Identifying and developing leaders early can pay dividends later when an opportunity arises to advance in-house talent. Hospitals can evaluate not just the CEO position, but the entire C-suite annually to find out which executives have the potential to step up into the CEO role if the current CEO departs.
In the case of an upcoming retirement, tab a leader and have them work closely with the outgoing CEO to ensure a similar vision and approach is maintained in the new regime. In some cases, multiple C-suite executives may be nearing retirement at the same time. To deal with that, hospitals should get ahead of a massive changeover by attempting to stagger exits.
As for the CEO turnover that hospitals choose to create, organizations should be aware that a change in strategy may require a runway and allow their CEO the time and resources to see it through. Putting a CEO in the best position to succeed by surrounding them with the right leadership team and instilling confidence can mutually benefit both the CEO and the company.
Of course, even as the CEO position experiences change, other areas of the healthcare workforce remain in flux and that's something Charlton doesn't want to lose sight of.
Nurses and other clinicians continue to be vulnerable, which is why CEOs have had to manage the effects on their workforce while also dealing with it personally.
"We're all facing it," Charlton said. "It's just more magnified at the CEO level."
One partnership is just beginning while the other has so far been a drain on earnings.
Two recent and notable joint ventures by health systems will be worth keeping an eye on as the calendar flips.
Henry Ford Health signed an agreement last month with Ascension Michigan that will bring the latter's southeast Michigan and Genesys facilities and assets under Henry Ford's.
Meanwhile, HCA Healthcare's joint venture with physician staffing firm Valesco, which it acquired a majority stake in earlier this year, is having a sizeable impact on its bottom line.
Here's a look at what each joint venture means for the respective health systems, both now and going forward.
Henry Ford Health and Ascension
Essentially, the move creates a combined organization with over $10.5 billion in annual operating value that will keep the Henry Ford Health brand and headquarters in Detroit.
Henry Ford Health president and CEO Bob Riney will lead the new system, which will employ approximately 50,000 people across more than 550 sites of care, while the board of directors will be represent both systems.
The nonprofits said that the agreement is not a merger or an acquisition and that no cash transaction will take place. The deal, which includes all of Henry Ford Health's acute care hospitals and other care facilities and assets, including Health Alliance Plan, is expected to close in summer 2024 pending federal and state regulatory reviews.
The agreement creates a fully integrated healthcare delivery network that will offer "exceptional performance in quality, safety, and service" while "expanding access to care, lowering costs, and improving health outcomes," the organizations said.
For Ascension, the move allows the St. Louis-based hospital operator to benefit from the combined operating revenue and Henry Ford Health branding after facing financial struggles in fiscal years 2022 and 2023. For this past year, Ascension posted a net loss of $2.7 billion and an operating loss of $3 billion as it dealt with high expenses and sustained revenue challenges.
In an effort to bolster margins, Ascension also sold Providence Hospital to the University of South Alabama for $85 million earlier this year and gave up 50% of its stake in insurer Network Health to Milwaukee-based Froedtert Health.
For Henry Ford Health, the joint venture adds locations under its name and extends its reach in the community. Through the first half of this year, the health system reported consolidated operating income of $42.6 million, an improvement from the $74.8 million in operating loss during the first six months of 2022.
HCA
The joint venture by HCA, on the other hand, is already creating a headache for the giant health system less than a year into the deal.
The health system giant revealed that its partnership with Valesco cost the company approximately $100 million its adjusted EBITDA for the third quarter and year-to-date basis, while resulting in around $50 million lost per quarter in the near future, CFO Bill Rutherford told investors on a call.
HCA acquired 90% of Valesco earlier this year through an agreement with now bankrupt Envision Healthcare to fortify its physician roles and eventually deliver significant revenue. Instead, the joint venture has so far fallen short of expectations by a wide margin.
HCA leadership said that as they started to see claims paid, the revenue was at a lower rate than they anticipated. To address the results, Rutherford pointed to efforts to reduce the cost structure, adjust programming, and work with payers on reimbursement. He also mentioned that with HCA's increased position, they now manage the entirety of the revenue cycle which puts them in a better position to assess trends and respond to them.
CEO Sam Hazen stood behind the decision to form the joint venture, saying: "It is important to understand that we believe the decision to consolidate Valesco was strategically imperative in maintaining the overall competitive positioning and capacity offerings of the company. As has been the case historically with our teams, I am confident that we will find a pathway forward to mitigate the impact it has had on our results."
Considering financial headwinds and the general state of hospitals across the country, HCA's finances are still holding up—it reported net income of $1.08 billion, compared to $1.13 billion over the same period last year.
However, if the results from Valesco don't turn around over the next year, look for HCA to potentially pursue other dealmaking to balance out their earnings or find a way to cut their losses.
How leaders of hospitals and health systems are being paid is affected by the current financial climate.
A competitive talent market coupled with the thin operating margins is causing hospitals to rethink how they compensate their leaders.
Retaining and recruiting executives, however, remains a priority for CEOs, who continue to deal with the financial and operational ramifications of workforce turnover.
The challenging environment though has led to modest increases in executive compensation for the year, according to a report from consulting firm SullivanCotter, which surveyed more than 3,100 organizations representing nearly 42,000 individual incumbents.
Based on the report and other rumblings, here are three trends on executive pay for CEOs to monitor heading into 2024.
Base salaries going up
Hospitals and health systems understand that keeping and attracting talent requires renewed commitment on their end, which has taken the form of higher base salaries.
For 2023, the year-over-year median base salaries for all executives increased 4.1%, compared to 4.3% in 2022, the report found. Whereas health system executives saw increases of 4.8%, subsidiary hospital executives experienced increases of 3.9%, adhering to a trend that has been present over the past several years.
The roles within health systems that showed median base salary increases of 5% or higher tended to focus on strategy/planning, technology, financial sustainability and risk, integration, and workforce strategy.
CEOs must anticipate base salaries continuing to rise along these lines in 2024 and be prepared to compensate executive as such, even in the midst of financial unrest.
Incentive awards stagnating
Where hospitals and health systems are scaling back in executive pay, to offset the rise in base salaries, is with incentives and bonuses.
Due to a dip in incentive plan payouts in 2022, the year-over-year increase in 2023 total cash compensation (TCC) was lower than the increase in base salaries, the report revealed. Health system executives saw TCC levels increase by 3.5%, compared to their increase of 4.8% in base salaries.
As incentives are tied to the performance of organizations, CEOs have had to be cautious in extending TCC while margins stabilize. CEOs can still offer incentives, but they should be strategic by rewarding top performers and focusing incentive plans around priority areas to improve operations.
CEO pay draws scrutiny
Between recent workforce strikes and criticism of nonprofit hospitals, CEO pay has recently come under fire.
The issue has reached Capitol Hill as Sen. Bernie Sanders, I-Vt., took aim at community benefits and CEO compensation provided by nonprofits through a report by the Senate Health, Education, Labor and Pensions committee.
"While these hospitals provide woefully insufficient care to the patients most in need, they provide massive salaries to their top executives," the report stated. "In 2021, the most recent year for which data is available for all of the 16 hospital chains, those companies' CEOs averaged more than $8 million in compensation and collectively made over $140 million."
The American Hospital Associated denounced the report's argument on community benefits but didn't respond to the criticism regarding CEO pay.
The more unrest there is in the workforce, the more under the microscope CEO salaries will be. CEOs must be ready to stand by their pay, while also being cognizant of the perception from both outside and inside their organization. Assessing employees' level of satisfaction with their compensation and proactively addressing it can potentially avoid further friction.
As workforce unrest takes hold, physician groups look toward unionization.
Workforce unrest in healthcare has been building since the pandemic and it doesn't appear to be calming down anytime soon.
Through several strikes, organized labor is making its presence felt and it's coming during a period in which hospitals and health systems are already stretched thin financially and operationally.
CEOs must be ready to respond to unionization and, ideally, focus on preventing them in the first place, especially as unionization is spreading across the healthcare workforce with greater physician involvement.
A sign of things to come?
In the latest example of bubbling frustration among healthcare workers, around 400 physicians and 150 nurse practitioners and physician assistants across more than 50 clinics operated by Allina Health voted to unionize earlier this month. The vote, which was 325 to 200, according to the National Labor Relations Board, creates what is believed to be the largest group of unionized private-sector physicians in the country.
The union will be represented by the Doctors Council, an affiliate of the Services Employees International Union, which said in a statement on its website: "This is a win not only for the doctors that stood together and the supporters who rallied alongside them but also for the patients and the communities they serve."
Allina said it is not going to appeal the outcome of the vote to the National Labor Relations Board. In response to the vote, Allina said in a statement: "While we are disappointed in the decision by some of our providers to be represented by a union, we remain committed to our ongoing work to create a culture where all employees feel supported and valued. Our focus now is on moving forward to ensure the best interests of our employees, patients and the communities we serve."
Allina's employees unionizing may not be the most indicative of what other organizations could be in for going forward. The health system has been dealing with a range of operational challenges, from posting an operating loss of $122.7 million in the second quarter to ending a controversial policy that restricted care to patients with medical debt after facing public scrutiny.
Yet, the reasons for Allina's physicians choosing to unionize are also present everywhere: understaffing, burnout, administrative burden, and compromised care quality.
Similarly, resident physicians at George Washington University in Washington, D.C., voted to unionize earlier this year, citing pandemic burnout.
By addressing issues such as burnout, or at least showing your workforce you're willing to, CEOs will give employees less incentive to organize.
Prevention is the best medicine
Most of the time when unions form, the assumption is that compensation is the driving factor. While pay is often a sticking point for workers, it is usually in combination with another problem that creates dissatisfaction, such as extended hours on the clock.
Undoubtedly, CEOs must invest in their employees with competitive salaries and benefits to retain talent, but they should also invest in areas to improve efficiencies and reduce workload. Revenue cycle, for example, has opportunities for implementing technology that can both save time for physicians and help an organization's bottom line.
Outside of financial and operational investment, CEOs need to focus on personal investment to keep employees happy and feeling respected. Something like an employee recognition program or other benefits that extend beyond the workplace can go a long way.
Another way CEOs can really stay ahead of the game is by empowering their workers, especially physicians. Larger health systems may be more susceptible to unionization due to consolidation cutting down on independent practices and as a result, taking decision-making out of doctors' hands.
Encouraging physician leadership and valuing input allows doctors to feel like they have a say in how their patients are cared for.
Joe Perras, CEO of Cheshire Medical Center, recently toldHealthLeaders: "We need to make sure that we are doing everything we can to improve employee engagement across our hospital. Engaged employees provide higher quality, safe care than unengaged employees. People who believe in the mission will give their all to take care of patients, and we need to foster that."
A union formed. Now what?
If a petition is handed in and a union forms, it can feel like a loss, but the situation is far from unsalvageable.
Once this happens, CEOs need to shift from a proactive mindset to a reactive one. Now, it isn't just about assessing ways to improve the environment for employees, but addressing specific concerns or demands.
Most importantly, CEOs must maintain good working relationships with unions. The greater the friction and tension, the harder it gets to negotiate and find middle ground. Effective, good faith communication can be the difference in trading one demand for another.
Also, be aware of how agreeing to a union's ask will affect the rest of the organization. In the case of the recent Kaiser Permanente strike, the union stood firm on protecting the revenue cycle workforce from outsourcing. Kaiser agreed to that in the new deal, which means it will now have to find other ways to save on costs within revenue cycle, such as implementing automation.
Whether a union forms or not, CEOs should have an idea of where their organization's vulnerabilities lie, what their stance on certain issues are, and whether there's wiggle room to adjust.
This article has been updated to reflect Allina's decision not to appeal the vote of its members to unionize.
Despite overall hospital margins improving, many health systems remain in need of a lifeline.
As more hospitals feel the constraints of financial pressures, they're turning to dealmaking to alleviate costs.
Health system mergers and acquisitions are continuing to trend toward pre-pandemic levels, but the volume of transactions doesn't necessarily indicate improved financial health. Rather, several of the recent deals have been driven by financial distress, as well as issues sustaining higher occupancy levels, according to a report by Kaufman Hall.
Eighteen transactions were announced in the third quarter, easily clearing the 10 deals over the same period in 2022 and the seven deals in Q3 2021. Of the 18 transactions from July through September of this year, seven involved a hospital or health system that cited financial distress as a driving factor for the deal, Kaufman Hall stated.
While hospitals as a whole are seeing margins stabilize the further back the pandemic is in the rearview mirror, that doesn't mean every facility is enjoying the same financial relief. Kaufman Hall's latest National Hospital Flash Report showed the median year-to-date operating margin index increasing from 0.9% in July to 1.1% in August, with net operating revenue increasing 8% month-over-month and gross operating revenue rising by 9%.
However, as Kaufman Hall's report over the summer noted, the gap between performing and struggling hospitals has widened, creating a haves and have-nots dichotomy. That divide is creating a more robust environment for M&A, with health systems in need of a lifeline seeking out partners with increased financial flexibility.
Kaufman Hall's M&A report revealed that only one of the transactions in the third quarter was considered a "mega merger," or a deal in which the smaller party has annual revenues above $1 billion. Total transacted revenue was $8.2 billion, which was down significantly from Q2's figure of $13.3 billion, but the drop-off was due to the second quarter having three mega mergers announced.
"When removing the mega mergers from each quarter, the average revenue in Q3 was actually significantly higher than that of Q2, at $243 million and $159 million respectively, demonstrating the significant uptick in activity in sizeable independent hospitals seeking out partnerships with larger organizations," the report said.
Fourteen of the 18 transactions in Q3 featured nonprofit acquirers, with half of those being academic or university-affiliated health systems. While many health systems have seen patient volume slowly creep back up to pre-pandemic levels, academic health systems are experiencing higher occupancy levels, with a recent Kaufman Hall report showing a median inpatient occupancy rate of 70% at academic health centers, compared to 53% at acute-care hospitals.
"Aligning an academic health system with a community-based health system provides the opportunity to relieve some of the occupancy pressures at the academic flagship hospital by utilizing available space in high-quality community hospitals to treat lower acuity patients," the report stated.
"An academic/community health system pairing also offers expanded opportunities for residency programs, clinical research trials, and patient access to tertiary and quaternary services."
Looking forward, CEOs should be prepared for increased scrutiny on transactions with new proposed merger guidelines issued by the Federal Trade Commission and the Department of Justice, Kaufman Hall warned.
However, hospitals recently secured a major win against regulatory requirements for dealmaking when a U.S. district judge ruled in favor of LCMC Health's purchase of three Tulane University hospitals from HCA Healthcare. The ruling granted the health system's request for a summary judgement that the transaction was exempt from federal antitrust laws due to Louisiana's issuance of a state certificate of public advantage (COPA). The FTC has lobbied against COPAs, which are currently present in 19 states.
The company released its fourth quarter earnings and financial outlook for 2024.
Walgreens plans to shut down 60 VillageMD clinics and exit five markets next year in an attempt to cut at least $1 billion in costs as it pivots in strategy with a new CEO.
Two days after naming Tim Wentworth CEO, the drugstore chain released its fourth quarter earnings report, showing a net loss of $3.1 billion for the year, compared to net earnings of $4.3 billion for the 2022.
"Our performance this year has not reflected WBA's strong assets, brand legacy, or our commitment to our customers and patients. In just six weeks, we have taken a number of steps to align our cost structure with our business performance, including planned cost reductions of at least $1 billion, and lowered capital expenditures by approximately $600 million," interim CEO Ginger Graham said in the release. "We anticipate seeing the impact of these actions in fiscal 2024, beginning in the second quarter."
Graham also said the company is "intently focused on accelerating our profitability in the U.S. Healthcare segment," which will be helped by the closing of 60 underperforming VillageMD clinics in 2024, Walgreens leadership revealed on a call with investors.
The U.S. Healthcare division consists of primary care provider VillageMD, at-home care provider CareCentrix, specialty pharmacy Shields Health, and Walgreens Health.
While pro forma sales for the quarter grew 17% for VillageMD, 24% for CareCentrix, and 29% for Shields, the unit as a whole reported an adjusted operating loss of $83 million.
"While we have made progress on the build-out of our healthcare business, we are not satisfied with the near-term returns on our investments," John Driscoll, president of U.S. Healthcare, said on the call. "We will continue to grow in 2024, but with a renewed focus on more profitable growth."
He added: "VillageMD, Summit Health, and CityMD will be the most meaningful drivers of growth in fiscal 2024. It has taken us longer than anticipated to realize the cost synergies across the combined assets."
For the fiscal year 2024, Walgreens said it expects adjusted earnings per share to be between $3.20 to $3.50, coming in below analyst forecasts of around $3.70.
Graham highlighted three near-term operational priorities for the company going forward: supporting customer-facing activities, "scrutinizing every penny of spend that does not directly benefit the customer," and improve cash management.
Wentworth will be at the helm of the company, effective October 23, as it takes these steps to drive towards profitability.
Speaking on the call, Wentworth said: "Walgreens was built on convenience, access, and trust and has unique advantages in today's healthcare environment. I see the opportunities before us to build on our pharmacy strength and our trusted brand to evolve healthcare and the customer experience to deliver better outcomes at a lower cost."
