Healthcare may see more divestures and realignment going forward, says PwC.
After a decline in 2023, healthcare deal volumes may be on the rise in the coming year.
Financial headwinds such as interest rates and regulatory concerns have slowed down dealmaking, but thanks to factors indicating increased activity in the near future, the outlook for 2024 health services deals is “cautiously optimistic,” according to PwC.
The professional services firm’s deals outlook report noted that transaction volume through November 15, 2023, fell 13% year-over-year. However, 2021 and 2022 are considered outlier years for the record volume they experienced. When compared to the annual levels seen from 2018 through 2020, this past year’s volume was nearly twice the average.
“The declines in sector transaction volumes are consistent with the broader macroenvironment but remain generally in line with 2021 levels,” said Nick Donkar, US Health Services Deals Leader for PwC. “Non-traditional cross-sector partnerships continue to be a strategic focus of many health systems and strategic assessments persist in driving more divestitures and realignment in the sector. While financing challenges persist, the sector’s resilience continues to make it ripe for increased transaction volumes in 2024.”
Here are three deal drivers in 2024 highlighted by PwC:
Opportunistic funding
Though financial challenges persist, investors are finding creative ways to fund and execute deals. PwC reports that it has seen increased use of continuation funds and special purpose vehicles through which sponsors are exiting some of their equity.
Meanwhile, healthcare venture capital fundraising is on pace to exceed 2022 levels and private equity sector fundraising is flowing freely. Cash levels also remain significant, even if public valuations have underperformed.
Need for reinvention
Traditional providers and organizations are feeling the heat from disruptors, but it’s forcing them to strategize and identify ways to grow. More value is being placed on deals that invest in speed and resiliency to respond to convenient retail offerings.
Nonprofit organizations like health systems are cross-collaborating with for-profit entities in areas such as value-based care and less intensive services to shift care outside the hospital.
Regulatory effect
While increased regulatory scrutiny of deals has the potential to derail some transactions, other regulatory impacts could create opportunities for investment. For example, inadequate reimbursements rates coupled with reduced Medicaid enrollment and rising costs may put providers in a precarious position, making them targets for acquisition.
How regulations influence Generative AI is yet to be seen, however. Depending on how patent rights are shaped, GenAI could drive deal activity in its own right.
Healthcare is one of the industries facing increased scrutiny over dealmaking.
If it feels like healthcare transactions are under the microscope more now than ever, that’s because the Federal Trade Commission (FTC) is indeed cracking down to a level not seen in some time. Two decades, to be exact.
The regulatory climate hasn’t exactly slowed down the rate of hospitals agreeing to deals, but it is making life harder for organizations pursuing consolidation—a strategy that hospitals will continue to heavily explore heading into 2024 as they battle thin margins.
The FTC and Department of Justice (DOJ) released their Hart-Scott-Rodino Report, which revealed that 3,152 transactions were reported in the fiscal year 2022. That figure is the second-highest number of reported transactions over the past 10 years and more than 62% above the prior decade average.
Together, the FTC and DOJ filed 50 merger enforcement actions, representing the highest level of enforcement activity since 2001, when 55 merger enforcement actions occurred. The FTC alone accounted for 24 of the challenges in 2022: 11 in which it issued final consent orders after a public comment period, seven in which the transaction was abandoned or restructured as a result of antitrust concerns raised during investigation, and six in which the agency initiated administrative or federal court litigation.
In a statement to Congress regarding the report, FTC chair Lina Khan, joined by commissioners Rebecca Kelly Slaughter and Alvaro Bedoya, said: “The stakes here are real for the American people. We have heard from a wide breadth of people about how consolidation directly threatens their ability to live stable and secure lives.”
The FTC representatives pointed to the significant increase in transactions, as well as their complexity and scale.
“Transactions have also grown increasingly complex, in both deal structure and potential competitive impact,” they said. “Investment vehicles have changed, alongside major transformations in how firms compete in today’s economy. The size of mergers has likewise substantially grown.”
To help with the burden the level of activity is placing on the agency, the representatives asked Congress for additional resources and an update to the HSR Act. Specifically, the FTC wants to extend the 30-day window the agency is allowed to determine whether a deal warrants close investigation, along with the 30-day timeline after the merging parties certify they have “substantially complied” with the inquiry.
“Accordingly, these timelines are challenging in ordinary times given the agencies’ tight resources, and the recent deal surge has further underscored their inadequacy,” the representatives said.
Just days before releasing the report and statement, the FTC and DOJ issued their final 2023 merger guidelines to create a framework that more aligns with current M&A court rulings.
Retaining and attracting talent remains a priority for organizations.
Hospitals and health systems are finding ways to offer improved compensation and benefits to employees despite feeling the pressure to keep costs down.
As workforce turnover continues to plague organizations, hospital leaders are recognizing the value of investing in their staff with the thinking that the long-term dividends will outweigh the short-term costs.
According to a survey by Aon, 70% of hospitals implemented or bolstered sign-on bonuses in the past year, while 59% increased new hire pay, 54% increased their minimum wage scales, and 52% increased or added referral bonus programs.
The professional services firm released its annual Benefits Survey of Hospitals, which provides key findings for 160 health systems and 1,400 hospitals between April and June 2023.
The results also revealed that 62% of hospitals reported increased turnover among nurses, 41% experienced higher exits among non-physician clinical positions, and 22% dealt with physicians departing more often than the previous year. Turnover happened most often among staff with one to three years of tenure, the hospitals said.
Combating that level of turnover can feel like an uphill battle. With margins being thin and labor costs at the forefront of every CEO and CFO’s mind, hospitals leaders are getting creative to reward their employees in ways that are less detrimental to the bottom line.
Aon’s survey found that 95% of hospitals are offering tuition reimbursement programs, 93% are offering flexible work options, 84% are offering personal level, 80% are offering financial wellness/planning, 64% are offering gender-affirming benefits, 57% are offering enhanced behavioral health benefits, and 53% are offering paid parental leave beyond state and city mandates. A minority of the hospitals surveyed, meanwhile, are offering other premium benefits such as reduced hours for benefits eligibility (45%) and on-site daycare (28%).
Improving employees’ health benefits is another strategy organizations are pursuing. Of the hospitals surveyed, 82% aim to pay 76% or more of their workers’ healthcare costs, while 13% offer a no-cost health plan option to some of their employees.
Offering these types of benefits can be valuable for hospitals who are more restricted in their financial flexibility or are competing for talent in rural areas. Joe Perras, president and CEO of Cheshire Medical Center in Keene, New Hampshire, recently toldHealthLeaders that to survive as a rural hospital, his organization has to “kind of thread the needle and make sure that we can provide competitive wages so that we're not losing the limited staff that we do have to other folks in the market.”
Even with the efforts to keep their employees happy, hospitals remain concerned about their workforce heading into 2024. Two of the top concerns surveyed leaders have are offering competitive total rewards to attract and retain talent (85%) and increasing healthcare costs for the health system (85%).
Reconciling those concerns will continue to be a balancing act for hospitals for the foreseeable future.
Michael Charlton shares his views on how health systems can deal with and benefit from disruptors.
If you’re a leader in charge of a healthcare organization, there’s a good chance you’ve been thinking a lot recently about what disruption in the industry will mean for you.
Whether it’s bad or good is really in the eye of the beholder if you’re a provider. For Michael Charlton, new CEO of AtlantiCare Health System, disruptors give hospitals “guidance on what the consumer wants,” he recently told HealthLeaders.
At the same time, Charlton also recognizes that health systems have the human capital and infrastructure, which will always give them the edge on the inpatient side of the business. Still, providers can’t suffer from complacency and have to continue finding ways to make care convenient for patients.
Watch Charlton opine on the state of disruption in healthcare in the video below.
The health systems decided not to fight regulators in court.
Chalk up another victory for the Federal Trade Commission and another defeat for hospital dealmaking.
A court ruling wasn’t even necessary this time around as John Muir Health and Tenet Healthcare called off their agreement for the former to acquire San Ramon Regional Medical Center due to the FTC’s motion to block the deal.
The health systems said in a statement that they chose to not challenge the agency in court because of the length of time and costs a legal battle would require. While the FTC may have been able to persuade a court that the deal would have eliminated competition and led to higher prices, the agency’s ability to kill a deal without a legal decision by applying pressure alone is discouraging for hospital M&A.
The agreement would have given John Muir, which already held a 49% stake in San Ramon Regional since 2013, the remaining 51% from Tenet for $142.5 million.
After the health systems called off the deal, the FTC moved to dismiss their case challenging the transaction.
“The FTC has scored another major health care win in less than a month, delivering patients in California continued access to quality, affordable health care services. John Muir’s anticompetitive hospital takeover would have driven up health care costs for critical services like heart surgery, spinal surgery, and maternity care,” Bureau of Competition director Henry Liu said in a statement. “It also threatened to eliminate improvements in care driven by competition, which directly benefit patients.
“Now that this transaction is terminated, John Muir and Tenet’s San Ramon Regional Medical Center can continue competing head-to-head to offer high-quality care at the best prices for Californians in the I-680 corridor.”
The FTC and the Justice Department also jointly issued the 2023 merger guidelines, which describe what the agencies consider when reviewing mergers and acquisitions.
The new guidelines modify the draft merger guidelines that were released in July and “emphasize the dynamic and complex nature of competition ranging from price competition to competition for the terms and conditions of employment, to platform competition.”
The event brought shared viewpoints among emerging leaders to the forefront.
Some of healthcare’s future leaders convened at the HealthLeaders UpNext Exchange in Austin, Texas to share their perspective on how the industry can best adapt in the face of its many challenges.
The overarching sentiment at the two-day event, which featured 18 leaders from various organizations and in different positions, was that the approach to solving healthcare’s biggest issues must change to keep up with healthcare itself being ever-changing.
Here are three common ideas we heard at the Exchange:
Get back to basics
As much as the current climate requires some new solutions, the leaders agreed that a “back to basics” approach can go a long way to shoring up areas that don’t need to be reinvented.
In a post-COVID world, organizations need to get their muscle memory back—things that were automatic before are now forgotten or suffering from complacency.
Manging labor is one of those areas. After being infused with money by the government during the pandemic, hospitals have relied too heavily on labor cost structures that are now creating problems due to margins being thin. Contract labor, for example, no longer has the same viability as it did when patient volume was through the roof.
The pandemic taught valuable lessons, but as circumstances return closer to a pre-COVID world, organizations must get back to what worked well in the past—not just strategies, but also mindsets.
Embrace technology
It’s almost impossible right now to operate in healthcare—or any industry for that matter—and not be looking for ways to integrate technology to improve workflows and outcomes.
However, many of the leaders at the Exchange expressed that organizations are perhaps still too hesitant on fully committing. Hospitals may be investing in technology but if it’s in a tepid way and without choosing a defined direction, they’ll likely not realize the true returns on their investment. That could cause organizations to be stuck in an investment loop as new technology continues to come along.
Instead, don’t be afraid to play out the string and see just what your investment gets you. Even if it doesn’t work out, trusting the process will allow you to make more informed decisions with future investments.
The leaders recognized that something like AI can significantly ease the load on an organization’s workforce by reducing time and burden associated with administrative tasks. That type of technology can’t be optimized to supplement the workforce though if hospitals don’t educate their staff and have the right people in place to manage it. All that takes a buy-in from organizations—something they have almost no choice but to do going forward.
Be willing to try and fail
Whether it’s investing in technology or implementing any other strategy, the leaders were adamant that organizations must be ready and willing to try new things—and not be scared off by failure.
The standard three to five-year plan isn’t tenable anymore, not with C-suites in constant flux and experiencing rapid turnover. The quicker organizations can roll out solutions, the quicker they can get hard data back and learn what is working and what isn’t. Iterate, don’t stagnate.
That type of culture needs to be built, however, and it starts with the biggest voices in the leadership room. The leaders at the Exchange may get that opportunity for themselves soon, but for now they’re eager to contribute however they can to taking healthcare in a new direction.
The 2024 HealthLeaders UpNext Exchange is sponsored by Collette Health.
New data reveals the industry is experiencing the third-most reductions in 2023.
Jobs are being cut at the highest rate since the height of the COVID-19 pandemic and healthcare is one of the sectors suffering the most, according to a report by Challenger, Gray & Christmas.
Healthcare/products, including hospitals and manufacturers, announced 57,758 cuts from January to November, marking a 99% increase over the 29,031 jobs cut during the same period in 2022. The reductions are coming as hospital and health system leaders attempt to scale back on labor costs and find new ways to solve workforce challenges.
The only industries that have cut more jobs than healthcare this year are technology, which slashed 163,562 jobs, and retailers, which scaled back 78,730 jobs.
Across all sectors, companies announced plans to cut 686,860 jobs, a significant jump from the 320,173 cuts over the same period last year for a 115% increase. It is the highest figure since January to November 2020, when 2,227,725 jobs were lost in large part due to the pandemic. Pre-COVID, this year's total is the highest since 2009, when 1,242,936 jobs were cut during the Great Recession.
For healthcare, November did bring an upswing in job growth as the industry added 77,000 jobs, well above the 54,000 average monthly again over the past 12 months, according to the Bureau of Labor Statistics. Within that total, ambulatory care services accounted for 36,000 new jobs, hospitals accounted for 24,000, and nursing and residential care accounted for 17,000.
Keeping the workforce strong is arguably the primary focus for decision-makers right now, but labor expenses are making that difficult to achieve. Heading into 2024, CEOs and CFOs will continue to have costs on their mind as they shape their approach to retain and supplement their workers.
Whether it's investing in technology to bring more automation into operations, or strategically utilizing attrition to make the workforce leaner and more efficient, leaders must weigh where and how to slim down.
Dr. Boris Pasche is taking advantage of his past experience in his role.
New Karmanos Cancer Institute president and CEO Dr. Boris Pasche is less than six months into his tenure, but his clinical background is both easing his transition and paying off for the organization.
Pasche recently joined the HealthLeaders Podcast and spoke about his experience wearing many hats, including physician, researcher, and cancer treatment inventor.
In the following video, Pasche explains how that background has benefited him as a CEO—particularly one in cancer care—by allowing him to tap into a large network of other physicians that he can work alongside or recruit, giving him a strong understanding of the landscape.
The divesture is one of several the health system pursued in 2023 to ease its finances.
Community Health Systems (CHS) was aggressive as a seller this past year in the face of financial turbulence.
The for-profit system's latest deal, a sale of three Florida hospitals to Tampa General Hospital for $294 million, closed earlier this month to give CHS additional resources as it attempts to claw out of the red in 2024.
In the transaction, 120-bed Bravera Health Brooksville in Brooksville, 128-bed Bravera Health Seven Rivers in Crystal River, and 124-bed Bravera Health Spring Hill go to Tampa General Hospital, along with their associated assets, physician clinic operations and outpatient services.
The move followed a string of sales by CHS in 2023. The system agreed to sell two North Carolina hospitals to Novant Health for $320 million in February before signing a deal to sell an El Dorado-based single hospital to South Arkansas Regional Hospital in April. CHS also completed a $92 million sale of a West Virginia hospital to Vandalia Health after agreeing to the transaction in January.
In the second-quarter earnings call with investors, CHS CEO Tim Hingtgen said the divestures "enable us to deliberately focus our resources in markets that we aim as most investable and that can produce greater growth and returns over the long term."
CHS will hope that by trimming down its portfolio and shifting its full focus onto key markets that it can turn around its margins heading into the new year.
The system's recent earnings report revealed it suffered net losses for the third-straight quarter, despite rising patient volume and efforts to bring down labor costs.
"Inflationary pressures continue to impact operating expenses and margins," Hingtgen said on the third-quarter earnings call. "While we remain highly confident in the potential of our overall portfolio, the growth in margin development opportunities in a small number of markets have been hindered in this rising cost environment. We are taking swift and necessary steps to mitigate these headwinds."
After signaling a desire to sell in 2023, CHS may not be done exploring opportunities entering the coming year.
The inaugural event is bringing together a diverse group of healthcare's finest in Austin, Texas.
The coming wave of healthcare leaders discussed the industry's foremost challenges and new approaches to tackling them at the first HealthLeaders UpNext Exchange.
Through day one at the two-day event in Austin, Texas, the 18 participating leaders shared their personal views and experiences dealing with the same pain points that are keeping CEOs, CFOs, and other c-suite executives up at night—but with a fresh outlook steadfast in its belief that the status quo is no longer enough.
The inaugural honorees consist of physicians, nurses, pharmacists, finance leaders, attorneys, and administrators representing organizations ranging from a 35-bed rural community hospital to a large regional health system with more than 80,000 employees.
Whereas other HealthLeaders Exchange events bring together leaders in the same role or discipline, the UpNext Exchange features a diverse group with voices in different areas of the industry, creating an environment rich with new thoughts and ideas.
Whether the topic was workforce, disruption, or technology, the leaders spent the first day stressing that the mindset for solving healthcare's biggest problems must evolve. In a post-COVID-19 world, the same strategies and way of thinking that may have worked in the past aren't necessarily the most effective now or going forward.
The pandemic has also put the entire industry on the defense or in crisis mode, which has hampered innovation. That reality forced the leaders to consider how they can get back to strategizing and revamping—while continuing to put out fires instead of waiting for them to dissipate.
Where and how technology fits into that was another major talking point, particularly in relation to the workforce. As the presence of AI and automation continues to grow, healthcare must find the most effective way to utilize that technology to supplement the workforce, not just replace it.
Stay tuned for more coverage of the UpNext Exchange, which will include ideas from day two in a full recap of the event.
The HealthLeaders Exchange is an executive community for sharing ideas, solutions, and insights. Please join the community at our LinkedIn page.
Join us for the next HealthLeaders Exchange!To inquire about attending a HealthLeaders Exchange event, email us at exchange@healthleadersmedia.com.
The 2024 HealthLeaders UpNext Exchange is sponsored by Collette Health.
