This past year saw 17 private equity-owned companies in healthcare filing for bankruptcy.
The numbers are clear—more and more bankruptcies happening in healthcare are related to private equity.
According to research by the Private Equity Stakeholder Project, 17 of the estimated 80 healthcare bankruptcies in 2023 involved companies backed by private equity firms.
That figure is more than twice the number of cases in 2019, illustrating the growth of private equity’s presence in recent years, as well as the shift towards more negative outcomes.
The fate of three Connecticut hospitals remains up in the air.
Yale New Haven Health is suing Prospect Medical Holdings to exit its acquisition of three Connecticut hospitals, alleging that a breach of contract has changed aspects of the deal.
If the transaction passes, trio of hospitals—Manchester Memorial, Rockville General, and Waterbury—would return to nonprofit status and gain financial stability. However, Yale is arguing that Prospect has failed to hold up its end of a purchasing agreement signed in October 2022 that was contingent on certain commitments.
Those requirements included protecting patient and employee personal data, remaining current on all payment obligations, and meeting all state and federal regulations.
Instead, Prospect allegedly hasn’t paid physicians and vendors, struggled with cybersecurity, neglected the upkeep of facilities, and more.
“Prospect and the Selling Entities have subjected the Businesses to a pattern of irresponsible financial practices, severe neglect and general mismanagement,” the complaint said.
After initially agreeing to a sale for $435 million, the two sides had been working on a revised figure following Prospect’s breaches.
“Prospect has refused to negotiate in good faith,” Dana Marnane, a Yale spokesperson, told the CT Mirror in a statement. “Yale New Haven Health has remained committed to the success of the transaction, cooperating with the Office of Health Strategy and engaging in good faith discussions to attempt to reach an agreement with Prospect. Despite numerous notifications by Yale New Haven Health that Prospect has failed to uphold the [contractual] obligations and closing conditions, Prospect has refused to acknowledge and address these breaches.”
In response, Prospect claims that it offered Yale a “good-faith price reduction” after the purchasing the party couldn’t secure a $80 million grant from the state. Prospect also stated that its hospitals’ patient volumes and finances have greatly improved.
"This lawsuit is a blatant, 11th hour attempt by Yale Health to back out of the commitment they made more than two years ago to the communities served by Prospect's Eastern Connecticut Health Network facilities and Waterbury Hospital," Prospect’s statement said. "Prospect believes Yale is in breach of the asset purchase agreement that was signed by both parties more than two years ago, and we will be seeking legal remedies, including completion of the transaction, to ensure Yale keeps its word to our communities."
Reducing labor expenses remains a point of emphasis for hospital leaders.
UPMC is laying off around 1,000 employees, or approximately 1% of its workforce, as the Pittsburgh-based health system aims to slash expenses and improve its bottom line.
As rising labor costs continue to plague hospitals, many operators are downsizing staff, particularly on the non-clinical side.
That’s where UPMC’s layoffs will be focused with the nonprofit mostly cutting non-clinical and administrative staff, UPMC chief communications officer Paul Wood said in a statement. The reductions also entail closing unfilled positions through attrition and eliminating redundancies.
“The entire health care industry continues to face the realities of a still evolving, post-pandemic marketplace,” Wood said.
The 40-hospital system experienced an increase in labor costs by 6.4% to $9.7 billion in 2023, contributing to a $198 million operation loss. It was a significant downturn from the $162.1 million in operating gain UPMC reported for 2022.
One of the primary strategies hospital decision-makers are utilizing to bolster finances is attacking labor expenses. A recent report from the Healthcare Financial Management Association and Eliciting Insights found that of 135 surveyed health system CFOs, 96% said lowering expenses associated with the workforce remains a priority.
However, those costs are still heading in the wrong direction. Kaufman Hall’s latest Physician Flash Report revealed that staffing accounted for 84% of expenses in the first quarter of the year.
The unfortunate reality for hospitals right now is that finding the balance between reducing staff to an efficient level while avoiding workforce turnover is a constant challenge.
When considering layoffs, CEOs must weigh the value of specific roles and understand the impact to the organization of eliminating certain position altogether.
'Lack of profitability' is causing the company to retreat from the healthcare space.
Walmart's plans to disrupt healthcare ended abruptly this week as the company announced the shuttering of its health clinics and virtual care business, representing a significant step back for retailers.
Executives of the retail giant said that their healthcare offerings were "not a sustainable business model for us to continue" as they ran into challenges with reimbursement and profitability—problems that aren't unique to Walmart as retailers struggle to scale up.
While the company's decision to close all 51 of its health centers across five states and end its virtual care services is somewhat unexpected and a U-turn from its plans for expansion, there were signs of the retailer running into roadblocks. This past month, Walmart announced that it was delaying the opening of six health centers in Phoenix and four locations in Oklahoma City to next year.
The health centers strived to give patients a lower-cost option to primary care, dental, behavioral health, labs, x-ray, community health, and telehealth.
Retailers are finding immense headwinds in the primary care space and those challenges have only picked up in recent years, according to Arielle Trzcinski, principal analyst at market research firm Forrester.
“Primary care is often a loss leader for larger health systems but serves a critical role as a feeder of patients and customers for specialty care and procedures,” she said. “Without those higher revenue opportunities, retailers must achieve high levels of adoption and volume to unlock profitability.”
Walgreens has also found tough sledding in primary care, choosing to close 160 VillageMD clinics after investing billions. The result has been $6 billion in net loss for the company in the second quarter.
The same pain points that are weighing heavily on hospitals and other traditional providers are also affecting retailers.
“Labor costs have risen and providers have been leaving the industry in droves, resulting in a capacity calculus that restricts retailers' ability to deliver convenient, highly accessible care—their key value proposition for consumers,” Trzcinski said. “Administrative burden and costs from health insurers have also increased, with some large health systems dropping major insurers and plans in response. Consumers are being left to search for a new provider that is in-network mid-plan year. Retailers that bill insurance are not insulated from these additional issues.”
Other retailers, however, are persisting in their efforts to disrupt primary care.
Amazon purchased One Medical for $3.9 billion last year and remains committed to expanding the venture, while CVS scooped up Oak Street Health for $10.6 billion in 2023 and plans to open up 50 to 60 clinics this year.
Walmart and Walgreens’ shortcomings will serve as both a warning and lesson for other retailers in the space, showing that the strategy for scaling requires a more nuanced approach.
Walmart especially can serve as a test case for why size isn’t everything when it comes to scaling in healthcare. As the largest company by revenue in the country, Walmart has no shortage of resources to throw at the problem, but for whatever reason failed to build out its footprint and connect with potential patients.
The need for virtual care remains though and retailers wanting to fill the void have an opportunity to serve patients in rural areas.
“As medical deserts continue to expand, other retailers operating in healthcare should take action now to reassure patients of their long-term strategy to protect customer retention,” Trzcinski said.
Federal regulators failed to properly enforce mergers over two decades.
The Federal Trade Commission (FTC) has recently upped its level of enforcement on M&A activity, but a new study finds that the agency didn’t take enough action against mergers previously.
Underenforcement of antitrust laws negatively harms competition in hospital markets and leads to price increases for patients, according to the research published in the American Economic Review.
Of the 1,164 mergers among acute-care hospitals from 2000 to 2020, the FTC challenged only 13 (1%) instead of the 238 they could have enforced (20%) using the standard screening tools available to them to identify anticompetitive activity.
Based on the prices that hospitals negotiate with payers, the study’s authors found that the mergers the FTC could have challenged between 2010 and 2015 eventually led to price increases of 5% or more.
Mergers in rural regions and areas with lower incomes and higher rates of poverty had larger average price increase than urban areas and those with higher income, highlighting competition and health inequity.
The FTC’s inaction doesn’t appear to be due to lack of information, with researchers stating that about half of the deals that could have been flagged for negatively impacting competition were reported to the agency under federal law.
Rather, the authors suggest that underfunding of the FTC restricted its enforcement capabilities. The study notes that the agency’s average annual budget and antitrust enforcement budget between 2010 and 2015 was $315 and $136 million, respectively. For comparison, the mergers that occurred during that period increased health spending on the privately insured by $204 million on average in the following year.
“We posit that much of the underenforcement is likely a function of a lack of funding for the antitrust enforcement agencies,” Zarek Brot-Goldberg, an assistant professor at the Harris School at the University of Chicago and one of the study’s authors, said in a news release. “Mergers in the hospital sector are generating short-run harms that roughly approximate the FTC’s entire budget, which suggests the agency might lack sufficient resources to take necessary enforcement action and preserve competition.”
The FTC has, however, stepped up its efforts to halt mergers deemed harmful, with the recent Hart-Scott-Rodino Report revealing that the agency and the Department of Justice (DOJ) filed 50 merger enforcement actions in 2022. That figure marked the highest level of enforcement activity since 55 merger enforcement actions took place in 2001.
This past December, the FTC and DOJ also issued their final merger guidelines that should give regulators more leeway in going after deals.
As a result, several transactions have been recently challenged as the process for completing mergers becomes more difficult.
A new report examines the financial impact of private equity involvement in healthcare companies.
Private equity ownership in healthcare is increasing leading to organizations filing for bankruptcy, according to a new report from the Private Equity Stakeholder Project (PESP).
As private equity’s presence in the industry continues to expand, more bankruptcies are expected this year due to many companies dealing with significant leverage and credit rating downgrades, the nonprofit investigator said.
In 2023, there were 17 instances of private equity-owned organizations filing for bankruptcy, which accounted for 21% of all healthcare bankruptcies. That figure also more than doubled the number of private equity-owned bankruptcies from 2019 (eight) and cleared the amount from the past three years combined (13).
“Private equity’s excessive use of debt and aggressive financial strategies put healthcare companies at risk, and in turn threaten the stability of critical healthcare resources across the country,” the report stated.
PESP highlighted that bankruptcies in healthcare threaten more than just a company’s financial viability—they can also result in closures, disruption of services, layoffs, and more.
Some private equity firms are “repeat offenders,” such as KKR which owned two companies that filed for bankruptcy last year: physician staffing firm Envision Healthcare and oncology provider GenesisCare. KKR also owns Covenant Physician Partners, Global Medical Response, and One Call Corporation, which are all distressed and carry heightened risk for default.
The report projects more defaults ahead this year, pointing to Moody’s Investors Service ratings. Of the 45 companies with a probability of default rating of B3 negative and lower as of November 2023, all but three were owned by private equity firms.
One well-known organization that has already experienced bankruptcy this year is Miami-based primary care provider Cano Health, which filed in February following months of financial turmoil.
Meanwhile, the hospital closures amidst the Steward Health fiasco have further led to lawmakers putting the spotlight private equity involvement in healthcare.
As the industry hits a point of reckoning with private equity, one hospital CEO believes bigger questions must be asked.
Matt Heywood, president and CEO of Aspirus Health, recently told HealthLeaders: “We have to decide, do we want free market? Do we not want free market? And then if we want free market, do we want to put some guardrails in place to ensure that you don't have some of these adverse outcomes? That's something our country hasn't really had to grapple with historically but we're going to need to as more for-profits, more hedge funds, and private equity get involved in healthcare in general and this environment is getting tougher. We're going to have to address how much are we willing to allow to not go well before America decides it wants to put some guardrails.”
The for-profit health system is seeking out flexibility to potentially be a buyer again.
Community Health Systems (CHS) is selling off more hospitals as it remains committed to cleaning up its balance sheet and regaining funding to pursue future acquisitions.
CEO Tim Hingtgen reiterated to investors in its recent first-quarter earnings call that the operator’s sales could yield more than $1 billion, allowing it to shed debt and turn around its finances.
In its latest bit of dealmaking, the Franklin, Tennessee-based health system has entered into a definitive agreement to send Tennova Healthcare-Cleveland to Hamilton Health Care System for $160 million in cash.
The transaction, which will see CHS hand over control of the 351-bed hospital, is expected to close in the third quarter, subject to regulatory approval.
In 2023, CHS sold off eight hospitals and the majority interest in another as it kicked its aggressive divestiture plan into high gear. Those sales included sending three Florida hospitals to Tampa General Hospital for $294 million and offloading a West Virginia hospital to Vandalia Health for $92 million.
However, CHS also ran into regulatory roadblocks with its sale of two North Carolina hospitals to Novant Health for $320 million, which the FTC is attempting to blockfor harming competition. CHS and Novant have since responded to agency’s antitrust claims with their own arguments for the deal.
After reporting a net loss of $133 million last year, CHS’ first-quarter earnings were a mixed bag. While the operator saw improvement in operating revenue, which grew 1% year over year to $3.1 billion, it still experienced $41 million in net loss.
On a call with investors, Hingtgen stated that the system is “off to a good start” with its finances in 2024.
“We continue to evaluate opportunities for further divestitures across a handful of markets that could total more than $1 billion in total proceeds,” he said. “The divestiture of Tennova Cleveland is anticipated to close in the third quarter – and we believe that one or more additional transactions could close within the calendar year, providing substantial capital for the company to redeploy.”
CEOs will have to adjust their strategies to maintain their workforce if the final rule stands.
The Federal Trade Commission (FTC) voted to ban noncompete agreements and the ramifications on healthcare’s workforce are nothing short of significant.
The final rule, which was proposed in January 2023 and passed with a 3-2 vote, will allow for greater movement among medical workers and force employers to strengthen their recruitment and retention efforts.
In its announcement of the rule, the FTC called noncompetes an “exploitative practice” and said that the ban is expected to lower healthcare costs by up to $194 billion over the next decade.
The FTC clearly had healthcare and physicians specifically in mind when putting together the rule, noting that it “received a large number of comments from physicians and other healthcare workers stating that non-competes exacerbate physician shortages.”
With hospital consolidation becoming more prevalent, physicians with noncompetes often face the choice of having to move out of the market to continue practicing or stop practicing altogether.
The ban will face serious opposition in court and has already been met with a lawsuit from the Chamber of Commerce, so the rule is far from set in stone. However, it will become effective 120 days after publication in the Federal Register.
Providers on the back foot
Leaders at provider organizations have already been dealing with a multitude of challenges related to the workforce, but the difficult level will be ratcheted up if the ban holds.
In response to the rule proposal in January 2023, the American Hospital Association said that “now is not the time to upend the health care labor markets with a rule like this. The COVID-19 pandemic exacerbated existing shortages of skilled health care workers, and these shortages will persist well beyond the pandemic.”
The FTC’s rule also features two key caveats that will further impact workforce dynamics. The first is that existing noncompetes for senior executives earning more than $151,164 annually and in policy-making positions can remain in force. The second, and arguably more important stipulation, is that the rule may not apply to nonprofit entities because they’re outside of the FTC’s enforcement.
That differentiation of the rule’s application on for-profits versus nonprofits could hurt both types of providers. For example, physicians may now prefer to pursue employment at for-profit organizations due to the freedom of movement they’re afforded. Conversely, nonprofit providers with physicians under noncompete contracts may experience less workforce turnover as compared to for-profit organizations.
Chip Kahn, Federation of American Hospitals president and CEO, said in a statement: “This final rule is a double whammy. The ban makes it more difficult to recruit and retain caregivers to care for patients, while at the same time creating an anti-competitive, unlevel playing field between tax-paying and tax-exempt hospitals – a result the FTC rule precisely intended to prevent.”
Even though the FTC can’t go after nonprofits, the agency said that organizations that claim nonprofit tax status but are organized for their profit of their members will have to adhere to the rule.
In terms of competing for workers, CEOs will undoubtedly have to raise compensation. The FTC estimates that the rule will increase the average worker’s earnings by $524 per year. In addition to better pay, leaders will be tasked with offering more or better benefits to attract and keep talent in-house.
A consequence of that could be an increase in labor costs during a time when hospitals are aiming to cut down on expenses.
The noncompete ban may also affect M&A activity, with private equity entities potentially shying away from gobbling up physician practices and networks with less employment control over physicians.
While the FTC’s final rule is a victory for healthcare workers, employers will have to rethink their approach to the workforce.
The pandemic forced physician practices to reassess their approach to operating their business.
In this episode of HL Shorts, Ron Holder, chief operating officer of MGMA, explains how strategies utilized by physician practices to remain independent have evolved over time.
Michael Charlton tells HealthLeaders why hospitals leaders need to take the long view for a shifting industry.
After six months at the helm of AtlantiCare, CEO Michael Charlton is already looking six years forward.
Charlton unveiled his plan to usher the health system into the future with Vision 2030 in Atlantic City earlier this month, relaying the importance of getting ahead of the trending challenges that are shaping healthcare.
At the heart of the plan are four pillars that he believes will define the health system for years to come: serving community, workforce excellence, accelerating transformation, and growing market share.
During a time when many hospitals are focusing their efforts on the present or near future just to remain viable, Charlton advocates for looking further out when possible. While operators across the country have been forced into survival mode due to the unforgiving circumstances brought on by the pandemic, long-term sustainability remains the ultimate goal.
“Planning for the future isn’t a choice, it’s a moral obligation to the people we serve,” Charlton told HealthLeaders. “My advice is to stay deeply connected to the core mission of your organization. The rapidly evolving healthcare landscape, marked by technological advances, consumerism, and industry consolidation, calls for leaders who are not only adaptable but also bold in their vision and execution.”
Two of the areas AtlantiCare will strategize around are pain points that are at or near the top of every CEO’s list right now: workforce and technology.
Within workforce, the health system wants to develop the next generation of workers by investing in education. That includes building a medical school in Atlantic City and creating AtlantiCare YOUniversity to offer a clinical career program.
On the technology side, the operator is aiming to increase efficiency and improve care delivery through initiatives like its partnership with Oracle Health to provide new generative AI-based Oracle Clinical Digital Assistant. It will allow clinicians to use voice commands to afford them more time to interact with patients.
Vision 2030 is also emphasizing social determinants of health by setting goals to reduce food insecurity for patients by 6%, reduce unsheltered homelessness by 20%, expand life expectancy by five years, and increase annual fundraising for the AtlantiCare Foundation by 20% year over year.
“While there are challenges and opportunities in the healthcare sector, we can’t shy away from addressing problems like health equity and the social determinants that impact it,” Charlton said. “Through Vision 2030 we are taking on these big issues by harnessing cutting-edge technology to transform patient care, and expanding strategically to provide comprehensive services that are accessible to all. We are also cultivating a workforce that is not only skilled but empowered, with initiatives like AtlantiCare YOUniversity that prepare our team for the healthcare jobs of the future.”
AtlantiCare also wants to significantly expand over the next six years by becoming a $2 billion organization and growing its market share by 5%. To achieve that, the health system is working to increase access to service lines like behavioral health and cardiology to reach as many patients as possible.
The ambitious plan will require a considerable investment from the health system into both the community and its own resources, made possible by a healthy bottom line and strategic partnerships. In addition to the agreement with Oracle Health, AtlantiCare is also partnering with Global Neurosciences Institute and affiliating with Drexel University College of Medicine and Cleveland Clinic Cancer Institute.
“AtlantiCare has maintained its financial health through careful stewardship and thoughtful planning, ensuring we have a robust balance sheet to support our ambitions,” Charlton said. “Each initiative under Vision 2030 is backed by a sustainable funding strategy, designed to maintain financial integrity while advancing our goals. Partnerships and affiliations also play a critical role in our strategic approach.”
Whether or not AtlantiCare hits on every goal it has set, the intention to strive for transformation is critical in an industry reckoning with change and disruption.
