From keeping the workforce strong to maintaining a healthy bottom line, there's plenty to consider for the topmost execs.
Many of the same challenges hospital CEOs have reckoned with for years remain at the forefront in 2024. Through the ebbs and flows, the biggest question for leaders continues to be, ‘How do we solve for those challenges better?’
Here are three pain points that CEOs will be diving into at next week’s HealthLeaders CEO Exchange, where the hospital decision-makers will convene to share strategies and ideas to improve best practices:
Fiscal sensibility
Unforgiving financial headwinds have further put an emphasis on efficiency and optimization, forcing CEOs to evolve their approach to both survive and grow.
So how are execs holding other leaders accountable for financial stewardship and achieving efficiencies in portfolio management? CEOs now need to think outside of the box, so what new areas are you looking at to save money?
Pictured: Attendees discuss operational pain points during the 2023 CEO Exchange.
Technology
Maybe no area of focus for CEOs has changed more in recent years than technology, which continues to outpace healthcare’s adoption of it.
Can execs be ahead of the curve? If not, can they at least not fall behind the curve completely to the point where new technology is passing them by?
Innovation should be at heart of any CEO’s long-term vision right now, but it requires a commitment to investing resources and a willingness to potentially fail and learn from those failures.
Technology is unlikely to ever replace the workforce completely in healthcare, so how can you make it work in concert with staff in a supplementary way that gets the most out of everyone?
Physician workforce
Speaking of the workforce, recruiting, retaining, and promoting physicians specifically is a major talking point at the moment.
A hospital can’t thrive without its talented physicians, but creating an environment where they want to practice in is becoming more challenging, as unions and strikes across the country are demonstrating.
Attracting physicians and having strategies in place to avoid them feeling burned out or devalued is only part of the equation, however. As a CEO, how are you also training them to be effective leaders so they can be part of the decision-making process alongside you?
These questions and more will be asked next week at the CEO Exchange. Follow HealthLeaders for more coverage of the event.
Are you a CEO or executive leader interested in attending an upcoming event? To inquire about attending the HealthLeaders Exchange event, email us at exchange@healthleadersmedia.com.
The HealthLeaders Exchange is an executive community for sharing ideas, solutions, and insights. Please join the community at our LinkedIn page.
Dealmaking in the first quarter was down, "even from 2023's sluggish pace," analysts revealed.
Private equity’s impact on healthcare has been in the headlines of late, but actual investment activity by firms continues to slow down, according to a new report.
Research by market data firm PitchBook found that a tough regulatory climate, price differences between buyers and sellers, and signs that the Federal Reserve will hold rates higher or longer has depressed private equity dealmaking.
In the first quarter of the year, 158 estimated deals were announced or closed by private equity sponsors, which marked a decrease from 2023’s rate and a 20% decline from the 200 deal count over the same period last year.
While private equity investment has been trailing off since the end of 2021, PitchBook notes that it expects activity to ramp back up in 2025 and that more deals will be announced toward the end of this year.
Though more firms are actively looking to invest and financing is easier than it was in 2023, certain factors are driving down numbers at the moment.
Chief among those causes is regulatory concern, which was heightened as a result of the Change Healthcare cybersecurity attack. The breach, which occurred in February, “caused temporary delays in active deal processes as target companies scrambled to reconfigure their billing processes and buyers looked for assurance that revenue would normalize at previous levels,” the report stated. Additionally, the event created heightened awareness for buyers over cybersecurity compliance and HIPAA compliance risk.
PitchBook also highlighted that while antitrust enforcement remains low, the increase in chatter about private equity trends in the news cycle is resulting in a cooler market. For example, the struggles of Steward Health Care have been well documented and brought more attention from lawmakers to private equity’s role in healthcare.
“Even if the public spotlight drifts elsewhere post-election, we fear a lasting effect on perceptions of PE’s interests and approaches among potential sellers and partners in the provider landscape, including physician groups and health systems,” the report said.
From a state perspective, California now has a deal review process that gone into effect, which could lead to extended deal timelines, extra review costs, and the publicizing of information on the parties involved. Other states have followed California’s lead, such as Connecticut, Illinois, Indiana, Massachusetts, Minnesota, Nevada, New York, Oregon, and Washington.
Finally, the report shed light on the ramifications of the Federal Trade Commission’s vote to ban noncompetes in April.
“If implemented, a noncompete ban would theoretically advantage health systems over PE-backed physician groups in physician and clinical staff retention, and could also result in further wage inflation in the industry,” the report said.
Despite private equity investment in healthcare trending downward, a recent report by the Private Equity Stakeholder Project found that more bankruptcies in the industry are coming from private equity-backed companies.
Even more bankruptcies and defaults are expected this year due to many organizations suffering from significant debt and downgraded credit ratings.
The struggling hospital operator is searching for financial solvency while keeping its facilities open.
Steward Health Care announced this week that it has filed for Chapter 11 bankruptcy and put all 31 of its U.S. hospitals up for sale as it attempts to dig its way out of financial ruin.
The Dallas-based health system, which is the largest physician-owned hospital operator in the country, has suffered a precipitous fall after accruing significant debt stemming from missed rent and vendor payments, which lawmakers have laid at the feet of its previous private equity ownership, Cerberus Capital Management. Steward marks the latest example of private equity-backed companies in healthcare going awry due to mismanagement and overleveraging.
In announcing its bankruptcy filing—a move regulators anticipated—Steward said it is finalizing debtor-in-possession financing from Medical Properties Trust for initial funding of $75 million and up to an additional $225 million upon the satisfaction of certain conditions.
“Steward Health Care has done everything in its power to operate successfully in a highly challenging health care environment. Filing for Chapter 11 restructuring is in the best interests of our patients, physicians, employees, and communities at this time,” Ralph de la Torre, CEO of Steward, said in the news release. “In the past several months we have secured bridge financing and progressed the sale of our Stewardship Health business in order to help stabilize operations at all of our hospitals. With the delay in closing of the Stewardship Health transaction, Steward was forced to seek alternative methods of bridging its operations.”
One day after declaring bankruptcy, the operator stated that it has put all of its hospitals across eight states up for sale.
During a court hearing in Houston, Steward attorney Ray Schrock told U.S. Bankruptcy Judge Chris Lopez that the health system wants to keep all of its hospitals open as it works to complete transactions by the end of the summer.
Steward has over $9 billion in total liabilities, including $1.2 billion in loans, $6.6 billion in long-term rent obligations, almost $1 billion in unpaid vendor bills and $290 million in unpaid wages and benefits, according to court documents. Schrock said that the operator had $6 billion in annual revenue before filing for bankruptcy.
Spotlight on private equity
Not every private equity-backed organization in healthcare has gone down the path of Steward, but the operator’s unraveling has further put private equity’s impact on the industry under the microscope.
With much of the growth in private equity happening at the level of physician employment and consolidation though, Steward’s bankruptcy is a bit of an outlier in regards to health systems, Pam Stoyanoff, president and chief operating officer at Texas-based Methodist Health System, told HealthLeaders.
“Considering private equity in general, healthcare is complicated, local, capital and labor intensive, and relational. The wheels can turn slowly,” she said. “The requirement for higher and more rapid investor financial returns that are emphasized by private equity firms can be underestimated and consequently detrimental. To some extent, I believe that’s what we are seeing with Steward.”
Bankruptcies by private equity companies in healthcare, however, are on the rise, according to a report from the Private Equity Stakeholder Project.
This past year saw 17 such bankruptcy cases, which accounted for 21% of all healthcare bankruptcies. In comparison, the previous three years combined for 13 bankruptcies.
Lawmakers have taken notice and the result could be legislation designed to create more ownership transparency.
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.”
