At the Becker's Hospital Review Annual Meeting on May 18, Cartsten Beith, co-head of tax-exempt M&A at Cain Brothers, and Casey Nolan, managing director for Navigant Healthcare, discussed the new types of transactions occurring in healthcare.
Here are some key questions and responses from the panel, which was moderated by David Jarrard, president and CEO of Jarrard, Phillips, Cate & Hancock.
Question: What are you seeing out there that gets your attention?
Mr. Beith: The payors are challenged by healthcare reform, particularly if exchanges go forward as expected. Exchanges will really drive prices down for payors and providers. We would almost argue that over time, payors will almost become utilities. They might say we have a busted model on the premium side of the equation. They're trying to figure out their next business model, and we're starting to see payors move into acquiring providers. United bought Monarch out in California. Aetna did a joint venture with Vanguard, while WellPoint bought CareMore. Payors are trying to figure out how they're going to thrive, and they've figured out they want to get into that 85 percent premium being taken away from them by healthcare reform.
When we look at transactions in the hospital sector, there have been a lot of transactions driven by capital. They tended to be outright acquisitions. We're also seeing a lot of joint venture structures. When you look at non-profit and for-profit joint ventures, communities tend to like them because of the notion that you can keep control and that the community values won't be sold. At the end of the day, they are still conversion transactions.
Mr. Nolan: If you go back 10 years ago, the range of deals was much narrower. In the past few years, we've seen an explosion of hybrids. We've gone from a plain vanilla to a rocky road in that standpoint. I think the other thing that's dramatically different today is the entry of private equity. That's changed the dynamics and structures of these deals quite a bit as well. The for-profits kind of sat on the sidelines during the great recession, and now they're very hungry. I think that with the advent of private equity with the great recession receding a bit, that has spawned a range of different deal structures we didn't see before.
From a payor perspective, insurers are taking one of three strategies. One is, "We're a claims processing shop." Others are like Highmark, when they want to be like Kaiser and own hospitals, health plans and physicians. Third, they're entering into strategic partnerships with providers under accountable care organizations and bundled payments. They're taking three tracks, one of which creates acquisition deals in the marketplace. The tremendous change of funding mechanisms have spawned new structures.
Q: Are today's deals more strategic?
CB: Before, 95 percent of acquisitions were driven by financially damaged hospitals seeking partners, where today we see relatively strong systems (hospitals with A to A- ratings) thinking about where the future lies as the market develops. They might not do it for capital but from a strategic perspective. Northeast Health and Lahey Clinic [formed an affiliation], driven primarily by strategy, thinking about where the market was going to move in the Boston area.
CN: A couple things to keep in mind in terms of that. A few years ago, it was the distress players [merging]. Today, there are organizations that are saying, "The best time to do a deal is when you don't have to do a deal." They are choosing to deal from a position of strength. The dynamic in play now is that, from all the M&A activity, it's going to be like musical chairs. The music will stop and you might be last one standing without a chair. You might be unable to get into a deal with FTC considerations.
Q: How do you know when to consider merging or selling?
CN: Really objectively assess the hospital. From a quality standpoint, financial standpoint, physician standpoint, patient quality standpoint. Compare it to competition and ask how those numbers will change over time. Then seriously ask yourself if you're likely to remain successful if you remain independent. Do a deep dive in terms of the hospital's critical success factors today and going forward, transitioning into value based payment.
CB: What we work with our clients on is to game out likely scenarios. There are a lot of "knowns" in terms of healthcare, and we work with clients to develop a gaming therapy. Through that exercise, we develop the funding need and funding access. Typically, but not always, we end up with the funding gap. There is a whole host of dynamics, but in long-term, most of our clients are recognizing that scale really matters. A starter Epic system is $100 million, so organizations are quickly realizing IT and physician strategies are fairly daunting from a capital standpoint.
Best Practices for Strategic Communications During a Transaction
6 Recent Hospital Mergers & Acquisitions
Here are some key questions and responses from the panel, which was moderated by David Jarrard, president and CEO of Jarrard, Phillips, Cate & Hancock.
Question: What are you seeing out there that gets your attention?
Mr. Beith: The payors are challenged by healthcare reform, particularly if exchanges go forward as expected. Exchanges will really drive prices down for payors and providers. We would almost argue that over time, payors will almost become utilities. They might say we have a busted model on the premium side of the equation. They're trying to figure out their next business model, and we're starting to see payors move into acquiring providers. United bought Monarch out in California. Aetna did a joint venture with Vanguard, while WellPoint bought CareMore. Payors are trying to figure out how they're going to thrive, and they've figured out they want to get into that 85 percent premium being taken away from them by healthcare reform.
When we look at transactions in the hospital sector, there have been a lot of transactions driven by capital. They tended to be outright acquisitions. We're also seeing a lot of joint venture structures. When you look at non-profit and for-profit joint ventures, communities tend to like them because of the notion that you can keep control and that the community values won't be sold. At the end of the day, they are still conversion transactions.
Mr. Nolan: If you go back 10 years ago, the range of deals was much narrower. In the past few years, we've seen an explosion of hybrids. We've gone from a plain vanilla to a rocky road in that standpoint. I think the other thing that's dramatically different today is the entry of private equity. That's changed the dynamics and structures of these deals quite a bit as well. The for-profits kind of sat on the sidelines during the great recession, and now they're very hungry. I think that with the advent of private equity with the great recession receding a bit, that has spawned a range of different deal structures we didn't see before.
From a payor perspective, insurers are taking one of three strategies. One is, "We're a claims processing shop." Others are like Highmark, when they want to be like Kaiser and own hospitals, health plans and physicians. Third, they're entering into strategic partnerships with providers under accountable care organizations and bundled payments. They're taking three tracks, one of which creates acquisition deals in the marketplace. The tremendous change of funding mechanisms have spawned new structures.
Q: Are today's deals more strategic?
CB: Before, 95 percent of acquisitions were driven by financially damaged hospitals seeking partners, where today we see relatively strong systems (hospitals with A to A- ratings) thinking about where the future lies as the market develops. They might not do it for capital but from a strategic perspective. Northeast Health and Lahey Clinic [formed an affiliation], driven primarily by strategy, thinking about where the market was going to move in the Boston area.
CN: A couple things to keep in mind in terms of that. A few years ago, it was the distress players [merging]. Today, there are organizations that are saying, "The best time to do a deal is when you don't have to do a deal." They are choosing to deal from a position of strength. The dynamic in play now is that, from all the M&A activity, it's going to be like musical chairs. The music will stop and you might be last one standing without a chair. You might be unable to get into a deal with FTC considerations.
Q: How do you know when to consider merging or selling?
CN: Really objectively assess the hospital. From a quality standpoint, financial standpoint, physician standpoint, patient quality standpoint. Compare it to competition and ask how those numbers will change over time. Then seriously ask yourself if you're likely to remain successful if you remain independent. Do a deep dive in terms of the hospital's critical success factors today and going forward, transitioning into value based payment.
CB: What we work with our clients on is to game out likely scenarios. There are a lot of "knowns" in terms of healthcare, and we work with clients to develop a gaming therapy. Through that exercise, we develop the funding need and funding access. Typically, but not always, we end up with the funding gap. There is a whole host of dynamics, but in long-term, most of our clients are recognizing that scale really matters. A starter Epic system is $100 million, so organizations are quickly realizing IT and physician strategies are fairly daunting from a capital standpoint.
More Articles on Hospital Transactions:
Strategic Thoughts for Independent Hospital ConsolidationsBest Practices for Strategic Communications During a Transaction
6 Recent Hospital Mergers & Acquisitions