Healthcare executives often point to a persistent financial pressure that has accelerated strategies to cut costs, grow revenue or potentially scale up. That pressure may be causing providers to hastily enter mergers or acquisitions without the proper due diligence, some M&A experts say.
Hospitals, particularly of the not-for-profit ilk, have struggled to boost revenue enough to keep up with rising labor, technology, supply and compliance costs. They are also closely eying threats to their business models as new competitors take shape. Outside investors are behind the scenes of many healthcare deals, scanning for new opportunities.
In some cases, hospital and health system executives are prematurely signing a letter of intent to get under the hood and take a look rather than diligently forming a detailed offer, said Angela Humphreys, head of the healthcare practice at Bass, Berry & Sims.
“This is putting the cart before the horse,” Humphreys said, adding that outside of the hospital sector, most deals aren’t announced until the definitive agreement is signed. “You open yourself to a lot of scrutiny and criticism if you haven’t brought in your stakeholders. In some cases, it can make a deal dead on arrival.”
A letter of intent, which typically includes exclusivity provisions, confidentiality mandates and sometimes deadlines, once represented a firm handshake—a good faith commitment, said Joe Lupica, chairman of Newpoint Healthcare Advisors.
“Now some think that it is more exploratory. A letter of intent is signed to do due diligence; that is disappointing,” Lupica said. “People are under pressure to get into the game and get quickly to an LOI.”
More private equity money is flowing into the industry as healthcare deals have yielded more than a two-times return, a recent report from Bain & Co. found. Global private equity deal value surged almost 50% to $63.1 billion in 2018, up from $42.6 billion, according to Bain.
The number of healthcare deals involving private equity firms is estimated to reach nearly 750 in 2019, up from 229 a decade prior, according to PricewaterhouseCoopers. Total assets under private equity management have increased by $600 billion since 2006, up to $1.35 trillion in 2017, PwC’s data show.
Private equity investment coupled with some of the big tie-ups like CVS and Aetna are causing providers to think about how primary and long-term care are shifting, and may be accelerating merger talks, said Gurpreet Singh, a partner at PwC and its health services sector leader.
“The threat of a lower-cost or value play occurring in the provider space is putting pressure on about 70% of their revenue, which is why we are seeing more conversations,” he said.
The number of failed deals hasn’t increased significantly, said Robert Creighton, managing partner at Farrell Fritz who focuses on mergers and acquisitions. About a quarter of announced deals don’t come to fruition, a ratio that has stayed relatively constant, he said.
Baylor Scott & White Health and Memorial Hermann Health System called off their merger in February, about five months after the Texas-based health systems signed a letter of intent.
Atrium Health (formerly Carolinas HealthCare System) and UNC Health Care scuttled their deal last year, about six months after the letter of intent was signed. Just this month, Atrium entered into another agreement to merge, this time with Wake Forest Baptist Health and Wake Forest University.
Cone Health and Randolph Health, also based in North Carolina, called off their deal in May 2018 after more than a year of talks as Cone Health was unwilling to “scale back projects or put them on hold,” Cone Health executives said.
“More often than not it’s related to a mismatch of expectations or a clash of culture,” Creighton said.
There needs to be buy-in from leadership, physicians and the community, experts said. Frank discussions about culture and objectives are needed. Leadership teams should be mapped out as well as defined-benefit pension plans.