COVID-19, which rapidly put healthcare transactions on hold, has exacerbated the conditions for organizations — especially smaller ones — that were seeking a partner due to financial distress or risk.
At the same time, the financial fallout of losing revenues from nonessential surgeries and procedures has left larger systems rethinking plans to grow through acquisitions, mergers and other partnerships.
"They just don't necessarily have the financial confidence to move forward," said Matthew Albers, partner at Vorys, Sater, Seymour and Pease LLP and a member of the healthcare group with a focus on healthcare mergers and acquisitions activity.
Northeast Ohio saw this play out clearly as Mich.-based Beaumont Health walked away from its plan to bring Summa Health into its system when the two were just days away from finalizing an arrangement both had spent the previous year working on.
Throughout that process, Dr. Cliff Deveny, Summa president and CEO, emphasized that the system wasn't looking for a partner out of desperation. Rather, it hoped to find opportunities for a partner to invest in the system and help it grow, a point he reiterated in late May after the deal fell apart.
Though many unknowns remain — especially with the risk of another surge in COVID-19 cases — some predict transactions will return more quickly for smaller organizations that expedite existing plans to secure a partner or begin looking more seriously for one in the hopes of adding economies of scale and a bit of a financial buffer. For-profit entities are also expected to pick up transactions again more quickly.
"Now that we've lived through the pandemic, how are health systems going to change some of their growth strategies, including partnerships, merger and acquisitions and also capital investments?" wondered Allan Baumgarten, a Minnesota-based healthcare consultant who studies the Ohio and Michigan markets, among others.
He's working on securing a grant to support his research into answering these questions and expects the range of reactions from healthcare organizations to be broad.
Kate Hickner, partner at Brennan, Manna & Diamond working with the firm's national healthcare practice, works in the for-profit healthcare space primarily with entrepreneurs, private equity and physicians.
"For-profit companies tend to be willing to take on more risk and be more nimble than nonprofits, but even in my space during March, things stopped fairly abruptly," said Hickner, whose work spans the country.
Things dramatically picked up for Hickner in the second half of May, although her workload still hasn't returned to pre-COVID levels. She's opened new matters and has been asked to revisit some that were put on hold due to the pandemic. Her current work involves the acquisition of home health agencies, the sale of a medical device company, a pharmaceutical joint venture and the negotiation of physician employment arrangements.
In speaking with healthcare attorneys from across the U.S., Hickner said she hears from many that they expect deals will pick up eventually, even in the tax-exempt space.
"I anticipate that more and more physicians will want the stability of a system and be able to take advantage of economies of scale and have more negotiating leverage and the security of being an employee as opposed to an owner," she said. "I bet we see more and more desire to sell after this is over."
Albers, who typically works on larger transactions representing large nonprofit health systems and academic medical centers, said that after a wait-and-see approach, discussions have started up again.
"I don't see energy behind consummating a lot of it yet, because the financial impact among systems has been very large," he said.
Institutions will be examining their cash reserves and seeing how well and how quickly they can ramp up outpatient procedures and bring back furloughed staff.
"All of those factors have to be put in the mix for determining if and when those kinds of broader, very long forward-looking strategic activities and transactions will occur," Albers said.
He added he expects to see some more risk-tolerant market players, such as those in the private equity world, be more aggressive. Nonprofits will perhaps view the preservation of assets to reinvest in their mission and purpose as more important than the expansion or acquisition of an additional footprint, he said.
The few organizations that are in a position to be buyers — though there aren't many — may be able to get additional assets and negotiate lower prices than they otherwise would have, Albers said. It's a buyer's market.
"To the extent that there are buyers, this is a good time to be one — like it is pretty much in every space," he said. "If you want to buy a house right now, it's a great time to buy a house."
One limiting factor could be lender hesitancy to provide access to large pools of capital, given the uncertainty about when healthcare revenues, reimbursement streams and volumes will return to pre-pandemic levels, he added. With debt financing of transactions potentially more difficult to come by, most larger transactions may have to be on a broader cash basis.
"It's kind of an odd time to figure out whether the long-term payoff is going to be there the way we assume it would," he said.
Now more than ever, healthcare organizations of various sizes are taking a step back and examining their options. An arrangement or a partnership that a practice may have explored but not focused on previously may be a more attractive option going forward, said Tom Campanella, director of the healthcare MBA program at Baldwin Wallace University.
"I don't care if it's private equity, if it's venture capital, if it's the nonprofits side, for-profit entities — all of them are having financial challenges," he noted.
Campanella said he's optimistic that this upheaval will be beneficial in the long run. COVID-19 could push the healthcare industry to a better model when it comes to creative partnerships to potentially cut costs and improve the health status of Americans, he said.
Deveny said in late May that he was "disappointed" to see Beaumont walk away from the partnership after all of their work to plan integration and gain regulatory approvals. The total amount Summa spent through the process on external partners and the time and effort of hundreds of employees — from SummaCare, shared service, IT and more — totals "in the millions," he said.
Beaumont put the partnership process on hold in late April as the hospitals focused on COVID-19. Since then, it evaluated the partnership and decided it wasn't the right decision.
"This decision was only about whether Summa was the right fit for Beaumont during these extraordinary times," Beaumont spokesman Mark Geary wrote in an emailed statement.
Summa will spend the next three to six months focused on reopening and growth plans — the system is expanding urgent cares, building a new ambulatory center and has a new behavioral health pavilion, he said.
After that, Summa's board will examine where things stand and whether another partner search is the right option. Deveny said, though, that all of the partners and organizations Summa previously interviewed are not the same as they were before the pandemic.
As Summa looks at potential partners, it needs to "look outside of the box," Campanella said. For instance, establishing strategic relationships with a third-party outpatient provider or considering for-profit entities are two options as they evaluate partners from a short-term and long-term perspective, he said.
Baumgarten said that even before the pandemic, he was beginning to see health systems look for ways to grow through strategic partnerships rather than adding to operational costs. The pandemic could accelerate that.
Just days before officials announced COVID-19 cases in Ohio, Lake Health announced it was exploring the option of a strategic partnership in response to the rapid changes the healthcare industry was already facing due to consumerism and technology advances.
"Lake Health was always going to be careful and deliberate in exploring any potential partnership, and that hasn't changed with COVID-19," Lake Health spokesman Dino DiSanto wrote in an emailed statement.
For Albers, the uncertainty is the biggest takeaway from this time.
"No one really knows how long and in what way the healthcare industry is going to recover from this and then what the refractory period on that will be," he said.
This article was originally published in Crain's Cleveland Business.
