Zoom, pandemic complicating healthcare M&A

The COVID-19 pandemic has forced healthcare companies to rethink how they structure mergers and acquisitions, especially now that much of the work is happening remotely.

The once-in-a-lifetime crisis has changed the way providers discuss deals, write contracts and assess their potential partners. Remote meetings, COVID-19 recovery timelines and digital health capacity are a new, or bigger, part of the due diligence process.

What’s more: Health systems are doing it all while managing recurring waves of seriously ill COVID patients and the challenges of maintaining adequate staff and supplies during a pandemic.

“It was in many ways the ultimate example of changing the tires as you’re going down the freeway,” said Dr. Gary Kaplan, co-CEO of Virginia Mason Franciscan Health, a new system with $4 billion in annual revenue formed through the January merger of Seattle-based Virginia Mason and Tacoma, Wash.-based CHI Franciscan.

Whether it’s using drones, virtual tours or enlisting third-party companies, sizing up potential partners during the pandemic has forced companies to get creative.

For example, some have piloted drones to count inventory like pharmaceuticals or tour a nursing home alongside an employee, said Steven Shill, a partner with BDO and national leader of its Center for Healthcare Excellence & Innovation.

“We’ve seen things that would blow your mind, that you’d think would be almost science fiction-esque in terms of how you’re actually performing the physical aspects of due diligence,” he said.

Some executives said they didn’t view the shift to phone and video calls as much of a hindrance. In selected cases, it has expedited the process and brought more individuals into the fold.

That said, some decisions that previously could have been made in a single afternoon with a face-to-face meeting became more drawn out in the virtual setting, Kaplan said.

“And probably there was a bit of deal fatigue that set in,” he said.

Orlando Health and LHC Group started discussing their joint venture in the third quarter of 2019. Before the pandemic, everyone would get on a plane for a meeting in Orlando, Fla., or LHC’s headquarters in Lafayette, La., said Greg Ohe, Orlando Health’s senior vice president of ambulatory services.

“You can progress that conversation faster when you’re face to face,” he said.

Both Ohe and Kaplan said it helped that their discussions had begun well before the pandemic ramped up in March 2020. Each was able to have in-person meetings related to their respective deals pre-pandemic.

Video calls are a different animal, to be sure. It’s harder to pick up on body language or facial expressions, which means a lot can get missed, Ohe said. Simple word choice—even if unintentional—can tip an agreement one way or another, he said.

“The frailty of some of those meetings when you’re not sitting face-to-face—just understand that that’s a risk when you’re doing everything through video,” Ohe said.

Publicly traded LHC and Orlando Health ultimately sealed their deal Aug. 1, 2020. LHC will offer home health and other services at six Florida locations, including three facilities previously wholly owned by Orlando Health.

In some cases, however, virtual meetings may have doomed deals. Advocate Aurora Health and Beaumont Health walked away from their proposal to create a $17 billion system across Illinois, Michigan and Wisconsin in October. Those talks started in late 2019 but paused in 2020 as the systems dealt with COVID.

While it wasn’t the only contributing factor, the pandemic “gravely injured normal interpersonal interactions,” Beaumont CEO John Fox told reporters after the deal was called off.

“(Normally) we’d have a process that is really essential for community-based organizations to build relationships, and get to know each other,” he said. “We’ve tried to Zoom a couple of times and other mechanisms, but it’s not really been adequate.”

Conducting meetings with boards, committees, physicians and other stakeholders was “impossible,” Fox said, noting that M&A activity plummeted from 2019 to mid-2020.

Advocate Aurora and Beaumont hadn’t partnered much prior to their letter of intent, which presented another hurdle.

By the time Ohio-based systems University Hospitals and Lake Health started talking about merging, they were well acquainted with each other.

“They know us and we know them, so this was a little unique,” said Paul Tait, chief strategic planning officer at University Hospitals. “Relationships really matter in healthcare; parties have to be comfortable with one another, particularly if you’re talking about a major integration. If you’re starting out cold, it can be a bit more challenging.”

Lake Health sent out a request for proposal in early March seeking a potential partner. Lake and UH had a neonatology clinical affiliation and jointly own a cancer center in Mentor as well as a hospital in Beachwood that specializes in orthopedics.

Most of their meetings were facilitated via Zoom and a virtual data room, except for one socially distanced board presentation where several UH execs met with about a dozen Lake Health board members. The boards agreed to a member-substitution model in December and executives hope to have regulatory approval in the first quarter.

“It’s harder to assess culture from a distance,” Tait said. “If you didn’t have an existing relationship or a history of working together, then it’s harder to do over Zoom.”

Tait referenced another transaction that didn’t come to fruition in 2019, in part because the parties didn’t know each other as well, he said. They had a series of face-to-face visits as they tried to assess culture and operational style. But it ultimately didn’t work.

Health systems are increasingly trying out informal partnerships to test the waters, potentially paving the way toward mergers, said Rob York, a director with the Chartis Group, noting that joint ventures and service line affiliations have been more frequent over the past year.

“We’re seeing more conversations about the future being too murky,” he said. “They are working on certain service lines for now and potentially moving toward a fuller partnership down the road.”

Some executives said the pandemic’s arrival effectively paralyzed their negotiations, at least temporarily, as leaders turned their attention toward managing the crisis.

Both Orlando Health and LHC Group “had to go really heads down to figure out how to prepare for this onslaught of patients coming into our organizations,” Orlando’s Ohe said. That put the deal on the back burner for a period of time. For his part, Ohe had to ensure the health system’s COVID protocols were applied across its ambulatory and post-acute settings—a full-time job. When talks resumed, they weaved COVID best-practices into the integration process, executives said.

Not all transactions were delayed, though. In Washington state, more than 250 executives from Virginia Mason and CHI Franciscan worked on integration planning during the summer of 2020, said Ketul Patel, the other co-CEO of Virginia Mason Franciscan Health. Even when the pandemic hit, there was a separation between leaders focused on managing the crisis and those focused on completing the merger.

“We’ve been, over the last several years, very blessed that we’ve got leadership that’s been very focused on this primary area,” Patel said.

The same was true for Ochsner Health and Lafayette General Health. Most of the due diligence had been completed before the pandemic hit, said Pete November, Ochsner’s chief financial officer. The systems signed their definitive agreement on April 1. Once the pandemic got underway in March, they were able to separate the leaders who would focus solely on the pandemic and those who could help close the merger, November said.

“We were thoughtful about making sure the people who really needed to focus all their time and energy on the pandemic did that,” he said.

In addition to navigating the pandemic, executives have been cautiously approaching regulatory approval as state and federal authorities continue to closely scrutinize consolidation.

Entities are doing more due diligence prior to signing a letter of intent to head off regulators’ antitrust concerns, Chartis’ York said. “COVID has accelerated that,” he said. “The case for a partnership had to be really strong, especially with the bandwidth and operational challenges. They had to focus on partnerships that had the most strategic benefits.”

Ochsner’s 35-hospital merger with Lafayette General closed months later than expected partially because the regulatory approval process took so long, November said. He said that was because the relevant government agencies had turned their attention toward COVID and many of their employees were working remotely. The deal, projected to close in spring 2020, was ultimately sealed on Oct. 1.

Organizations are also factoring in how quickly they are poised to recover from the pandemic’s chill on profitable non-urgent procedures and the abrupt pivot to ambulatory and virtual care.

“There are a lot more questions on financials and recovery projections,” York said, adding that executives are parsing out financial performance with and without relief funding. “Many if not all are talking about virtual/digital health and that being a core capability, along with health plan capabilities, to manage risk. COVID put even more attention on digital pathways, robust ambulatory networks and health plan integration.”

Finances are only part of the equation, experts said.

Potential suitors can become fixated on the financial value of a transaction, potentially overlooking a broader, long-term vision, University Hospitals’ Tait said.

“Some of that strategic value transcends the real-time finances over the last quarter or 12 months,” he said. “COVID-19 is a bit of an anomaly; volumes are down across the healthcare industry. But there’s also the fact that COVID has been a disruptor, so things will probably come back in a different state.”

For instance, University Hospitals sees an opportunity to bolster Lake Health’s virtual visit technology and infrastructure. UH has improved its home monitoring services, which has freed up inpatient capacity and reduced length of stay, Tait said.

“We are doing a couple thousand virtual visits a day in our system. Given what you can charge with virtual visits and if patients don’t have to go to urgent care, it reduces revenue but would be better for patient care,” he said. “Financially we may not get 100% back to pre-COVID levels.”

Despite the added challenges of closing deals during the pandemic, there are some indications that the crisis will actually accelerate consolidation in 2021.

More than 40% of the 100 healthcare CFOs who responded to a recent BDO survey said they think the pandemic will increase consolidation across the industry. Organizations that went into the pandemic with weak balance sheets will emerge even weaker afterward, Shill said. The survey also found only 27% of organizations have more than 60 days cash on hand, a finding Shill called “stunning.”

“When you look at the number of large organizations that are electing to have a smaller role in the partnership, that is a sign that people are looking at industry collaboration as a tactical response to COVID,” said Anu Singh, a managing director at Kaufman Hall.

While deal volume lagged in 2020, the fourth quarter saw the most announced transactions since the fourth quarter of 2017. That could indicate pent-up demand will lead to more deals in 2021, said Eb LeMaster, a managing director at Ponder & Co.

“Hospital governance seems to be getting used to Zoom,” he said, expecting deal volume to reach 2019 levels but not the record-level activity of 2017 and 2018. “At the end of day, the real spur will be major changes in reimbursement. I’m not sure what the appetite is for that in the near term.”