An Expert Looks at M&A—and Hospitals on the Edge

July 2, 2024
Kaufman Hall’s Anu Singh sees a complex landscape unfolding around M&A

The past few years have proven financially stressful for virtually all hospital-based organizations in the United States. But it’s absolutely clear that the level or degree of financial stress has been uneven across the U.S. healthcare system. Indeed, the intensifying financial pressure on hospital-based organizations has served to help further intensify merger and acquisition (M&A) activity nationwide.

One expert who has been tracking and analyzing all the current activity is Anu Singh, managing director and practice leader in the M&A Practice at the Chicago-based Kaufman Hall consulting and advisory firm. Singh was one of the experts whom Healthcare Innovation Editor-in-Chief Mark Hagland interviewed for the publication’s “Executive Handbook: Top Priorities in Healthcare 2024,” which the publication published last month. Below are excerpts from that interview.

One of the conversations that’s taking place regularly these days is around the viability of standalone hospital organizations. Hospital organizations of all types are feeling intensifying financial pressures, but standalone, smaller, and rural hospitals are being hardest hit. Would you agree with the contention that it is becoming economically non-viable for smaller and standalone hospitals to survive financially?

Let’s look at the past and at the transactions taking place. Are there organizations finding themselves financially ill-equipped and are therefore looking at partnership models? Yes. Is that the only thing happening? No. Billion-dollar-net-patient-generating health systems in multiple markets, with solid relationships with payers and developing a consumer outpatient strategy—organizations like that are engaging in M&A activity. And why is that happening? It’s similar to your premise. There’s an intellectual capital base, and they don’t have it, and their ability to generate that know-how in-house is leading them to partner, even some of the established ones. And the documentation is pretty clear: about one in eight organizations have been A-minus-rated or higher, and have elected to be the smaller partner in an acquisition. And mega-mergers are happening, electing to do something in a partnership model because they see even greater capabilities than have today.

Do you think that the majority of smaller and standalone hospitals will be acquired over the next several years?

The ability to remain independent will be a harder road to take, the smaller the organization is. Per that, margin improvement on the fringes right now is driven primarily by a reversion to a more reasonable expense base than what has been in place in the post-pandemic period. We’re dealing with a higher expense for labor, as the primary driver of expenses.

Further, margin improvement on the fringes right now is driven primarily by a reversion to a more reasonable expense base than what has been in place in the post-pandemic period. We’re dealing with a higher expense for labor, as the primary driver of expenses.

Yes, indeed, many industry observers are saying that those challenges will put more pressure on standalone organizations to do something, with one of the main choices being to join already-large multihospital systems, in order to better manage labor expenses. What are your thoughts about that?

No one is pulling back from M&A activity. So I think that if margins improve, leaders of patient care organizations will still move forward. I don’t think M&A activity is going to slow down; it’s pretty much going to continue to matter what. And I believe that it will accelerate to where we were pre-pandemic, in terms of activity.

Our recent survey found that, following “overall financial challenges,” at 54 percent, “staffing shortages and costs” ranked second-highest in terms of the challenges hospitals are facing right now, at 50 percent.” came in last, at 25 percent (respondents were asked to choose all that applied).

What we’re seeing is that labor expense is slowly moving backwards, and so if that’s the case, if it went all the way to pre-pandemic levels of expenses, well, prior to the pandemic, we had more M&A activity than we do now. So yes, there’s a little bit of financial distress; yes, there are well-situated organizations looking for a partner. But no one is pulling back from M&A activity.

What key markers are you looking at right now?

Just because the M&A activity is accelerating, I want to be clear that I don’t think that all the industry’s ills can be solved through M&A activity. You have to ask yourself, what are the risks we’re facing? And if we were to go down a partnership model, what sort of partnership structure will make sense? And I don’t believe there’s a single organization in the country that shouldn’t be proactively thinking about those questions. A lot of times, activity is a reaction to local forces or developments, and it’s a little bit hard to determine what’s going on. So this is a time to be careful—measure twice, cut once.

Do you think that too many organizations are leaping into M&A?

I would say it’s unwise to get into dealmaking without thinking carefully about strategy; having a game plan around what you’re trying to accomplish, is key. What are you going to do as an independent? What are the risks to you in staying on the course you’ve been on. And if you haven’t created a foundational set of goals and objectives of what you’re trying to accomplish, you can get ahead of yourself. I would say, the best way to figure out if someone’s a good fit for you is to do a very good analysis of what you’re trying to accomplish, and how that other organization might fit into your strategy. If you’re doing it as part of a well-thought-out plan, you’re opening yourself up to strategic opportunities. But if you’re simply participating without strategizing, you could end up having the process will dominate you, rather than the other way around. Not every set of goals and objectives is perfect, but almost all of them are directionally right; they give clarity as to what the aim is. At the very least, that ought to be done.

 

 

Per all of these financial pressures, the leaders of more and more patient care organizations are plunging ahead and developing artificial intelligence in order to help them solve a range of operational and other issues. You’ve been tracking the leveraging of AI in the revenue cycle management area. What are you seeing?

When we talk about AI, we’re still really talking about RPA, robotic process automation. And one of the challenges that we have is that the payer side of the world: they’re using systemic response and action based on machine learning. The volume that has traditionally been involved in things like denials, has increased exponentially. And our ability tor respond to that has not kept up with that volume increase. I’m looking for solutions that can see and interpret and respond in kind, without human intervention: interpreting the response, determining a course of action, acting, and responding to the payer. All of that. Right now, every single piece of that process is executed by humans.

Per what you’ve described, what will need to happen?

I think it requires a little bit of imagination; it requires the definition to be developed by people who are looking at this from an oversight and management perspective, to understand where the pain points are. And you need to be able to dedicate the resources to the development, and recognize that the development you’re working on will be individual. Your individual processes will determine how you react and respond to issues. And there are certain markers you can identify for areas to focus on. But the solutions become very specific; and that’s a challenge, because it will require individual-organizational approaches.

You won’t be able to go to Target?

Certainly not initially. We need to identify and validate specific use cases, and then build the tools to allow for variability of setup. It will have to become environment-agnostic: process changes that need to fit over and around specific operational processes. The analogy I’ll give you is this: when we were doing interfaces, we would do one-on-one interfaces between the organization and the payer; if you saw one, you saw one. Then the concept of interface engine evolved, with individual inputs and a standardized output. That’s the approach we need to take in this area.

 

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