Deceptive ads will be under the microscope going forward thanks to new CMS regulations.
As we approach the annual open enrollment period, Medicare Advantage (MA) insurers will need to be more careful than they've been in the past in how they market to seniors.
Misleading advertising has plagued the private program for years and with the exponential growthMA continues to experience, more seniors than ever are at risk of being led astray.
Insurers, brokers, and other third-parties are allowed to begin MA marketing for the coming coverage year on October 1 in the lead-up to open enrollment kicking off on October 15. For the 2024 plan year, payers will have to keep CMS' new MA marketing regulations in mind when they try to add to their membership.
CMS will prohibit any ads that do not mention a plan name, use words and imagery that could be confusing, or use the Medicare name or logo in a misleading manner.
"This final rule will strengthen Medicare Advantage and hold health insurance companies to higher standards for America's seniors and people with disabilities by cracking down on misleading marketing schemes by Medicare Advantage plans, Part D plans and their downstream entities," CMS said in a press release.
The rule will require a change from insurers from how they've targeted seniors in the past—even as recently as last year. According to analysis by KFF of data on English-language TV ads that aired across national and local markets on broadcast television or national cable during the open enrollment period for coverage in 2023, viewers were often hit with marketing that is now prohibited.
There were more than 9,500 ad airings per day and of those, over a quarter (27%) included a government-sponsored Medicare card or an image that resembled it. The Medicare card or a similar image appeared in 28% of insurer-sponsored airings, compared to 21% of airings sponsored by brokers and other third parties.
Insurers will have to be more cautious for the upcoming enrollment period and do their part to curb a problem that has negatively affected beneficiaries, leading to a rise in complaints and attention from CMS and lawmakers.
There are several facets of pricing information that hospitals should stay on top of.
Providing pricing information is just one aspect of improving price transparency—undermined by giving patients inaccurate or inconsistent prices.
To achieve greater price transparency and build trust with patients, hospitals must go beyond what is just required by the current regulations in place. That can mean providing uniform prices for the same services, regardless of how those prices are sought.
Since going into effect on January 1, 2021, the hospital price transparency rule requires each facility to provide a machine-readable file of standard charges for all items and services in a consumer-friendly display of shoppable services. Many hospitals are struggling to follow these requirements and as a result, the number of fines handed out by CMS for noncompliance continues to grow.
In the absence of more standardization being introduced in the law, hospitals need to take the initiative to button up and streamline pricing information themselves. Part of that is finding ways to have a user-friendly online display of services, allowing patients to access and decipher prices in an uncomplicated manner. CMS has tried to help by releasing three voluntary sample formats for hospitals to use.
Beyond just finding ways to present the data though, hospitals also need to find consistency in the information they're giving to patients.
According to a studypublished in JAMA Internal Medicine by several universities and co-authored by Mark Cuban, hospitals may quote different prices for their services depending on where that information is obtained. The cross-sectional study of 60 hospitals used "secret shoppers" to find out prices for vaginal childbirth and brain MRI over the phone before comparing it to prices on the hospitals' websites. Researchers found that prices varied widely, suggesting a poor correlation between prices posted online and prices offered over the phone.
The research is another example of hospitals' issues with price transparency efforts, which can not only lead to patients choosing to seek care at another location, but potentially further push patients to retail experiences.
Innovating ways to offer clear, upfront pricing may still take time for providers, but there is low-hanging fruit right now for hospitals to clean up their price transparency. It just requires making it more of a priority than an afterthought.
Hospitals should even consider collaborating with other providers, Tina Barsallo, vice president of revenue cycle operations at Lifepoint Health, recently toldHealthLeaders.
"If possible, pull a team together to create joint ownership and partnership in creation of the tools and to help drive consistency and compliance," Barsallo said. "Reach out to peers to brainstorm on ways they have accomplished compliance, so you don't need to reinvent the wheel. It is extremely helpful to collaborate with other providers and health systems."
Providers have ways to gain more leverage, but it includes being willing to walk away from a bad deal.
If it seems like contract negotiations between payers and providers are becoming more adversarial and playing out in public more often, that's not just perception—it's the reality in which the fragmented healthcare system currently operates.
Thanks to economic headwinds made up of record inflation and operational challenges, hospital and health system CFOs find themselves with their backs against the wall in negotiations with insurers. Operating margins may be slowly improving, but they remain razor thin for many, especially in comparison to the profits payers continue to reap.
As contracts agreed upon in a different financial climate reach their expiration, the two sides are being forced to come to the table and find new common ground during a new normal in healthcare.
"Those negotiations will be ferocious because once again hospitals have burned through their cash," Britt Berrett, managing director and teaching professor at Brigham Young University and former CEO with HCA, Texas Health Resources, and SHARP, told HealthLeaders. "Their biggest issues are salary, wages, and benefits. They don't see those going away. So this is going to be all-out battle between providers and payers."
CFOs could have more leverage in these talks than they think, but it requires willingness and preparation to pull levers that may be uncomfortable.
Go public
There's a reason so many contract negotiations play out in the media. It's a tactic that has been utilized repeatedly to garner public support and paint the other side as the villain.
With the financial chasm between payers and providers as wide as it's ever been, there's even more reason now for the latter party to convey that dynamic to the public.
"I think you're going to see an acceleration in the public town square, the competitiveness and the negotiating in the public opinion space," Berrett said. "I think moving forward, you're going to see a tremendous amount of public awareness on contract negotiations. Payers and providers are going to be arguing their cases in the town square."
One of the negotiations in the headlines right now is the one between Bon Secours Mercy Health and several regional Anthem Blue Cross Blue Shield plans. Bon Secours alleges that the insurer is not giving fair reimbursement for services and put out a statement directly speaking to the community, highlighting increases in its labor costs and operating expenses.
"Unfortunately, what Elevance Health (Anthem) pays our doctors, nurses and other caregivers is not sustainable or market competitive," the statement reads. "Their current reimbursement rates – which are substantially less than those we receive from other payer partners in the market – have not kept up with inflation or labor costs and are overwhelmingly inadequate to account for the cost of providing safe and quality care."
Making the media aware of contract impasses and providing your side of the story can be effective, but shaping the narrative through direct communication with the patients you serve puts the insurer on the opposite side in an undesirable position.
Consider vertical integration
Vertical integration isn't so much a negotiating tactic as it is a long-term plan to break free from complex negotiations, but providers can at least put themselves in a less desperate position in talks by weighing consolidation opportunities.
As more and more people get their health insurance from the individual and exchange market rather than from employers, providers can gain more flexibility by moving towards an integrated delivery system.
"I'm of the opinion that if you do not have a strong integrated delivery system and if you are really struggling with your cost control of salaries, wages, and benefits, you have very little leverage over the payers," Berrett said. "And that's just a real dynamic that's going on right now.
Hospitals can opt to partner with a health plan to share in the cost savings. Alternatively, they can choose to negotiate directly with employers who are self-insured or with payers representing large employers and use that as leverage in negotiations.
Focusing on high-end tertiary services rather than standard fare primary care can also make providers more appealing to insurers and reduce the competition.
Walk away
If all else fails, providers should consider terminating a contract and stepping away from the negotiating table. It's not the ideal path to go down, but there is some truth to the axiom 'no deal is better than a bad deal' in this case.
Showing payers you're willing to detach if they don't meet you somewhere in the middle can create both immediate and future leverage. Sometimes just the threat will force payers to up their rates and relent.
However, an empty threat is just that. Providers need to have some willingness to walk the walk, which means assessing their out-of-network prospects before making that leap. Hospitals that rely on patient volume through their emergency department will be less affected by an out-of-network status, for example, because emergency services qualify for in-network rates.
This may cause providers to lose a segment of their patients, but that's where conveying your process and position to the public, as mentioned, can maintain trust.
It's an uncomfortable measure for hospitals and health systems to take, but with the playing field being what it is, gaining any kind of edge can make all the difference to the bottom line.
Aetna's performance in the bonus program could have a sizeable impact on the payer's operating income.
CVS Health CEO Karen Lynch expressed confidence that Aetna's Medicare Advantage (MA) star ratings will improve for 2024, weeks ahead of CMS' release.
When CMS reveals star ratings results, the implications could be significant for MA insurers hoping to qualify for bonus payments—given to plans with at least four-star ratings.
Last year's release saw star ratings fall across the board, with the average rating dropping from 4.37 to 4.15 due to an adjustment in methodology to account for the pandemic winding down. CVS wasn't immune to the decline as it saw the ratings of its largest MA plan, Aetna National PPO, fall a full star from 4.5 to 3.5. That left the payer with only 21% of its MA members enrolled in plans with star ratings of at least four stars, compared to 87% in 2022.
Speaking at Morgan Stanley's healthcare conference this week, Lynch said she expects Aetna will improve on its star ratings for the coming year.
"I'm optimistic about where we will kind of land relative to our stars performance based on the kind of internal indicators I have," Lynch said.
Back in May, CVS announced that it expects the loss of bonus payments to affect its operating income in 2024 by $800 million to $1 billion.
In a call with investors after the release of the company's first quarter earnings, Lynch said she was "encouraged by what we're seeing on the internal metrics relative to our stars performance," pointing to contract diversification and investments to improve the clinical and member experience.
Following the release of its second-quarter earnings, CVS announced restricting and layoffs with the aim of reducing costs by up to $800 million in 2024. For the quarter, the payer experienced a 37% decline in net income year over year to $1.9 billion.
A look at three health systems that were up and three that were down in the second quarter of the year.
Nonprofit hospitals and health systems are beginning to claw their way back from the struggles of 2022, but challenges persisted in the first half of this year.
Second quarter earnings reports revealed nonprofits continue to deal with high operating expenses, which has restricted financial flexibility.
The good news is patient volume and utilization is on the rise, resulting in some health systems reporting positive operating margins.
Here's a look at notable second quarter earnings among nonprofits:
In the black
Halfway through its first full year since merging, Advocate Health reported an operating margin of 0.6% and $996.7 million of excess revenue over expenses. The health system is one of the largest nonprofits in the country after last year's merger combined Advocate Aurora Health and Atrium Health.
Advocate Health's second quarter saw $75.3 million in operating income, a significant improvement over the $10.4 million in its inaugural quarter. Through the first half of the year, outpatient visits increased 6.5% while physician visits rose 7.3%. The health system's bottom line was also helped by $938.4 million in net investment income.
Advocate also made a change in leadership, with CFO and executive vice president Anthony DeFurio resigning from his role, paving the way for Bradley Clark, senior vice president and treasurer, to step in as interim CFO.
Another health system that merger last year, Intermountain Health, similarly benefited from significant investment income of $909 million in the first half of the year to produce almost $1.1 billion in net gain.
Expenses, however, jumped from $5.9 billion to $7.4 billion year-over-year, resulting in operating income falling to $184 million, compared to $285 million through the first six months of 2022.
Elsewhere, Kaiser Permanente reported a net income of $2.1 billion in the second quarter—a strong recovery from the $1.3 billion in loss during the same period last year.
The integrated healthcare delivery organization experienced a whopping rise in operating income to $741 million, compared $89 million in the second quarter of 2022.
Once again, hefty investment income of $1.3 billion boosted financials, but Kaiser warned it tends to see lower operating margins in the second half of the year due to expenses going up.
In the red
Other health systems haven't been as fortunate through the first half of the year, such as Providence Health & Services, which reported an operating loss of $202 million for the second quarter.
Still, it was an improvement over the $424 million operating loss the nonprofit suffered in the second quarter of 2022, leading to a cost-cutting restructuring.
Rising inpatient admissions (2%), non-acute volume (6%), and outpatient surgeries and procedures (17%) helped Providence continue to fight its way back, but operating expenses also increased 7% year over year through the first six months.
SSM Health also experienced an operating loss $39.6 million in the second quarter yet improved on the $49.8 million loss during the same in 2022.
It marked consecutive quarters of operating loss for the St. Louis-based health system, which lost $16.5 million in the first three months of the year. Operating expenses increased 11.9% to $2.64 billion, in-line with other nonprofits.
Elsewhere, UPMC regressed after a promising first quarter that netted a $31.5 million gain, reporting $85.8 million in operating loss for the second quarter for a drastic 82% drop.
The integrated nonprofit system dealt with expenses rising 11.2% year over year to $13.8 billion, bringing down its operating margin for the year to 0.1%.
Economic circumstances are fueling animosity, especially when negotiations go public.
Inflationary pressures are putting strain on contract negotiations between payers and providers as the two sides work to iron out deals in a challenging financial climate.
Many contracts that were agreed upon before the economy experienced record inflation are now coming to an end, but tensions are higher as providers and insurers battle over new terms. While hospitals are beginning to bring labor costs down and experience more patient volume, they've enjoyed nowhere near the financial stability of major payers—many of which continued to rake in profits through the second quarter of the year.
Hospitals are under the gun to secure favorable reimbursement rates in negotiations and payers are reluctant to capitulate. The result can be a public, drag-out war-of-words such as the one Prisma Health and UnitedHealthcare (UHC) have engaged in.
The South Carolina-based health system filed a lawsuit against the insurer giant, alleging UHC breached its confidentiality agreement during contract negotiations by disclosing information about Prisma's rate proposals to media outlets. Prisma asked the judge to require UHC to retract its previous statements to the media that Prisma demanded a 24% increase in reimbursement rates.
UHC, however, fired back in a response to the court, claiming Prisma "started this whole mess through its own media efforts" by sending an email to its patients with UHC coverage, informing them of the upcoming termination of the parties' contract. In the email, Prisma writes "We need insurance companies, including United, to cover their fair share."
Today, the court ruled against Prisma's request for a temporary injunction to restrict UHC from disclosing additional information while the case continues.
In addition to highlighting how hard both sides are fighting to not give up an inch, the dispute between Prisma and UHC also illustrates the dangers of taking negotiations public. That tactic is one providers have had to resort to in an attempt to grab whatever leverage is available to level the playing field against insurers. But it's a lever that can come with consequences.
Britt Berrett, who successfully used that tactic during his stints leading several hospitals in his career—Texas Health Presbyterian, Medical City Healthcare, and Sharp Chula Vista Medical Center—told HealthLeaders that it should be used sparingly.
"You can light that fire once. You can light that fire twice. But if you continue to light that fire, the payers are going to work around you and find alternative solutions," said Berrett. "So yes, in the here and now, it's an effective tool in the short term. But long-term, that's building animosity."
Amazon Clinic is giving patients the transparency they want; and it’s something they're not getting enough of from traditional providers.
Retail giant Amazon is disrupting healthcare in several ways, but one of the areas Amazon Clinic is taking aim at is somewhere providers are especially vulnerable: price transparency.
As we know, healthcare costs can be incredibly cloudy, so Amazon Clinic's commitment to price transparency could force hospitals to become more competitive in their pricing structures—which could also lead to a possible downward pressure on healthcare prices.
But, while Amazon Clinic represents a major market disruptor for CFOs, organizations can adapt and compete by leveraging existing strengths, embracing price transparency technology, and prioritizing the patient experience.
Amazon’s delivery
Amazon Clinic contracts with four startups to offer virtual messaging and video appointments for around 30 medical conditions in an effort to create a retail experience for patients. After launching the initiative in November 2022, Amazon recently announced it was expanding to all 50 states, including asynchronous care in 34 states and nationwide telehealth services.
The convenience it affords patients is obvious, but Amazon Clinic also offers the kind of upfront pricing that providers have either struggled to share or so far been unwilling to. As detailed in a report by Forbes, Amazon Clinic can charge $35 for messaging with a physician who will respond within an hour and 45 minutes, or $40 to get a response in 30 minutes, while a video visit with a wait time of around 90 minutes can cost $74.
Essentially, Amazon is giving patients tiered pricing based on quality and quickness—and all that information is provided before the patient has to choose a service.
Aside from its current limitations in how many conditions it can offer services for, Amazon Clinic also doesn't accept insurance yet. So, while it may not be revolutionizing healthcare, it's still offering patients a unique alternative at a time when many traditional providers are struggling just to keep their doors open.
Transparent, not invisible
What can providers do when a disruptor like Amazon Clinic encroaches their lane? Building greater trust with patients by making their lives easier is a good place to start.
"Healthcare, I believe, is still a relationship business and will be at least for a while longer," Kris Kurtz, chief financial officer for the University of Michigan Health-West, recently toldHealthLeaders. "We have patient relationships today for the most part, so it's our business to loosen access, and the ease of use is probably the best strategy we can deploy. As an industry, we make it far too difficult for patients to enter and navigate the system. In some instances, we may need to partner with the disruptors rather than compete with them. [Likely it's] probably a combination of both."
When it comes to price transparency, providers need to get their house in order first. Depending on the source, compliance rates are varying wildly. The latest report by Patient Rights Advocate found that of 2,000 hospitals reviewed, only 36% were complying with the price transparency rule. The American Hospital Association fired back at the report, saying it "blatantly misconstrues" hospitals' compliance and pointed to a recent report by CMS that found that as of 2022, 70% of hospitals had complied with both federal requirements and 80% had complied with at least one.
Regardless, that still leaves many hospitals who are failing to comply and CMS itself has proposed changes to regulations to crack down on compliance in 2024. But compliance isn't the only issue with price transparency.
Handing prices over to patients and letting them decipher it is not enough. The complexity and size of the data creates a usability issue that is further worsened by lack of standardization for organization and reporting. That is where a service like Amazon Clinic shines by giving patients pared-down pricing without the need to seek it out.
It will likely take some time before there is a widescale adoption of that type of pricing feature by providers, but hospitals shouldn't skip steps in the meantime by not doing their part to be as transparent as possible to patients.
"The higher percentage of completeness regarding the publication of machine-readable files and accurate patient estimate tools, the closer we are to empowering patients to gain confidence in knowing how much their healthcare services will cost," Chris Severn, CEO of Turquoise Health, toldHealthLeaders. "Adherence from both hospitals and payers also eliminates a significant burden of negotiating new rates because all rate data will be publicly available, meaning fair rate calculation becomes simpler and accessible."
"Overall, these lead to lowering the cost of healthcare."
Wake-up call
What Amazon Clinic is attempting to do with their transparent, tiered pricing isn't unheard of and its aforementioned limitations make it more supplemental than a true replacement of care services, but providers should be getting the message loud and clear that innovation is necessary for them to survive in the future.
Providers still have the homefield advantage as the more trusted source for care and they still have a leg-up by allowing patients to pay with their insurance.
The technology side is where healthcare has to close the gap on retailers, but it will require a willingness to serve patients in a different way than has traditionally been the case.
"Most of us in the healthcare industry are trying to work on access," Kurtz said. "We tend to be one of the last industries to innovate. [Retail's presence in healthcare] will certainly accelerate that and force us to innovate. I don't know why healthcare has always lagged behind when it comes to digital innovation. But I think these retailers will definitely speed up our transition."
Outpatient settings are experiencing the biggest fluctuations due to patients potentially delaying elective procedures.
Hospitals could experience a rise in patient volume in the coming months, especially on the outpatient side, after a decline in the summer.
Patient volume has been a barometer of the financial health of providers following the onset of the COVID-19 pandemic. Many of the largest for-profit hospitals reported encouraging admission totals in the second quarter of the year, which contributed to stabilizing operating margins.
July, however, brought a dip in patient volume and revenue as hospitals' financial performance worsened compared to previous months, according to Kaufman Hall's latest National Hospital Flash Report. Adjusted discharges per calendar day fell 7% month-over-month, with outpatient revenue per calendar day dropping 8%, compared to a 3% decline on the inpatient side.
At least on the outpatient side, the decrease in volume shouldn't come as much of a surprise, Janet Carbary, CFO at IRG Physical & Hand Therapy, told HealthLeaders.
"It's pretty typical on the outpatient side that it slows down," Carbary said. "We're very used to a summer dip because people go on vacation, they don't want to commit. We did see a little bit in July. We were blaming it maybe on the new COVID wave coming through, higher COVID numbers, and people are still reluctant to go into medical places if they have a high vulnerability to COVID. But it's not uncommon because staff and doctors all take vacations during the summer.
"I suspect we're going to see it bounce back up in September to pre-COVID numbers."
IRG may have already started to experience the autumn bump with record-setting volume for August, Carbary shared.
"We're a bit stunned by it ourselves," she said. "We have truly seen the first pre-COVID numbers. So we're excited about what we're seeing so far."
Carbary attributes the increase to demand rebounding after the pandemic kept patients away. Even with outpatient revenue per calendar day declining month-over-month in July, Kaufman Hall found it was still 9% higher year-over-year, 12% greater year-to-date compared to 2022, and a whopping 47% above 2020 levels.
"A lot of people delayed treatment until a time they felt comfortable to go get them," Carbary said. "People are just trying to get back to some sense of normalcy and they're not letting those things deter them or stop them like they were in the past."
With the current fiscal challenges, hospitals can improve their financial flexibility and stability by capitalizing on the shift to outpatient settings in a post-pandemic world. By implementing strategies to expand their outpatient footprint, rural health and critical access hospitals in particular may be able to keep their doors open.
Simply, hospitals that emphasize care transitions will be in a better position than those who don't. That could mean establishing relationships with local outpatient providers.
"I come out of the hospital environment and we don't do outpatient the same way freestanding outpatients do," Carbary said. "We're not as nimble and our systems aren't set up to accommodate, especially if you're a large acute care facility, you just don't do outpatients the same way and as efficiently as it can be done in an outpatient setting. So I see hospitals absolutely concentrating more on the outpatient side and the opportunity and the money to make it there, if they're efficient in how they do it."
Some payers have decided to shift their strategy or focus their attention on their core line of business.
While most major payers continue to reap profits, not every insurer has experienced smooth sailing over the past year.
Certain companies have either decided to leave markets or abandon their lines of business entirely.
Here's a look at five recent market exits by payers:
Cigna
The insurer announced it is trimming down its Affordable Care Act exchange offerings, notably leaving Kansas and Missouri in 2024.
Instead, Cigna will expand into 15 new counties in North Carolina, with the potential to reach an additional 200,000 members. With the shift, the payer will offer plans in 350 counties in 2024, compared to 363 in 2023, and in 14 states in total.
Cigna also revealed ACA plan benefits, which include 24/7 virtual care for members through MDLive, along with $0 preventive care, $0 copayments, and $0 deductibles on certain services.
"We take a thoughtful and deliberate approach to our geographic presence to ensure our plans meet high standards for affordability, network quality and comprehensive coverage," Chris DeRosa, president of Cigna's U.S. Government business, said in a press release.
Humana
Earlier in the year, Humana made the decision to leave its employer group commercial medical products business to continue making Medicare Advantage its priority.
The move came after a strategic review that determined the business could no longer meet commercial members' needs or support the company's long-term plans.
Medicare Advantage is Humana's bread and butter, with the payer commanding the second-largest market share behind only UnitedHealth Group.
"This decision enables Humana to focus resources on our greatest opportunities for growth and where we can deliver industry leading value for our members and customers," Bruce D. Broussard, Humana president and CEO, said in a statement.
Friday Health Plan
It's been a disappointing journey for Friday Health Plans as it wound down its operations this summer.
After raising hundreds of millions in investments, the insurer eventually sputtered out, leaving tens of thousands of members in search of new health plans.
"Unfortunately, Friday has been unable to scale our financial infrastructure to match the pace of our growth and secure the additional capital required to run our business," the company said in an announcement.
Bright Health
By selling its Medicare Advantage business in California to Molina Healthcare in a deal worth approximately $510 million, Bright Health is now completely out of the insurance business.
The sale allows the company to pay off its debts and obligations to bank lenders and put money towards its liabilities in its discontinued ACA insurance business.
The struggling insurtech was facing bankruptcy and had been slashing its reach in insurance, choosing to instead build around its care delivery business.
"The sale allows us to focus on driving differentiation and sustainable growth through our Consumer Care Delivery business," Mike Mikan, president and CEO of Bright Health, said in a statement.
Oscar Health
Another insurtech, Oscar Health, will leave the California individual market for 2024 with the intention of reentering the state down the road.
Last year, the payer also announced exits for the Exchange and Medicare Advantage markets.
Nevertheless, the company said following the first quarter of 2023 that it expects to hit profitability this year.
"A year ago, we were focused on absorbing our increased scale, ensuring that our operations could handle a sizable increase in growth," said newly appointed CEO Mark Bertolini on a call with investors. "Today, we are focused on advancing the capabilities and technology to best serve our members and have been able to shift our attention to implementing a series of initiatives aimed at improving the efficiency of our operations."
Understand the value you bring to the table and have a long-term strategy, says one CFO.
After historic levels of private equity (PE) deal-making in 2021 and 2022, activity dipped in the first half of this year as firms dealt with debt service costs and other economic challenges—but that doesn’t necessarily mean your organization is safe from the PE disruption.
PE deals are expected to rise though in the second half of the year and into 2024 as the debt market recovers and inflationary pressures settle.
This just goes to show that PE’s presence in healthcare isn't diminishing anytime soon, even if the level of activity doesn't return to the record-breaking highs during the peak of the COVID-19 pandemic.
CFOs have decidedly realized that if you can’t fight PE, you might as well partner if necessary, so reading the market and recognizing the ebbs and flows of PE is critical for providers who are considering partnerships with firms.
What is the state of PE now?
As it stands, hospitals aren't the only ones under financial stress—investors are also dealing with economic pressures that are causing them to move cautiously.
The result has been a slowdown in PE deal-making in the first half of 2023 following two straight years of historic investing. Thanks in part to the trillions in monetary stimulus the economy received to offset the effects of the pandemic, 2020 saw a record $151 billion in total deal value, according to research from Bain & Company. That breakneck pace didn't sustain in 2022 as market forces in the second half of the year caused a dip to $90 billion, but it was still more than $10 billion greater than the next-closest year.
Recent research by PitchBook, revealed that PE deals in healthcare declined "unexpectedly" in the second quarter of 2023. An estimated 164 deals took place in 2023, the lowest figure since the second quarter of 2020 and a decrease of 23.7% from the first quarter of 2023. While it marks the sixth straight quarter of deal count declines, the second quarter was still 12.3% higher than the average quarterly deal count in 2018 and 2019.
Much of the deceleration is due to heavily leveraged platforms feeling squeezed by growing debt service costs and upcoming maturity walls from the federal funds rate being set at 5.5%, Pitchbook notes.
It’s not all downhill though.
It's expected that PE activity will steadily climb again in the second half of the year and into 2024. Pitchbook believes a "gradual reversal" is coming with buyers more willing to accept prices lower than those from the past two years. As the economy stabilizes, inflationary pressures settle, and the debt market recovers, PE deal-making should pick up as firms have their dry powder at the ready.
What does this PE activity mean for CFOs?
It’s not out of the question for CFOs to consider partnering with PE firms, especially when there are minimal financial alternatives.
PE isn't all bad, Janet Carbary, CFO at IRG Physical & Hand Therapy, told HealthLeaders.
"They can help a company grow. They can bring in some expertise on the ground that the company doesn't have, especially in the finance and marketing area. And they certainly give the company access to capital," Carbury says.
But keep in mind they aren't in it for the long term, "private equity is rarely in it for longer than five years," she says.
Still, some providers may see a PE deal as an opportunity to shed management and administrative responsibilities to focus all their efforts on delivering high-value care. PE firms can provide financial relief or allow a practice owner to exit on their own terms.
"There are so many owner-operators who don't have a really good exit strategy for when they retire and no longer want to be an owner-operator," Carbary said. "It does potentially give the owner-operator a way to transition their company into a little bit longer term exit strategy for the company and the employees."
So how can providers capitalize if they are looking to partner? Carbary offers two pieces of advice: know your worth and know what you want to accomplish, both in the short- and long-term.
"You have to understand your value as a provider," Carbary said. "Too often owner-operators out there don't have a good idea of what their company is worth. It's really important that you feel like you're in control and that you know you're valuable coming in and that private equity is interested in you because they feel like they can continue to add value."
Do you want to remain independent? In that case PE is probably not the way to go, Carbary warns. "Or do you want to sell a minority share that's going to bring in capital to allow you to grow to a point where you can essentially buy them out again? You as a provider have to have a very clear understanding of what your relationship is going to be with private equity."
Private practices can also take steps to make themselves more attractive to PE firms, such as auditing workflow processes and implementing new technology.
Regardless of whether providers ever make the leap into PE, being ready to jump at the right opportunity will be an advantage during this new normal of PE in healthcare.
