Coming out of the pandemic, many U.S. health systems are seeking to implement new growth strategies that can enable them to strengthen their market position and remain competitive.
The financial challenges of 2022, the worst financial year for U.S. hospitals since the pandemic, continue to impact the industry. Capital is now more limited and workforce shortages are driving higher contractor labor expenses. In-patient volume growth continues to be weak, with adult inpatient volumes projected to increase by just 2% over the next decade.
“CFOs are now trying to think about acquisitions and growth while their balance sheets are depleted and income statements have been challenged by a combination of lost revenue and significantly higher labor and supply expenses,” said Grant Thornton’s National Healthcare Advisory Principal Stephen Thome “It’s reduced the dry powder of capital they have and it has changed the threshold of what constitutes a sound investment, whether organic or inorganic.”
Expanding from within
Viewing growth strategies through an internal lens
Currently, healthcare organizations are focused on getting back in the black, and have deferred M&A deals they would have approved in the past. In a changing healthcare market, scale alone is not the answer for sustainable growth. They are focusing on adjusting their workforce to today’s economic realities and taking costs out of the system to improve the bottom line.
“Today, deals have to be very strategic, with a clear rationale—to extend your market reach, firm up your ability to care for your community, and take on some sort of premium risk,” said Grant Thornton Healthcare Advisory Managing Director John Summerlin. “Scale isn’t the only driver now.”
“Today, deals have to be very strategic, with a clear rationale—to extend your market reach, firm up your ability to care for your community, and take on some sort of premium risk”
Unlike five years ago, when health systems were focused externally, health systems in today’s economic environment are focused internally to find new efficiencies and optimize their operations. Growth in the current market will be driven by the need to expand existing services and to maximize existing assets in order to evolve and thrive.
“They are more focused now on internal efficiencies and optimization,” Summerlin said. “That takes much more attention than making a new acquisition. So, they don’t have the time and liquidity to absorb M&A deals into their operations as slowly as they have in the past.”
The regulatory environment is also much different from just a few years ago. With the rapid consolidation of hospital systems—and growing evidence in recent years, that consolidation has led to higher costs—federal agencies and some states are taking a closer look at hospital mergers, with a renewed push for antitrust enforcement in the healthcare sector.
Recently, the Federal Trade Commission and the U.S. Department of Justice proposed new guidelines for screening healthcare deals that could increase scrutiny on potential healthcare mergers.
With Medicare’s push towards value-based care, the industry’s M&A perspective is transitioning from acquisition of hospitals to growing the network of care. Systems have been shedding non-core assets like home health services and labs and selling them to joint venture partners, and bolstering their balance sheets with the proceeds. “Smaller deals—to acquire ASCs or provider practices, for example—are just easier transactions to make, even in the current economic environment,” Summerlin said. “Of course, interest in megamergers among the really large health systems isn’t going away.”
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Creating growth strategies
Making better decisions about ways forward
So, how can health systems ensure that their growth strategies are productive?
“As health systems look at providing services that meet the needs of their communities, they’re going to need to make choices that are more fiscally responsible in the short term out of necessity, but with a responsible eye to the long term,” said Grant Thornton Healthcare National Managing Principal David Tyler. “As a new equilibrium among not-for-profit and private equity providers takes hold over the next few years from now, they will need to rethink the services they can and can’t provide.”
Health systems will be operating in a new normal that will have a higher cost base in terms of labor rates and supply chain. The new way will require more efficient delivery models, but today’s governing boards will need to be careful to select those services that continue to be profitable.
“I think that health systems will need to reach new markets by partnering with other providers with lower-cost structures,” Thome said. “As health systems move toward value-based care and take advantage of diversified growth opportunities by making acquisitions or partnerships that enable them to deliver a broader set of services, they will need to manage them carefully as they are integrated into the health system. ”
“As health systems move toward value-based care and take advantage of diversified growth opportunities by making acquisitions or partnerships that enable them to deliver a broader set of services, they will need to manage them carefully as they are integrated into the health system”
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Moving ahead in a changed environment
Clearly, growth is going to look different in the coming years. Health systems will need to have a clear view of what they want to be in the future. “They’ll have to think through who their competitors will be in 10 years,” Thome added. “They’re going to have to compete with emerging private equity healthcare organizations and understand that their service models will need to cede services in some areas to those leaner and more nimble for-profit entities in order to survive.”
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