Member Article

Executive summary

The COVID-19 pandemic has created significant challenges for smaller hospitals and health systems. It has presented significant challenges to smaller, less capitalized and otherwise distressed healthcare providers. In terms of operating performance, half of our country’s hospitals reported negative margins as Q1 of 2020. Reductions in commercially covered elective procedures and COVID-19 preparation and response, including the purchase of personal protective equipment (PPE) with the concomitant price increases, have created intense operating challenges for providers.

However, the pandemic also has revealed that certain health systems are well-positioned for growth. Those that saw industry transformation taking shape over the last several years had begun to reposition their service lines, optimized existing core operations and collaborated to extend and improve approaches to care delivery. Many have evolved to address changing consumer expectations in the pursuit of mobile and telehealth initiatives. We see ample evidence that many health systems have responded well and have managed to remain positioned for strategic growth.

Ultimately, larger systems are better positioned for the future. Access to capital, scale, vertically-integrated services and adaptability are crucial factors in achieving long-term strategic growth in today’s healthcare industry. With higher revenues and access to assets to pledge as collateral, larger systems have obtained debt financing in greater amounts and on more favorable terms than their smaller counterparts.

The COVID-19 pandemic has reduced M&A transaction volume as the focus of many hospital systems shifts from strategic growth to managing the financial and operational challenges of the pandemic. As we emerge from this period and move into 2021, a surge of hospital M&A activity is likely.

Independent hospitals that have been struggling may need to make difficult decisions to preserve the viability of their hospital, such as:

• Reduction or elimination of service lines
• Reductions in force
• Drastic cuts in expenses
• Reduction of capital investments
  
  

While the desire to remain independent is understandably important to many community hospital boards, independence may no longer be realistic in the current environment. Waller’s Ken Marlow and Kaufman Hall’s Anu Singh foresee an increase in the number of independent hospitals and smaller systems that will need to explore partnerships in order to ensure the continued delivery of quality healthcare in their communities.

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