An expert looks at mergers and acquisitions and hospitals on the brink

The last few years have proven to be financially stressful for virtually all hospital organizations in the United States. But it is abundantly clear that the level or degree of financial stress has been uneven throughout the U.S. healthcare system. Indeed, the mounting financial pressures on hospital organizations have contributed to the continued intensification of mergers and acquisitions (M&A) across the country.

One of the experts who has been following and analyzing all the ongoing activities is Anu Singh, Managing Director and Practice Leader in the M&A Practice at Chicago consulting and advisory firm Kaufman Hall. Singh was one of the experts who Innovation in healthcare Editor-in-Chief Mark Hagland was interviewed for the Executive Handbook: Top Priorities in Healthcare 2024, which the publication released last month. Below are excerpts from that interview.

One of the regular conversations of late is the viability of stand-alone hospital organizations. Hospital organizations of all types are feeling increasing financial pressures, but stand-alone, smaller, and rural hospitals have been hit the hardest. Would you agree that smaller, stand-alone hospitals are becoming economically unviable to survive financially?

Let’s look at the past and the deals that are happening. Are there organizations that are in a difficult financial situation and are looking for partnership models? Yes. Is that the only thing that’s happening? No. Health systems that are generating billions of dollars net in multiple markets, have solid payer relationships, and are developing a consumer-focused ambulatory care strategy—those organizations are engaging in M&A activity. And why is that? It’s similar to your premise. There’s an intellectual capital base that they don’t have, and their ability to generate that knowledge internally is leading them to partner, even some of the established ones. And the record is pretty clear: about one in eight organizations received an A-minus or better and decided to be a smaller partner in an acquisition. And there are mega-mergers that are deciding to do something in a partnership model because they see an even bigger opportunity than they do now.

Do you think most of the smaller and independent hospitals will be taken over in the next few years?

The ability to remain independent will be a more difficult path the smaller the organization. Accordingly, the improvement in margins in the periphery is currently driven primarily by a return to a more reasonable cost base than the one that prevailed in the post-pandemic period. We are dealing with higher labor costs as the main driver of expenses.

Moreover, the improvement in peripheral margins is now mainly driven by a return to a more reasonable spending base than the one that prevailed in the post-pandemic period, with higher labor costs being the main driver of spending.

Yes, indeed, many industry observers say these challenges will put more pressure on independent organizations to do something, and one of the main choices will be to join already large multi-hospital systems to better manage labor costs. What do you think?

Nobody is getting out of M&A activity. So I think if margins improve, patient care leaders will continue to move forward. I don’t think M&A activity will slow down; it will continue, no matter what. And I believe it will accelerate to pre-pandemic levels in terms of activity.

Our recent survey found that after “overall financial challenges” (54 percent), “staffing shortages and costs” were the second most common challenges hospitals face today (50 percent), with “25 percent” coming in last (respondents were asked to select all that apply).

We see that labor costs are slowly coming back, so if that’s the case, if they’ve reached pre-pandemic spending levels, well, pre-pandemic, we had more M&A activity than we do now. So yes, there are some financial concerns; yes, there are well-heeled organizations looking for a partner. But nobody is pulling back on M&A activity.

What key metrics are you paying attention to right now?

As M&A activity accelerates, I want to be clear that I don’t think all of the industry’s problems can be solved through M&A activity. You have to ask yourself, what are the risks? And if we were to move to a partnership model, what kind of partnership structure would make sense? And I don’t think there’s a single organization in the country that shouldn’t be thinking proactively about these issues. Often, the activity is in response to local forces or events, and it’s a little hard to tell what’s going on. So this is a time to be cautious—measure twice, cut once.

Do you think too many organizations engage in mergers and acquisitions?

I would say it’s unwise to go into a deal without thinking through the strategy; the key is to have a game plan around what you’re trying to achieve. What are you going to do as an independent? What are the risks of staying on track. And if you haven’t created a basic set of goals and objectives of what you’re trying to achieve, you can be thinking too far ahead. I would say the best way to determine if someone is right for you is to do a very good analysis of what you’re trying to achieve and how this other organization might fit into your strategy. If you do that as part of a well-thought-out plan, you open yourself up to strategic opportunities. But if you just participate without developing a strategy, you can end up with the process dominating you, not the other way around. Not every set of goals and objectives is ideal, but almost all of them are directionally appropriate; they give you clarity about what the goal is. At least that should be done.

With all these financial pressures, leaders of more and more patient care organizations are jumping in and developing AI to help them solve a range of operational and other challenges. You’ve been tracking the use of AI in the revenue cycle management space. 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’re facing is that the payment side of the world: they’re using machine learning-based system response and action. The volume that was traditionally involved in things like denials has grown exponentially. And our ability to respond to that hasn’t kept up with that volume growth. I’m looking for solutions that can see, interpret, and respond in kind, without human intervention: interpret the response, determine a course of action, act, and respond to the payer. All of that. Every bit of that is done by humans right now.

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

I think it takes a little bit of imagination; it takes a definition that’s developed by people who are looking at it from a governance and management perspective to understand where the pain points are. And you have to be able to devote resources to development and recognize that the development that you’re working on is going to be individual. Your individual processes are going to determine how you react and respond to problems. And there are certain markers that you can identify to determine areas to focus on. But the solutions get very specific; and that’s the challenge because it’s going to require an individual approach and an organizational approach.

Won’t you be able to go to Target?

Certainly not at the beginning. We need to identify and validate specific use cases and then build tools that allow for configuration change. It will have to become environment agnostic: process changes that have to fit specific operational processes. The analogy I will give you is this: when we were creating interfaces, we were creating one-on-one interfaces between the organization and the payer; if you saw one, you saw one. Then the concept of the interface engine evolved, with individual inputs and a unified output. That is the approach we need to take in this area.