Following are nine key takeaways from the 12th Annual Healthcare Provider Conference held in Charlotte, North Carolina, on September 12, 2017.
- Ambulatory surgery center M&A hybrid investments increasing — Members of the ambulatory surgery center industry are noticing a shift away from the development of de novo centers and toward mergers or acquisitions of existing centers. The key takeaway here is the shift toward hybrid investments, rather than straight majority equity purchases. Interestingly, we have seen significant growth in hospital/health system-physician-manager joint ventures. Specific emphasis has been placed on acquiring a critical mass or core concentration in particular markets.
- Characteristics a CEO should expect from a private equity firm — One of the more interesting questions asked during the healthcare private equity keynote panel related to what a CEO (or founder) should look for in a PE fund partner. The panel suggested looking for industry focus and knowledge, an understanding of the business and trends. An interested private equity firm should be willing to meet with the CEO beforehand and offer references from prior transactions. The CEO should develop a relationship with the private equity firm that will facilitate a working relationship during successes and challenges. The CEO should ask a private equity firm for information on the consistency of the firm’s performance in prior transactions and for information on how the firm dealt with underperforming deals. The focus here is on successful management teams and a strong reputation in the industry.
- Characteristics a private equity firm looks for in acquiring a provider — Following the discussion of what a CEO should expect from a PE fund, the private equity keynote panel turned to what a PE fund should expect from a healthcare provider. Here, the panel suggested, among other things, looking for the CEO/founder’s ability to articulate a clear vision for the business, analyzing the provider’s point of differentiation in the market, and assessing whether the provider is in compliance with applicable healthcare regulations. For a more detailed overview of this topic, see “What Private Equity Looks for in Acquiring a DSO” by the dental practice brokerage company, Tusk Brokerage.
- Common characteristics in underperforming private equity healthcare deals — The healthcare private equity keynote panel engaged in extensive discussion about the common characteristics that have led to underperforming healthcare deals. Among these was the healthcare provider’s lack of strong management and operations teams. On the PE fund side, the panel noted the fund’s lack of industry focus in the seller’s space.
- Key points in hospital mergers and acquisitions
- Importance of culture to the success of a transaction — Ask whether the transaction will advance the vision of each of the original entities, as well as the vision of the joint venture. Address compatibility issues related to the culture of a hospital initially to avoid greater problems later. Hospital management should not assume that simply because two hospitals are nonprofit entities the cultures of the hospitals are automatically aligned.
- Reasons transactions/affiliations may not work — Culture and politics are common reasons why hospital transactions fail. The entities fail to plan for the post-closing period or fail to properly execute a concrete roadmap to extract synergies and efficiencies on both cost and productivity. It is also helpful to the ultimate success of a hospital transaction that hospital management discuss the plan with medical staff, elected officials and other employees prior to entering into an arrangement with another hospital.
- Create a culture of compliance, not just a compliance program — For a compliance program to be most effective, the focus should be on developing compliance tactics organically, working on an individualized approach for the entity, and being mindful of the frequency at which compliance issues are arising and their potential harm. We are seeing the Office of Inspector General shift some of its focus from large compliance issues to repeated small issues.
- HIPAA and data privacy highlights
- Enforcement trends — We currently are seeing a lot of “firsts.” The Office for Civil Rights (OCR) increasingly is publishing settlements that teach lessons, including in some of the largest settlements to date. The majority of settlements stem from breaches due to security failures — especially lack of or inadequate security risk assessments, and unencrypted mobile devices. Encryption, although not required, should be the standard.
- Technical issues — It is crucial to identify issues through risk assessments and then follow through by addressing them. Invasive techniques, such as hacking and ransomware, are not going away. OCR has issued guidance on very technical issues like ransomware, end-to-end communications, and cloud services. Complexity is not an excuse for noncompliance.
- Keys to avoiding liability — Use your resources. Educational materials and compliance tools are available on the Internet, from IT consultants and from lawyers. Employee training is critical. Many breaches occur because of employee errors. It is important to have privacy and security officers who are knowledgeable and have the capacity to focus on data privacy.
- Urgent care trends — The market for urgent care centers in urban areas is becoming increasingly saturated. As a result, we are seeing an increase in the development of urgent care centers in rural areas. Data from focus groups suggest that consumers do not perceive large differences among urgent care providers, so there is room for the development of a transformative urgent care brand. There remains some room for improvement in patient flow in order to optimize efficiency gains.
- Convergence — We are in the middle of a great convergence between payors and providers. Providers are increasingly taking payment risk (based on quality and outcomes) and payors are increasingly getting involved in provision of healthcare services. We see this in payors buying/merging with provider entities, development of new bundled payment structures, and the growth of organizations similar to accountable care organizations that share both risk and rewards of efficiency and quality. Regardless of the leadership in Washington, D.C., look for this trend to continue to accelerate.