Health System M&A Outlook: Juniper Advisory and Jarrard Interviewed Ahead of Becker’s Hospital Review’s Annual Meeting

Juniper Advisory’s Rex Burgdorfer and Jarrard’s Anne Hancock Toomey were interviewed ahead of their panel for the 8th Annual Becker’s Hospital Review Meeting. The session, titled “The Mergers and Acquisitions Market: Assessing Deals and Whether or Not to Merge, Sell or Align,” also included insights from attorneys Jeff Peterson and Geoff Cockrell of the law firm McGuireWoods.

In the interview, available below, Rex and Anne gave an overview of the current state of the M&A landscape and offered thoughts for health systems currently considering a transaction.

Talk about what you’re seeing in the M&A landscape right now. What’s the rough consolidation outlook?

Rex Burgdorfer:

It’s interesting: This morning I was listening to Atul Gawande’s TED talk again and the things he was talking about five years ago – with checklists and standardization and a reasonable equation between cost and quality – are obviously still huge issues and leading reasons behind health systems’ belief that they need to combine.

The industry is also still extremely fragmented. There are roughly 4,500 hospitals in the country controlled by about 2,000 companies.

Even though this topic’s getting new-found coverage in the The Wall Street Journal and The Economist, etc., change is still occurring very slowly. Only about 100 transactions are being conducted per year. So, to make a dent in an industry with 2000 players with that 100 transactions per year, it’s going to take a while.

But there is a new belief among high-quality academic medical centers and regional nonprofits that they need to grow and have significant scale within a certain geography. So, you have new participants – academic centers trying to buy hospitals for the first time along with high-quality, good credit nonprofit systems that were previously content in their own market looking to grow as well.

It’s also interesting to compare the hospital industry to other sectors of the economy. The hospital industry is composed of tiny companies. Even the largest organizations — the Ascensions or HCAs – are tiny relative to other industries that comprise a similar percentage of GDP.

Anne Hancock Toomey:

Hospital transaction activity in Q1 of this year is flat or down from the same quarter of last year. If you look at last year’s numbers, they were down from the year before. And you’re right; the pace of 100 transactions per year, given the scale of the industry, means it’s going to take a while to consolidate.

But I think consolidation is only going to continue. And you’re really seeing two tracks of transactions.

One is the regional systems that are buying up and partnering with other healthcare providers, physician groups, acute care players, post-acute, behavioral health, etc. In many cases, it’s to be able to pursue a population health strategy.

Second you have some of the bigger, more strategic transactions – big regional player to big regional player – that are complex and creative and sometimes involve, as Rex mentioned, academic medical centers. These are healthy systems, and these are more strategic plays.

In that second track, I think, it’s been harder to get transactions done, and it’s taking much longer for a variety of reasons. They’re flagging regulatory attention, there are significant politics involved and they’re legally and financially much more complex than ever before.

Needless to say, it’s an interesting time!

With reform efforts shelved – for the moment anyway – what effect is there on M&A? Does the uncertainty freeze deal flow or further incentivize players to seek the safety in scale?


I think the economic fundamentals of the industry transcend politics.

Health systems are going to be paid less for their services and are going to have to bear more costs in the form of more sophisticated IT, new service offerings to focus on outpatient care and population health. Those two fundamentals – prices going down and costs going up – mean that you need to get larger to be successful.

Regardless of what comes out of Washington D.C., I think the writing is on the wall that the industry needs to be more efficient. Most people translate that to mean combinations between health systems.

But I do think there has been some freezing effect following the election. If people wanted an excuse to step off the treadmill and take some time to retool their own organization – try to get more effective on their own, manage their revenue cycle better and so forth – this has been a six-month period that many have chosen to do that. But I don’t think that’s going to last forever.


I agree. I do think people were waiting to see if Repeal & Replace would get traction – if that would mean anything significant or impact their strategy going forward. Now I think it’s been confirmed, regardless – and I love the way Rex said that – the future of healthcare transcends politics.

The successful systems of the future are going to be able to deliver on better outcomes with lower costs, period. The ability to do that really depends on having scale. To be successful in that regard depends on partnerships to gain scale and ultimately better meet the needs of the populations you’re serving.

So, I think you will continue to see consolidation. The status quo is just untenable regardless of what Washington does.

From an oversight standpoint, any indication of whether it will be easier or harder to get deals done?


I don’t know if it’s specific to the Trump administration but there’s certainly a disconnect between the financial incentives of healthcare reform (Obamacare) – population health, being accountable for care, bundled payments, etc. – which drive business combinations between health systems. At the same time, the FTC is policing those combinations.

What’s strange to us, is that if you look at the structure of the insurance industry, those companies have consolidated to a huge degree over the last 20 years. We did a recent study which showed that something like 80 percent of healthcare expenditures are paid for by 10 parties – the federal government, through Medicare and Medicaid, and a handful of gargantuan insurance companies.

They have all the pricing power. Hospitals are really price-takers.

So, the notion that the combination of Penn State in Hershey, Penn., which has a couple hundred million in revenue, and Pinnacle in Harrisburg, Penn., also with a couple hundred million in revenue, is anti-competitive is strange to us. They’re 20 minutes away from each other and don’t even sum to $2 billion in revenue and that’s being contested. Meanwhile BlueCross has something like 80% market share. Who has the pricing clout?


I wonder if you’re going to start to see, with the collapse of Repeal & Replace, some of the power and innovation shift back to the state level. And if so, you’ll see two things…

One: Potential mergers, like the one being explored in East Tennessee, which create not only a combination of two organizations but also create partnerships with state governments to provide oversight to the efficacy of that resulting combination – in lieu of federal oversight. You may begin to see more of those partnerships elsewhere if they’re successful.

Two: You’ll continue to see these loose affiliations that don’t exchange ownership or membership substitution, but are rather clinically integrated networks and joint operating agreements, etc. You’ve got all sorts of these alliances across the country meant to achieve scale and collaboration.

Of course, there are a lot of opinions about how effective those affiliations are – if they can really move the needle. But they do allow you to move forward in pursuing partnership without as much need for regulatory approval.


My experience in talking with clients is that those partnerships can be very effective on medical grounds – sharing specialists, resources, etc. But that from a financial standpoint, they’re not as effective because you’re still accessing the capital markets as separate, small companies. Additionally, you’re not contracting together because the regulators look for consolidated ownership and control in order to grant single signature contracts.

Also, if you look at the durability, these passive affiliations have a very finite shelf life. They last five or 10 years, and for myriad reasons, they peter out.


Or they end in marriage, which has been the case with some of our clients.

So, what are the most beneficial, long-term structures organizations can pursue?


Even though there are countless “new” and innovative combination strategies, if you look back through time, there are only about a handful of ways in which health systems can work together.  They can affiliate in a way similar to how we just described; they can do a joint venture together; they can merge.

Durability increases as you form tighter, more permanent relationships. But, those can be hard to do – it requires a huge amount of trust. And it can require the ceding of local control in many cases.

I think the phenomenon you saw in the last presidential election plays out in hospital transactions.


Agreed. There’s a huge distrust in the large institutions of the U.S. and increasingly that includes health systems.

Because of that dynamic, boards and leaders of these institutions, as they’re looking toward the future and evaluating if they ought to pursue some sort of partnership, should not underestimate the politics of healthcare.

You have employees and physicians whose livelihoods are at stake, amid a great deal of uncertainty in our industry and the country at large. They’re thirsting for vision, leadership and security. If you don’t give it to them, someone else will.

So, you must begin the work of preparing your organization, its people, who are its lifeblood, as well as those you’re serving and those who regulate you long before you ever select a partner, sign an LOI, or try to close a transaction.

That work begins early if you hope to be successful.

What advice would you offer to leaders – executives or board members – who are considering a transaction?


That’s a question being considered in the boardroom of 80 percent of hospitals, according to one study.

The advice we would give would be to never to presuppose the outcome. So many people are inclined to close the door and try to come up with the solution on their own. More often than not, there is huge learning and education that comes from interfacing with the market of potential partners – hearing their ideas for how the system might move forward.

These potential partners can often be very sophisticated. They run many hospitals, they’ve seen many different situations. So, for the board that’s trying to make that decision – whether they can remain independent or not – that interaction is hugely beneficial.

Learning what other players are realistically willing to do allows organizations to make a determination with full information.


You can’t underestimate the politics that drive your ability, as a board or a leadership team, to be successful in pursuing a partnership or transaction. You have to know going in that there will always be some sand in the gears – you will face opposition through this process.

So plan for it. Expect it. And be deliberate about bringing along the stakeholders who matter to you. For instance, your physician leaders better be a part of the process. We’ve seen more physicians kill deals than any other constituency.

Bring along your nurses. Bring along your community leaders. Look outside your current understanding of your options and get to know what’s really possible.

Prepare your organization for change, which can happen whether you opt to pursue a transaction or not. Every health system that will be successful moving into the future is changing right now.

So, have a big story and tell that story. Help people understand that the status quo isn’t enough, and provide a clear vision for what you, as the organization’s leadership, believe healthcare can look like for your community. Then, show them the path forward and their place in it.

That work begins now.