When Push Comes to Shove: Distressed Hospital Sales
What happens when a hospital must look for a deal, not from a position of strength or long-term strategic growth, but out of sheer necessity?
In our M&A conversations with lawyers, bankers and business advisory experts around the country, distressed deals were consistently called out as a separate category, one that demands its own note. Especially today.
The consensus is that the number of distressed transactions will rise. Or, at least, the number of distressed hospitals looking for a partner will rise.
And what’s driving that? For one, the debt market is changing the discussion and will become an issue later this year. At the same time, financial pressure created by COVID-19 is likely to push many struggling hospitals out of compliance with their covenants. Meanwhile, Medicare Accelerated and Advanced Payment loans will start coming due soon.
And finally, hospitals that have been subsisting on ED revenue may see that option dry up with volumes dropping during the pandemic. A recent article in Modern Healthcare notes that ED volumes have not picked back up as quickly as those of other service lines. Though the article does not address rural or distressed hospitals (and actually mentions big-picture positives to shifts away from emergency care), it’s obvious that patients’ reluctance to visit the ED is creating significant problems for facilities that largely depend on that expensive care to stay afloat.
So providers who were distressed before are likely in a tougher position now and may be forced to move sooner than later.
On the buyer side? Our experts noted that debt markets are tight, and strategic plans have shifted. Buyers may not have access to the resources needed to make a purchase, and many are simply being selective and judicious. Consequently, there may not be enough buyers for everyone looking to sell. Anecdotal observation from our friends in the legal world suggests that distressed hospitals currently looking to sell are indeed finding fewer opportunities, at least for now.
Managing the tension and competing needs and resources noted above will take an intensely focused communication strategy. Because many of the challenges described above are external forces, they cannot be mitigated by hospital leadership. So, leadership should control what they can – the communications around the deal.
A good communications strategy is helpful regardless of the specific situation or the ultimate outcome. Keeping the waters calm can buy time for a distressed organization to find a solution for maintaining access to care. Good communications can rally support and help extend the runway, creating breathing room for leadership as they explore options. If an acquisition is the ultimate outcome, the hospital must carefully explain the real-world implications for the community. People will want to know about how new ownership will manage the hospital, staffing and service lines. And if the final outcome is closure, it’s absolutely necessary to have the hard conversations and be responsibly transparent about the transition of care. The facility must answer the intensely emotional question, “What does this mean for me and my family?”
A secret weapon: involving the board
Board members have a critical role to play as their organizations begin exploring deals. Over the past five months, hospital executive teams have carried the burden of managing hospitals through the pandemic. Many boards have chosen to stay out of the way and give management the room needed to maneuver. Having become accustomed to chronic crisis and in the process of preparing for further disruption, board members will find now a good time to come off the sidelines and support executive teams with vocal advocacy for hard decisions.
For a board member, being involved is also personally important. They carry some individual reputational risk if critical decisions aren’t communicated clearly. This is particularly true for smaller hospitals, where the board is typically made up of community leaders. In an environment where a town’s provider of care and large(st) employer is on the ropes, people need to hear from their trusted neighbors and leaders.
The point of a transaction is to ensure access to care for the community surrounding the distressed hospital – it is a means, not the end. A clear communications plan will help everyone involved see the transaction as a tool to achieve a common good and create an environment where the focus can stay on what really matters – continuing to provide care.