For two years, the pandemic has defined the hospital business—for good and bad. Downsides have included depressed volumes of elective procedures, which have yet to fully recover. Upsides have featured billions of dollars in federal support and access to low-cost, readily available capital. Federal funding is now waning, hospitals and health systems may have to pay back the funds they received, and low interest rates may soon be a distant memory. Add increasing costs for labor and supplies, and the financial health of many hospital and health systems may come into question.
We expect a rise in hospital consolidation, restructuring, closures and bankruptcies after a slow start in 2022. Most large for-profit chains are in good financial positions, but a confluence of trends is putting intense cost pressures on nearly every hospital and health system:
- Constrictions in the global supply chain, already severe in the pandemic, multiplied with Russia’s invasion of Ukraine, raising prices and causing shortages of everything from surgical gloves to exam tables.1 Overall inflation is now at a 40-year high, and high energy prices exacerbate supply chain struggles.2
- Staffing shortages, worsened by Covid burnout and a growing exodus to agencies, have doubled or even tripled the cost of replacing the most experienced nurses. Many nursing homes, home health care companies and other provider sectors are falling short as they compete for staff directly with hospitals and health systems.
- While capital is available, rising interest rates will add to the financial stress of providers with variable-rate debt who do not switch to fixed-rate financing. Systems seeking new capital will face higher debt service requirements. Coupled with declining margins, that could lead to covenant violations.
Many hospitals in jeopardy won’t find an easy way back to fiscal health, but lenders may continue to play along. Rather than call in a loan and demand immediate payment when a hospital can’t meet scheduled debt service requirements, many financial institutions have been taking an “amend and extend” approach, adjusting the terms of the loan to delay but not prevent an eventual reckoning. At least for now, hospitals may find new lenders to replace those who take a tougher stance.
But some signs of a painful shakeout are already apparent. Despite strong profits reported by some of the largest health systems, hospital margins declined over the past two years through February 2022. Overall operating margins in the sector are negative, driven by higher expenses and lower census and revenue. Absent infusions of federal funds, distressed hospitals have narrowing options, including seeking capital from institutional lenders and investors, finding partners and/or spinning off non-profitable operating entities. Buyers and partners are not always easy to find today; one large regional provider has closed two hospitals in the last six months after giving up its search for buyers. Not surprisingly, lawyers specializing in healthcare restructuring tell us their phones are ringing again after a slow 2021.
As events unfold, we expect careful, clear-eyed investors to find value proposition opportunities. Industry restructuring is always painful, and some communities may end up with fewer care options. But as excess capacity continues to consolidate, the nation’s hospitals and health systems will grow stronger overall and more capable of weathering financial strains and supply chain challenges.
Notable hospital deals in Q1 2022
- Jan. 4: Centene agreed to acquire Magellan Health from the Vanguard Group and other investors for $3.27 billion.3
- Feb. 1: GuideWell, a mutual holding company, acquired Triple-S Management, a managed care provider, from BlackRock, Vanguard and other investors for $856.7 million.4
- Feb. 2: City of Hope, a 186-bed tertiary referral center, completed its acquisition of Cancer Treatment Centers of America for $390 million.5
- Source: Duane Bailey, “Future of Health Care: How Supply Chain Challenges Are Impacting CEO Agendas in 2022,” LinkedIn.com, March 26, 2022
- Source: Anneken Tappe, “Consumer price inflation hit a new 40-year high in March“, CNN.com, April 12, 2022
- Source: Paige Minemyer, “Centene to acquire Magellan Health in $2.2B deal,” fiercehealthcare.com, January 4, 2021
- Source: Company Release, “GuideWell Finalizes Acquisition of Triple-S to Drive Health Care Affordability and Improve Health Outcomes in Florida and Puerto Rico,” triplesmanagement.com, February 1, 2022
- Source: “City of Hope Completes Strategic Acquisition of Cancer Treatment Centers of America, Building a National, Integrated Cancer Research and Treatment System with a Singular Focus on Eradicating Cancer,” onclive.com, February 10, 2022