Vasanta Pundarika, Co-Head of Healthcare Investment Banking, Amanda Verner Thompson, Co-Head of Healthcare Investment Banking

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Headlines have been relatively dramatic over the last several months, citing significant declines in operating margins and cash positions for not-for-profit health systems. Most health systems around the country ranging in various sizes and rating levels have been negatively impacted in the past fiscal year. Significant factors include rising labor costs, including both labor shortages and the demand for increased salaries, as well as other financial and operating pressures. During 2020 and 2021, many health systems were able to build balance sheet strength due to stimulus, other government funding and investment returns; however, the more recent liquidity draws from margin pressures, labor shortages, and investment losses have taken a toll on health system cash levels, resulting in a decline in days cash on hand.

Many health systems are working to stabilize operating margins by strengthening revenue while simultaneously establishing strong labor strategies related to recruitment and retention. However, improving days cash on hand may require a different type of strategy given the capital-intensive nature of health system assets, especially in a capital markets environment where debt is relatively more expensive than it has been in recent years. Fitch noted in their recent report that early indications show that health system median days cash on hand decreased 45 days from FY2021 to FY2022 [5]. Some health systems may also be coming close to debt covenant requirements.

So, what can health systems do to improve their liquidity, bolstering their cash positions and their balance sheets?

Health systems have many internal requirements competing for their cash resources. New investments may be needed across multiple components of the health system, each equally important to those components, but often requiring prioritization by the health system. Many health systems have also inherited aging assets that now need replacing, further straining already limited resources. Some of these assets inherited through prior M&A transactions may also be outside of the footprint that is core to the health system’s community mission. In addition, many health systems have been trying to provide a broad and full continuum of care, owning significant assets outside of the traditional acute care hospital.

If the goal is to bolster liquidity, and there are businesses or assets that are capital intensive, but not essential to the health system’s mission, then these may be good targets for potential divestitures.

During 2023, we anticipate that many health systems will need to analyze their portfolio of assets to determine which components of their systems are central and core to their mission and which components need to be wholly owned to continue providing high quality care to their communities.

In proceeding with a portfolio optimization analysis, Boards and Management teams can walk through various steps to make these determinations.

Transaction activity directly between health systems has slowed in recent years, in part because of the Federal Trade Commission’s increased scrutiny of hospital mergers, which has led to several mergers not coming to fruition. However, the M&A market specifically within health systems’ non-core sectors remains dynamic, including significant M&A activity from publicly traded, private equity-backed and private companies.

A few recent examples of health systems that have explored divesting non-core assets and thereby bolstering their cash positions are summarized in the following table.

Is Joint Venturing also an option?
There may be some business lines that health systems find essential, but not essential to wholly own. For example, in the past, several health systems have entered joint ventures with Acadia Healthcare, Universal Health Services, or more recently Lifepoint Health, to build behavioral health hospitals through these partnerships. These types of transactions continue to be attractive to health systems that are looking to coordinate physical and behavioral health, but do not have the capital resources available to build a behavioral health hospital on their own.

Conclusion
If a health system is in a position where their liquidity is strapped or they are close to defaulting on covenants, then it would be beneficial to assess whether a divestiture of any non-core assets would be an option. Even if a health system has healthy liquidity, it would still be advantageous to go through the same portfolio analysis to try and uncover any potential opportunities for optimization. It is generally good business practice to analyze, assess, and optimize a portfolio of assets periodically. From a strategic planning perspective, 2023 is a good year for health systems to determine key areas of focus and strengths, as significant interest and opportunities remain from outside parties looking to transact with health systems on their non-core assets.

About Matrix Capital Markets Group, Inc.
Founded in 1988, Matrix Capital Markets Group, Inc. is an independent, advisory focused, privately-held investment bank headquartered in Richmond, VA, with additional offices in Baltimore, MD and New York, NY. Matrix provides merger & acquisition and financial advisory services for privately-held, private-equity owned, not-for-profit and publicly traded companies. Matrix’s advisory services include company sales, recapitalizations, capital raises of debt & equity, corporate carve outs, special situations, management buyouts, corporate valuations, and fairness opinions. Matrix serves clients in a wide range of industries, including automotive aftermarket, building products, car washes, consumer products, convenience retail, downstream energy, healthcare and industrial products. For additional information or to contact our team members, please visit www.matrixcmg.com.

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[1] “Fitch Ratings 2022 Mid-Year Outlook: U.S. Not-for-Profit Hospitals and Health Systems,” Fitch Ratings, August 16, 2022

[2] “Early NFP Hospital Medians Show Expected Deterioration; Will Worsen,” Fitch Ratings, March 2, 2023

[3] “2023 Outlook – Negative as Inflation, Labor Costs Continue to Drive Expenses Higher,” Moody’s Investors Service, December 7, 2022

[4] “Outlook for U.S. Not-For-Profit Acute Health Care: A Long Road Ahead,” S&P Global Ratings, December 1, 2022

[5] “Early NFP Hospital Medians Show Expected Deterioration; Will Worsen,” Fitch Ratings, March 2, 2023

[6] “ProMedica Health System’s Sale of Home Health and Hospice Business Could Improve Balance Sheet,” S&P Global Ratings, February 28, 2023

[7] “Doylestown Hospital exploring indications of interest for potential sale of Pine Run Retirement Community,” Doylestown Health Foundation, February 16, 2023

[8] “Tower Health nears sale of 17 urgent care centers as turnaround efforts continue,” Philadelphia Business Journal, February 1, 2023

[9] “Quest Diagnostics to buy Summa Health lab services business,” Cleveland Business Journal, October 5, 2022

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