U.S. Healthcare Needs Private Equity

The Wall Street Journal is reporting this week that two major hospital systems, Ascension and Providence St. Joseph Health, are in merger talks. If the deal goes through, the combined entity would include nearly 200 hospitals across 27 states with annual revenues of about $45 billion. The combination would surpass the current largest U.S. for-profit hospital operator, Nashville-based HCA Healthcare.

Proponents of the deal say the move could add supply chain efficiencies, eliminate operational redundancies and reduce unnecessary spending. Analysts also like to blame the uncertainty surrounding the Affordable Care Act or what President Donald Trump might do as playing a role in all the deal making. And why wouldn’t we keep hearing these same things? The same rhetoric keeps working beautifully. It has kept the anti-trust police away and, for whatever reasons, even the press.

The largely unreported consolidation of U.S. healthcare providers continues to happen with little or no government interference, despite the fact that when these deals happen, patient choices inevitably go down and market prices always go up.

And while that’s old news, what’s new about recent M&A activity is the heightened level of private equity firms in these deals, along with their activism. According to a recent McKinsey & Company analysis, across 272 activist campaigns, established management won less than a third. In other words, the traditional healthcare guard is losing ground to non-traditional influencers.

Is this a bad thing?

There is real need and opportunity for investors with smart operators to improve the operations of poorly performing but critically important hospitals. Believe it or not, there are still new markets to conquer and there are new partnership models, such as joint ventures with not-for-profits and REIT financial arrangements, that are fueling the development of hospital care delivery in non-traditional ways.

Putting PE’s best capitalist thinking against the challenges of American healthcare?

Don’t expect Washington to lead the transformation of healthcare, not if PE continues to invest in acute care. They say that smart PE can build and win opportunities that others can’t imagine. And isn’t that precisely what U.S. healthcare needs — creativity, accountability? Let’s face it: If it’s between our lawmakers and PE, and you have an appreciation for the true effects of the market’s current consolidation, then what do we have to lose?

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