Financially troubled health systems will likely be at the forefront of M&A activity this year as macroeconomic conditions, payer pressures, the wind-down of the COVID-19 public health emergency and investment losses put many hospitals and health systems on unstable footing, according to McDermott Will and Emery's "Hospitals and Health Systems 2023 Outlook."
Many health systems are at risk for bond covenant violations and are trying to better position their organization by reallocating resources towards their core strengths, cutting underperforming service lines and outsourcing certain operations, according to the international law firm's report
Financially distressed systems are also considering potential sales, and private equity firms, big-box retailers and tech companies are paying close attention. But health systems looking to take over distressed systems make sure the factors that led to the distressed status can be solved.
In certain cases, Chapter 11 bankruptcy may be required to maximize benefits to the distressed system and begin the acquisition on more favorable terms, according to the report. Chapter 11 offers an opportunity to eradicate some contracts and leases that may be dragging down the distressed system's performance.
Open communication between all stakeholders is crucial when entering into these types of transactions.
"Parties to a potential transaction involving a distressed health system should anticipate and develop a communications strategy to deal with potential negative responses from local governments, federal antitrust regulators, physicians, patients and the press, and should be prepared to highlight the benefits of the transaction to the community, particularly with respect to continued access to care that may not be possible absent the transaction," McDermott Will and Emery stated in the report.