Hospitals and health systems across the country are facing one of the most financially difficult stretches in recent memory. With reimbursement under pressure, inflation continuing to drive up costs and labor challenges reshaping the workforce, many executives are rethinking the assets that once defined their growth strategies.
Increasingly, they’re finding that saying no — through divestiture, strategic reconfiguration or reframing their real estate footprint — has become a central lever for long-term sustainability.
For Karen Kole, principal at ECG Management Consultants, this moment is the culmination of years of mounting pressures.
“I work with hospital clients across the country, and this topic is particularly important to me as I sit within ECG’s M&A practice,” Ms. Kole said. “With inflation and the increasing cost of salaries — the biggest item on the income statement — plus supply-side challenges that will likely continue with tariffs, financial pressure is forcing systems to look at their portfolios differently. Many have already tried synergies, group purchasing and payer negotiations. Now they’re reassessing their portfolio. For underperforming ones, it may be time to divest or partner to help with managing them.”
Defining what works, and what doesn’t
For John Orsini, executive vice president and CFO of Northwestern Medicine in Chicago, the process begins with rigorous cost accounting.
“Reimbursement is always being pressured. A lot of health systems have relied on hospital-based billing because they tend to get more complicated patients,” Mr. Orsini said. “But freestanding [outpatient] sites are generally lower cost and more nimble because the throughput is competitive, and health plans are pushing business there. So we determine what is working and what is not from a procedural level and cost accounting standpoint. We manage to the whole. For example, with our lab services, we centralized activity into two entities — HealthLab and NM Ventures. That creates some consternation, but it’s important to get that high-volume activity into something where you have scale.”
Home health and hospice services are areas where many health systems have struggled to compete. Northwestern divested these services in 2019, selling its programs to JourneyCare.
“We just felt we couldn’t compete. When volumes are down, the community is voting with their feet. They’re going to go where they feel they’re getting the best quality, the best patient experience at the best cost,” Mr. Orsini said. “It eliminates a distraction when you have very small books of business taking a lot of management time. It’s about opportunity cost. Your [leaders] are focused on a small entity when they could be creating far more value elsewhere.”
Balancing financial sustainability with access
Both leaders emphasized that divestiture decisions must weigh community access.
Ms. Kole recalled a rural health system client struggling to maintain oncology services.
“They were having a hard time keeping oncologists on staff,” she said. “So they partnered with the nearest academic system. Even though it wasn’t close, it helped them continue providing care through new staffing arrangements. Sometimes shutting down services is not an option. Finding the right partner — ideally one that is local and has your best interests at heart — is key versus partnering with [an entity] that is multiple states away.”
Mr. Orsini said Northwestern faces similar challenges with Valley West Hospital, its critical access hospital in Sandwich, Ill.
“In rural areas, volume is low and the risk is clinical expertise. You want [providers] who are seeing patients, including complex patients, and they keep their skills up,” he said. “We’ve leaned on telehealth to make sure patients get specialty consultations. It takes more planning, but it ensures that we’re getting those patients into the level of care that will be best for them and for our clinicians.”
Real estate: an under-discussed risk
Real estate has become a significant, if often underappreciated, element in divestiture strategy.
“Real estate is complicated and a little tricky because if a facility has been financed with tax-exempt debt, there can be issues getting that debt retired in a compliant way,” Mr. Orsini said. “In urban areas, some sites might be redeveloped into something else, like housing, while still retaining an ambulatory footprint. But you want to avoid arrangements like Steward Health’s sale-leaseback, which is good in some ways, but also creates a lot of risk for those facilities because the lease payments are expensive.”
Often, the facilities most likely to be divested are the ones that have been underinvested in for years, according to Mr. Orsini. Bringing them up to standard can require significant capital, while closing them carries its own high costs, including the expense of decommissioning, according to Mr. Orsini. On top of that, communities are left worried about where they will receive care if a site shuts down.
Ms. Kole noted that health system leaders must carefully assess both the perceived and practical value of assets.
“A lot of times people think real estate is worth a lot just because of the land or building,” she said. “But you have to factor in financial obsolescence, rental rates and income streams. And once you do this, the real estate value declines. Some systems are selling real estate to physicians as another way to share investment, such as selling part of a medical office building.”
Due diligence and communication
Ultimately, both leaders underscored the importance of diligence and transparency.
“When you’re acquiring an asset, you don’t want to end up divesting it later,” Ms. Kole said. “We’ve seen clients rush transactions without proper diligence, and then struggle with integration. Some deals shouldn’t have happened in the first place.”
Mr. Orsini echoed this sentiment, noting that divestiture decisions ripple across employees, patients and communities.
“If we do divest, we ask whether we can partner or create a joint venture,” he said. “We take our time, we communicate broadly with the community, boards and regulators. You don’t want unnecessary headwinds. It impacts employees and patients, and you need to take that very seriously. Effective communication and thorough planning are essential.”
