This episode was recorded on August 28 at the 2018 Health:Further Festival. Our guest, Michael Ramey, is a Principal at PYA, an accounting and consulting firm with offices across the country and deep expertise in the healthcare industry. PYA is a long-standing sponsor and partner of Health:Further. Michael provides transaction advisory services, strategic planning, business valuation, fair market value compensation analysis, and related consulting services for hospitals, healthcare systems, physician practices, and healthcare information technology companies for purposes of facilitating mergers and acquisitions, performing due diligence, acquiring physician services, and pursuing joint ventures. His primary areas of expertise are in transaction support, due diligence, valuation, financial analysis, and post-merger integration. Although we’ve covered the topic of consolidation before, Michael is really the first person we’ve talked to for the podcast who is working directly in the arena of healthcare consolidation.
In this conversation, we discuss the overall healthcare landscape in terms of consolidation, who’s doing what (lots of private equity), and areas where Michael is seeing a lot of interesting activity (urgent care).
What’s really going on with consolidation in healthcare?
There’s a lot of different segments of consolidation right now. I’m obviously in the hospital arena, you’ve got a level of consolidation that for different reasons are somewhat unprecedented when you think about the size of some of the transactions that are occurring, especially in the not-for-profit world. You’ve got billion dollar health systems merging with other billion dollar health systems on what seems like a weekly basis. You couple that with what’s going on right now in rural healthcare and community hospitals and those that are quite frankly really struggling due to the amount of reimbursement constraints that they’re seeing within their market, coupled with the rising costs. They are really looking for opportunities to get access to capital to secure their viability and their future going forward so they’re looking to those tertiary care facilities to partner with. And that can be in the form of a merger or an acquisition by those tertiary or quaternary care facilities or it can be in the form of affiliation. [There are] a lot of different levels along that continuum. And we’re seeing all of those right now from service line level arrangements all the way up to full acquisitions.
One thing about the consolidation that we’re seeing right now, I really think it’s two things: it’s accessibility and it’s getting those access points and efficiencies. You see more of the efficiencies on those larger scales that I mentioned. [Health systems] are trying to garner more scale to drive efficiency, drive down costs, be a more powerful player in the market. But then even at tertiary care facilities, they’re looking at, “how do I best create access points to be able to serve this wide population that we have?”
Talk about the benefits of consolidation from the perspective of a healthcare system or healthcare organization.
So you think about the origins of community hospitals and rural hospitals. Most of them had been in the community for years and years and through that, they’ve hired their own HR department. They’ve hired their own accounting department. All of these back-office functions [and] oftentimes it’s difficult to be able to secure those resources. [I]f you think about the opportunities of merging with a larger provider, what you have there is elimination of a lot of the duplication of back-office functions.
And then you’re also able to leverage a larger physician network. [Y]ou’ve got a regional kind of clinical collaborative that you can [use] to support those specialists. [B]ut also you’re increasing quality because you’ve got a larger base. You’re not dealing with one or two general surgeons who are isolated out here in this community and this rural hospital. You’re now able to leverage clinical protocols from a larger tertiary facility. So I think all in all, it also impacts quality, which is of high focus right now in our shift from fee-for-service to value-based.
In an earlier conversation, you mentioned urgent care as a hot area right now. Explain why there’s so much activity there.
Let’s go back to the access. Urgent care is a great opportunity to get access into a system right now. […] There are less than probably 10 to 15 [ugent care companies and] less than a dozen that have more than about 40 centers.
I’m talking more about the freestanding urgent care centers. A lot of those were set up by physicians and they saw a need to have some access. Something that works a little bit different from primary care, that bridges primary care and emergency care. So there’s been a lot of entrepreneurial physicians who have gone and they’ve set these things up. […] They are a great way to serve the patients where they want to be served, not in the hospital […] and it’s easier to get in then calling the primary care physician and having to wait days or weeks to be able to get in.
It’s a great platform for access and that’s what makes it appealing first of all to providers. So you see a lot of a hospital system providers either creating de novo centers or looking to acquire those centers that are already there, that may be underperforming a little bit. And then you’ve got a lot of focus on PE-backed consolidators who are trying to roll this up, who are operators and and coordinate that in such a way where you can drive that efficiency. You can bring best practices when it comes to revenue cycle management and managing the overhead and creating staffing models that are optimal to still deliver high quality care.
Explain the differences – and overlap – between “physical fragmentation” and “digital fragmentation” in healthcare, and what that means for the consolidation trend.
You definitely have to have a strategy for your interoperability regardless of your strategy to get those access points. So the access points may be, okay, I’m going to go create or buy an urgent care center in this locale, or I’m going to set up a micro hospital concept [with a] freestanding ED, or I’m going to buy an existing hospital and I’m going to right-size the services. That’s one strategy. That strategy will fail if there’s not that interoperability.
[A]s we’re advising clients on these [transactions], one of the key things we have to bring to bear is, okay, you’re going to buy it now. How are you going to integrate? What are the costs associated with deploying your EMR?
It’s not just a grab from a geographic perspective, okay, we’ve got that. We’ve got to be able to manage that population and we’ve got to be able to have that interoperability and come up with a plan on how quickly you can get on those systems. That creates efficiency, that also creates higher quality because you can manage those patients better within one system.
What do smaller organizations like startups and physician practices need to be aware of when it comes to acquisitions?
Well, you can say the value boils down to risk. There’s a lot of different areas of risk in a particular transaction. There can be the financial risk, but financial risks can be a result of a compliance risk and there are so many regulations out there right now. You think about just the billing and coding applications and making sure you’ve got the right quality personnel to be able to understand all of the changes that come out every year from CMS on the fee schedules and how you’re interpreting that […]
We see time and time again that the compliance area is overlooked when evaluating a potential transaction. And that’s on the buy side and the sell side. So the sell side may overlook it in preparing for [the transaction]. That impacts value whenever you get to the point of the transaction […]
[A buyer is] buying that assembled workforce and those protocols and you’re inheriting the liabilities. From CMS, in a transaction. if you take that provider number, you’re inheriting all those old liabilities that may have resulted from a poor compliance posture previously. So it’s important that any buyer – or on the front end, a seller – is contemplating how those considerations impact value.
We always say, find it out on the front end before going to market, do a little bit of scrubbing on the financials so that you can feel confident in what you’re, you’re putting forward to the market because inevitably the buy side is going to likely identify those areas and that impacts value.