By Joel Kranc
The beginning of 2023 is a sharp contrast for healthcare economics compared to the same time one year ago. Inflation has risen to generational highs not seen in nearly half a century, and interest rates, as a result, have spiked up to combat the high rise of prices. The tight labor market remains a difficult scenario for employers and new COVID variants are making their way through the population.
“The industry in 2022 was on a downward tone – almost an ominous tone,” says Steve Shill, National and Global Leader, Healthcare with BDO. “There was a lot (of) concern about the economy…interest rates were rising and of concern to healthcare operators – ASC operators amongst them, and now it was becoming a reality,” he adds. “They were concerned not only about the economic slowdown, but a slowdown in M&A and access to resources. The outlook for 2023 is that the fears were not unfounded.”
According to the 2023 BDO Healthcare CFO Outlook Survey, another major M&A driver this year is expanding into a new market segment, a trend driven mostly by outpatient facilities and ASCs, with 40% citing it as their top goal. “Those organizations may be seeking to expand into more lucrative services to improve their financial stability in light of their challenges meeting profitability expectations last year,” says the survey.
As those concerns have mounted for CFOs running and operating healthcare organizations, a gap has also formed across industry-wide sectors. According to the survey, most healthcare organizations struggled to fulfill their financial covenants in 2022. Long-term, post-acute and home health organizations struggled the most, with 75% reporting defaults by October 2022. This is likely due to challenges attracting patients after the pandemic pushed people away from these organizations, as well as high labor costs. At the other end of the spectrum, 30% of hospitals and health systems defaulted in 2022.
Another issue that persists for healthcare and ASC organizations are global supply chains. These issues remain and healthcare organizations face continued supply shortages. To mitigate the impact, 42% of healthcare CFOs plan to increase investments in supply procurement this year.
At the same time, 44% percent of public-sector healthcare CFOs plan to increase spending on labor compensation and benefits, compared to 34% of private sector CFOs, possibly in a bid to attract more workers from the often higher-paying jobs in the private sector.
CFOs of ASCs within the survey say the biggest challenge when it comes to the current deal-making environment is economic uncertainty (33%), finding the right buyer (22%), valuation gaps (11%), navigating due diligence (11%), uncertain ROI expectations (11%), and regulatory compliance (11%).
“Organizations that are weakened and don’t have the resources to help their situation will become perfect targets for merger, maybe by larger, well-heeled organizations in the marketplace,” says Shill. Others, he adds, that still have resources will be able to prioritize investment and funding, re-examine their revenue cycle, cost optimization and cost cutting.
Also, the role of private equity has not gone away, he explains, and in certain aspects of healthcare PE is a great opportunity for disruption. New investing in aspects of the healthcare industry will act as a lifeline to some of these organizations.
The cautionary note, adds Shill, is that the level of investment will not be as high as it was last year or in previous years. “[Private equity firms] themselves have become a lot more introspective, are looking at their investments a lot more carefully before they deploy. Yes, deals will be done, they will be more selective, they will be done at a slower pace and for the few that are attractive to private equity that will become a lifeline.”
Shill notes that the reason ambulatory and urgent care centers are growing (and may also be attractive to investors or private equity firms) is because of the access to care issue. Post-pandemic, there has been consolidation and a “drying out” of physicians, it has been harder to get an appointment to see a doctor.
“Possibly, many of the lower volumes are a symptom of people just not being able to get to their doctors,” he explains. As a result, urgent care or ASCs are becoming more attractive because they are more accessible.
In terms of technology, the survey states that just 19% of healthcare CFOs are very satisfied with their electronic health record (HER) systems, with issues like workflow misalignment among their top-cited EHR challenges. Ongoing EHR issues could explain why just 13% of CFOs say their digital investments have had the greatest impact on clinical operations. Further, states the report, the increasing investment in telehealth may represent a misread of the market because, according to recent research from Trilliant Health, patients are beginning to return to in-person care as opposed to virtual or hybrid arrangements.
Overall, an eye towards balancing service lines, a closer look towards deal-making strategies (M&A or consolidation), and reinvesting in digital, will help CFOs navigate volatile economic conditions and “ensure continuity of care.”
