Becker's Hospital Review

10 CFO / FINANCE 'Too big to fail?': A cautionary tale for health systems By Alan Condon H ospital consolidation is gathering momentum across the country and is poised to grow on a much larger scale than before the pandemic, mirroring trends seen in other industries such as banking. Proponents argue that merging healthcare providers improves efficiency and care coordination, but critics warn that the lessons from banking consolidation — particularly the notion of institutions becoming "too big to fail" — should serve as a cautionary tale for hospitals. "I spent 30 years in banking, an industry that went through dramatic consolidation and change. Healthcare is at a reasonably early stage of its consolidation and may need to rethink its model," Sue Perrotty, CEO of West Reading, Pa.-based Tower Health, told Becker's. During the 1990s and early 2000s, large banking institutions such as JPMorgan Chase, Wells Fargo and Bank of America oen became regionally dominant. is le rural and underserved areas with fewer banking options, and smaller community banks struggled to compete. Similarly, an increasing number of health systems are acquiring hospitals in new markets as healthcare enters a "multi-region model." Cross-market deals are becoming more prominent, as well as geographically noncontiguous transactions. Risant Health, part of Oakland, Calif.-based Kaiser Permanente, is leading the charge here aer acquiring Danville, Pa.-based Geisinger Health in April and plans to acquire Greensboro, N.C.-based Cone Health. Risant, which is headquartered in Washington, D.C., aims to acquire five or six health systems over the next five years. One argument for banking consolidation was the potential for increased efficiency, but those gains didn't always translate to improved services or cost savings for consumers. Health systems will see more efficient administrative processes and economies of scale through consolidation, but they must ensure these do not come at the cost of patient care quality or access. e challenge will be balancing operational efficiencies with maintaining personalized care. Large-scale hospital consolidation may lead to regional monopolies, where one system dominates a market — particularly in rural or underserved areas. e argument here is that this could lead to reduced access to care in these regions and the closures of smaller hospitals. "I worry about small, rural hospitals and their ability to continue to serve their communities. I think healthcare will be smart and start to leverage new technology infrastructures," said Ms. Perrotty, who previously led Wells Fargo's global operations. Many banking executives previously believed small, community banks would not survive, but the way that they did was by sharing infrastructure, according to Ms. Perrotty. "[Wells Fargo] shared infrastructure that allowed their banks to piggyback into bigger banks: they could have an ATM, debit cards and many other products and services, which was all done through technology. I think that will happen in healthcare." Investing in technology and infrastructure may be the key to survival for many smaller, community facilities that continue to face significant financial and workforce challenges. "Health systems should partner to gain infrastructures, become less obsessed about owning infrastructure platforms, and focus on partnering with leaders in this space," Ms. Perrotty said. "Can they Tenet CEO not interested in 'risky,' 'turnaround' assets By Alan Condon D allas-based Tenet Healthcare is not interested in taking on "risky" or "turnaround" hospitals and is focusing on "acquiring high-quality assets that have good margins," CEO and Chair Saum Sutaria, MD, said during the Wells Fargo Healthcare Conference. Tenet's M&A position echoes a wider trend in the hospital sector, with many health systems hesitant about taking on assets that would dilute already weakened financial profiles — unless there is a particularly strong strategic purpose and clear path to turnaround. S&P Global said in an Aug. 7 report that this trend "could result in heightened entity distress, as challenged hospitals might have limited options for financial improvement." However, other affiliations tied to service lines and physician-aligned relationships with larger systems could be supportive for smaller or financially strained hospitals. Turnaround hospital assets can require significant capital investment for restructuring and operational improvement, which poses a financial risk. Acquiring underperforming assets also increases the likelihood of operational challenges, regulatory hurdles and reputational risks. Instead, Tenet is concentrating on developing surgical, high-acuity, acute care hospitals in high-growth markets, including San Antonio, Palm Beach, Fla., and Charlotte, N.C., according to Dr. Sutaria. "We are confident that as those markets extend, we can extend our footprint profitably," Dr. Sutaria said. Tenet reported an operating income of $2.5 billion in 2023, up 12.2% from 2022, with revenues increasing 7.2% to $20.5 billion. The company recently reorganized its portfolio and expects to see its ambulatory surgery center business drive a greater portion of its performance in the future. n

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