Becker's Hospital Review

24 CFO / FINANCE Hospital Stocks Sink After HCA's Earnings Stumble By Ayla Ellison M ajor for-profit hospital operators saw their share prices fall July 25 after Nashville, Tenn.-based HCA Healthcare released its earnings for the sec- ond quarter, which fell below analysts' estimates, according to Bloomberg. HCA's revenues increased 4 percent year over year to $10.73 billion in the second quarter of 2017, which fell below analysts' estimate of $10.85 billion. The compa- ny ended the second quarter of this year with net income of $657 million, which was down slightly from $658 million in the same period of 2016. After releasing its earnings, HCA shares fell 2.5 percent to $83.93. Dallas-based Ten- et Healthcare shares dropped 7.3 percent to $19.57 and Franklin, Tenn.-based Com- munity Health Systems shares fell 7.4 percent to $8.96, according to Bloomberg. n 4 M&A Questions With Crowe Horwath's Warren Beck, Former CFO of Vanderbilt University Medical Center By Alyssa Rege W arren Beck, a healthcare advisory services leader at public account- ing, consulting and technology firm Crowe Horwath, witnessed numerous changes throughout his more than 25-year ca- reer in the healthcare industry — particularly with regard to mergers and acquisitions. Prior to Crowe Horwath, Mr. Beck served as CEO of Nashville, Tenn.-based Cardiovascu- lar Care Group. He also spent more than 25 years in various roles at Nashville-based Van- derbilt University Medical Center, including CFO from 2009 to 2013. In an interview with Becker's Hospital Review, Mr. Beck said while hospitals and health sys- tems historically may have engaged in M&A activity for geographic reasons, more organi- zations are considering mergers to increase capital and keep operations running smooth- ly. Note: Responses have been lightly edited for length and clarity. Question: In recent years, how has a hospital or health system's finances influenced its decision to engage in M&A activity? How has that mentality changed from past years? Warren Beck: It has been well documented that consistent financial margins are difficult to maintain due to continuing Medicare payment reductions, extremely low Medicaid payments, the development of narrow payer networks that exclude certain providers, the transition from inpatient to outpatient care and the rising costs of pharmaceutical and implantable supplies. ese pressures have caused freestanding hospi- tals and health systems performing below their operating plans to seek financial partners that have greater wealth and can provide operating improvements. Management and board members have in- creasingly realized such negative economic factors are becoming more challenging than ever to overcome independently, and the de- velopment of successful improvement strat- egies under most circumstances is almost impossible without significant cash reserves, unique services and community and employ- er support. Most of the hospitals and health systems considering a merger have depleted their reserves as performance has declined — now, their future survival is based on being acquired or merged into a new entity. Q: What are some potential bene- fits to merging with the intention to create economies of scale? What are some of the negative aspects? WB: Some potential benefits include higher commercial payer rates attributed to contract- ing leverage due to a larger provider network; inclusion in narrow networks, which provides access to more patients, thereby increasing vol- umes; and cost efficiencies through the consol- idation of overhead services. One of the negatives felt mainly by the acquired entity is the potential loss of the organization's historical identity, which is oen a difficult change if it maintains a long history in the com- munity. Consolidation and a new name are tak- en personally by patients, employees, manage- ment and board members because it feels like failure even if it is the right thing to do. Mergers may also result in lost jobs and that affects every- one in the acquired entity. ere will also be po- tential changes with processes, systems, benefits and culture. ese changes can test the resolve of employees. Q: Healthcare M&A is a pretty specific field of law. How did you get involved and what led you down such a career path? WB: I have been in healthcare since I le col- lege in 1977. Generally, my experience has been in the provider sector. I had the pleasure of spending 25 years in senior leadership roles at a premier academic medical center which grew to become one of the most recognized in the country due to expansion and acquisition and an unprecedented organic growth. When I le academic medicine, I spent the next few years operating a startup hospital manage- ment company with two locations in very difficult markets. ese hospitals were prime candidates for acquisition because of our lack of sufficient capital to execute a successful turnaround. All of those experiences gave me a broad understanding of the challenges fac- ing all types of hospital providers and health systems. M&A is just one of those services where I can provide assistance to my clients. Q: What is one piece of advice you would give a hospital looking to merge in today's healthcare climate? WB: Once a provider or a health system's man- agement and board decide the best course of action for future existence is to merge, they need to do their homework as to who their best partner may be. e criteria to merge must be more than just access to wealth. ey need to look at the future well-being of their employee base, how their physicians may respond and if the prospective entity's mission and values are consistent with their own. Also, the leaders of the merged entity must really lead during the process by setting an example of cooperation and stewardship to achieve ultimate success. n

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