A Healthcare Finance Expert Sees Renewed Levels of M&A Activity in Healthcare | Healthcare Innovation

The landscape around healthcare finance continues to evolve forward, with the ongoing consolidation of elements of the provider sector seeming to be unstoppable. Indeed, the gradual shift into downside risk, a major element in the overall shift into value-based care delivery and payment, is only adding to the already-existing reasons for hospitals and medical groups to consolidate—either separately or together.

Mike Mauldin, who leads the Nashville-based healthcare group at the Birmingham, Ala.-based Regions Bank, spent three decades in healthcare, as a CFO and CEO, and then years in publicly held and private equity, before joining the Regions Bank healthcare team five years ago. The unit that he leads encompasses just under 40 professionals, including relationship managers, portfolio and underwriting teams, and credit risk teams, all focused entire on healthcare. The group’s activity falls into three areas, Mauldin confirms. Half of it is corporate finance—publicly held and privately sponsored healthcare organizations; 25 percent is non-profit hospitals and health systems; and 25 percent is assisted living, independent living, and memory care, with a small additional focus on long-term care organizations.

Recently, Healthcare Innovation Editor-in-Chief Mark Hagland spoke with Mauldin about his team’s work and about the current mergers and acquisitions (M&A) and financing landscape in healthcare. Below are excerpts from that interview.

Tell me about your team’s work; you act as financial advisers to healthcare organizations, correct?

Yes, that’s right. We serve as independent advisers to owners. That includes the privately owned businesses as well as management and leadership teams. Our job is to give advice and counsel, to help folks to create a balance sheet and capital plan to help implement their strategies. Sometimes, that strategy includes bank debt, and we’re a provider of that, as well as a provider of treasury services, as well as M&A transactions.

Mike MauldinRegions Bank

What does the current landscape of M&A in healthcare provider organizations look like to you right now?

Let’s talk about the environment from a financing standpoint, as well as a post-pandemic standpoint. If you think about the financial environment, stock and equity values are at historic highs. Most healthcare providers have high levels of liquidity and cash on hand. The industry was supported by the CARES Act, and that’s left people with cash on their balance sheets. And borrowing costs are at historic lows, and a lot of cash is available. So this is a good time for people to make strategic investments.

So we would expect a high volume of activity. The only damper on that has been the pandemic. Patient volumes were depressed in the last nine months of 2020, but we saw a strong rebound in the first quarter of 2021. Some sectors are back at pre-pandemic levels, and those who are still below are mostly just below at single-digit levels below. And as a result, we’ve seen a lot of M&A activity. First-quarter volumes were extremely high in comparison to prior years; second-quarter volumes appear to be very strong.

Volume in M&A activity among hospitals and health systems has been a little bit slow; there’s been a bit of wait-and-see; but I expect to see higher volume in the second half of the year. Physician practice volume M&A has been very high. In some cases, practices realized during COVID that they wanted to be a part of something bigger. So physician practice volume extremely high, and I expect it to continue to be so; and I expect that to rise.

It’s fascinating to consider the intersection of M&A activity involving physician groups, and the shift into value-based payment in healthcare, especially the shift into two-sided risk. How do you see those two phenomena intersecting in the near future?

That’s a fantastic question. Even twenty years ago, we had hoped to be in a place where providers could help manage risk. Today, from a technology standpoint, a capital standpoint, and a leadership standpoint, physician groups in many cases have been very successful in terms of value-based payment. So yes, there’s tremendous interest n groups that are successfully managing risk, so valuations of groups that have demonstrated that ability, are very high; they’re getting incredible multiples. So for groups that have that ability, it’s encouraged them to remain independent, because the value of their care management processes and systems is being seen and appreciated. For physicians who might be in smaller groups that might not have the scale or the back office to manage that risk, you may see them moving towards being part of a health system, to be protected from that.

Not surprisingly, those geographic areas where you have higher penetration of Medicare Advantage, as in Florida, for example, you see a lot of activity. Where MA doesn’t have that kind of penetration, you’ll see less activity. But what I would say is that what we’ve seen is that there are groups that really have developed not only the administrative systems but the clinical systems to be very effective managers; and they are being rewarded and sought after.

PPMs—the early version of physician practice management companies that emerged in the mid-1990s, proceeded to implode by the late 1990s. What’s different now, for physician groups, as they become more consolidated? It seems to be a very different landscape now.

I agree that it’s materially different now. The biggest thing to me is that the payment mechanisms are different. The financial incentives for care management in these kinds of contracts are there today. In the 1990s, we were talking about capitation, but outside of a few places, it really didn’t exist; you were trying to build a system that was made for capitation, but most groups were still discounted FFS.

Physician groups didn’t have the data, information systems, dashboards, for performance management, in order to improve their performance, correct?

Absolutely. And now, we have the data in advance to identify the high-risk MA [Medicare Advantage] patient, such as the dual-eligible patient, so we can identify them even before they incur costs. We can care-manage them.

What will the most successful physician groups in terms of two-sided risk, want to do?

Earlier on, we undervalued the diagnosticians and over-valued the proceduralists; that’s changing now. And these  value-based contracts will allow physician groups to maintain their independence, and to grow and expand geographically. And because of the timing of payments in VBC, it’s a pretty capital-intensive system, you don’t get the returns for months. So there will still be an advantage to scale. So in many cases, physicians who might have thought that partnering with or being employed by hospital systems, will remain independent.

Will hospital leaders be smarter now about acquiring physician practices? They made a lot of mistakes in the late 1990s, simply buying up physician practices in bulk, without creating performance-based contracts for individual physicians.

Yes, and somewhere around 40-50 percent of physicians are employed by health systems now. The health systems have the access to capital to work in payment systems as the independent groups have done. I think physicians are in a good place and will have a choice. I think health systems will do better than they did two years ago.

There’s one other element in there, too, which is that twenty years ago, there was fighting between the providers and health plans over those risk-based dollars. Today, it feels like that’s a lot more settle, and plans are much more willing to share that risk with providers. And that’s a meaningful difference; and providers much better understand how to manage risk.

I remember that 30 years ago, many experts were predicting that we would inevitably have a small number of “super-meds,” enormous integrated delivery systems that would absolutely dominate the U.S. healthcare system. That never happened; but consolidation is definitely advancing these days. What are your thoughts on that?

I can’t see it going that far. I still believe that healthcare remains largely local. But when I look at a major metropolitan area, you’re going to end up with two or three major health systems in that geographic area. As a consumer, as a patient, that’s kind of going to be what your choice is. Will you have some like an HCA that happens to own a number of those regional health systems? Yes, but I don’t see that as the ultimate model. And you’re still seeing consolidation on the not-for-profit side, and it was to get that equilibrium between payers and providers, that ability to get to scale to negotiate with the health plans.

So the arms war will stop in some local markets, as everyone has already bulked up, and it becomes hard to manage those large systems?

Yes, exactly for that reason that it’s hard to manage at that size, and the incremental benefits of marginally bigger size won’t be apparent.

The for-profit health systems haven’t necessarily thrived. Your thoughts?

There are a couple of profit-chains that are very good and very capable, and I put folks like HC into that category. They’ve had a demonstrated ability over a long period of time, to manage well, and they’ve managed their balance sheets well. Other for-profit providers have struggled to manage their balance sheets, with a desire for growth that didn’t turn out has envisioned. So I think there’s always room for good providers. And some will continue to grow and be active, but I think those fears that there wasn’t a role for non-profits just turned out not to be the case. Some 75 percent of hospitals remain not-for-profit, and I don’t see that changing.