Latest / Becker’s Healthcare Podcast / Health System Margins, Growth, and M&A with Alan Condon

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Health System Margins, Growth, and M&A with Alan Condon · Becker’s Healthcare Podcast

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  - The strategic agenda facing hospital and health system
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  - leaders right now is not a short list.
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  - Growth in a consolidating market, sustainable margins in
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  - a reimbursement environment that rarely moves in your
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  - favor,
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  - a tech investment cycle that demands both urgency
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  - and discipline,
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  - and a workforce story that is still being
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  - written.
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  - Eker's fourteenth annual CEO CFO roundtable brings together
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  - more than 1,500 executive level attendees and nearly
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  - 400 speakers across four days of sessions that
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  - are designed to help c suite leaders benchmark,
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  - pressure test, and sharpen their priorities.
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  - Not in the abstract, but against the real
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  - decisions they'll face heading into the next year.
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  - It's the kind of event you leave with
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  - a clear sense of where you stand and
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  - what comes next.
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  - So join us November second through the fifth
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  - at the Hyatt Regency in Chicago,
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  - and come ready to do the hard thinking.
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  - Register on our events page at beckershospitalreview.com
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  - by clicking on the events tab in the
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  - upper right.
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  - This is Scott Becker with the Beckers Healthcare
• 1:01
  - Podcast.
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  - I am thrilled today to be joined by
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  - a brilliant leader who who writes a lot
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  - and manages a lot and editor in chief,
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  - Allan Condon, on the finance side of health
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  - systems.
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  - Alan, what are the big stories that you're
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  - watching currently?
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  - What's top of mind in in the health
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  - care sector that you're watching currently?
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  - Yeah. I'll try and narrow it down as
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  - much as I can. I think certainly so
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  - much to kinda touch on,
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  - as we just kicked off q four a
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  - couple days ago. But I think,
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  - first and foremost, maybe just to touch on
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  - what we're seeing from a few of the
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  - big national nonprofit Catholic health systems.
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  - One of our fantastic reporters, Maddie Ashley, did
• 1:39
  - a fantastic report this morning on the end
• 1:42
  - of fiscal year twenty twenty six for Ascension,
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  - CommonSpirit,
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  - Trinity Health, and, Baylor Scott and White Health.
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  - Obviously, obviously, headquartered down in Texas,
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  - large regional system,
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  - fantastically
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  - run, and I'm super
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  - very, very profitable. But I think just a
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  - quick little breakdown of how these systems performed
• 2:01
  - at the end of the fiscal 2026,
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  - which ended at the end of June. So
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  - three out of those four systems I've mentioned
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  - did see their improved operating performance. So Trinity
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  - Health,
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  - swung from an operating loss of $281,000,000
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  - operating gain.
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  - Ascension and CommonSpirit
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  - also narrowed their operating losses,
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  - while Baylor,
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  - remained the strongest performer of that group. It
• 2:27
  - is still holding around an 8.3%
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  - operating margin. So a hugely, hugely successful, very
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  - well run, preferable system there. Of course, a
• 2:34
  - very different market down in Texas.
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  - I think
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  - an interesting takeaway here as we kinda compare
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  - these big four systems is
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  - strategic
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  - transactions
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  - are really
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  - materially affecting some of these financial results. So
• 2:49
  - to pull CommonSpirit out of the bag here,
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  - CommonSpirit reported a $3,200,000,000
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  - operating loss when we account for this $2,800,000,000
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  - in special charges, which is largely tied
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  - to its exit from Conifera Health Solutions,
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  - of course, the the revenue cycle management company
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  - that is now fully owned and operated by
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  - Tenet Healthcare.
• 3:13
  - Ascension, on the other hand, reported operating loss,
• 3:16
  - and it also reported a brief operating loss,
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  - though narrowed its turnaround somewhat year over year,
• 3:20
  - going back to three years ago when they
• 3:22
  - reported a $3,000,000,000 operating loss. Fantastic leadership by
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  - their CFO, Sarah
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  - Tripati, to really make sure they're marching marching
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  - those margins back up to break even point.
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  - A ton of growth ahead when we think
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  - about what's to come in terms of its,
• 3:36
  - growth trajectory with with AMSURGE.
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  - And then just lastly, Scott, just in terms
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  - of Baylor,
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  - still very, very high profitable system. Margins tightened
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  - somewhat.
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  - I think the system posted $1,500,000,000
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  - in operating income,
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  - around about $18,500,000,000
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  - in annual revenue.
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  - It's it's margin 8.1%
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  - for the year, slightly down from fiscal year
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  - twenty twenty five. But I think an interesting
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  - takeaway from Baylor's results there is a useful
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  - reminder that
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  - even strong profitable systems are seeing really expense
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  - growth eat into their their operating gains.
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  - No doubt, a lot of restructuring, cutting, and
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  - divesting in noncore
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  - areas for a lot of systems
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  - as they look at some of these big,
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  - big headwinds coming down in 2027 when we
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  - think about patient affordability,
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  - elective surgery slowdown that many systems have pointed
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  - to, rising costs and uncompensated care as well,
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  - and and no doubt those Medicaid funding cuts
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  - and redeterminations. So just a quick little lay
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  - of the land of what we're seeing at
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  - some of those big four nonprofit systems and
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  - as we, end the fiscal year 2026
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  - and kick off our fiscal twenty twenty seven.
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  - Thank you. And do those fiscal year ends
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  - not run on the calendar year?
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  - Is that the deal with this?
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  - The fiscal year for those four systems end
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  - 06/30/2026.
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  - So they just reported these results in the
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  - last week or so,
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  - and then really all eyes on the next
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  - kind of big, big results we're coming out
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  - of the pipeline as we look at towards
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  - the end of twenty twenty six... The calendar
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  - year 2026. Excuse me. Right. So it seems
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  - like systems did pretty well for... Through this
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  - fiscal year,
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  - at least better improved results. The only one
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  - going in the wrong direction, David Scott and
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  - White, but, again, they're quite profitable to start
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  - with and doing a great job there.
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  - How do you square that with so much,
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  - discussion in the industry about
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  - people rolling off insurance roles, Medicaid roles, ACA
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  - coverage, and not even coverage, but still need
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  - hospital services.
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  - You know, we saw such projections from HC
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  - and others that they'd end up really seeing
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  - a challenges or
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  - operating
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  - income declines
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  - from having to treat these patients that no
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  - longer have coverage.
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  - And yet it seems like at least through
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  - the first half of the year and maybe
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  - through the year,
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  - the systems are still doing okay. How do
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  - you square some of that?
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  - Yeah. It's kind of a very interesting question.
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  - Certainly, something that was top of mind for
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  - myself reporting on some of these results.
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  - I spoke just recently on Friday with Ascension
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  - CFO, Sarah Tripathi, and I think,
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  - again, a lot going on within that system
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  - in terms of their operating model, kind of
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  - really looking at cutting and using AI where
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  - possible to really kind of drive some more
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  - ROI on the website and whatnot. Growth opportunity
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  - seems to be the name of the game.
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  - We hear so much from leaders that you
• 6:28
  - cannot cut your way to success. I believe
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  - something's... The sort of health CEO Warner Thomas
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  - said at a recent Becker's conference, know that
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  - we are seeing quite a lot of, restructuring
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  - and coding, but the CFOs, the CEOs that
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  - I've been speaking to over the last few
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  - months have all said,
• 6:43
  - growth growth is inevitable. We're really looking for
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  - those opportunities across the board. Diversification
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  - of their geographic markets, diversification of their revenue
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  - streams are really accelerating towards,
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  - outpatient care, more so than ever it seems.
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  - More joint ventures, more building and acquisitions of
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  - surgery centers. We're seeing a lot of these
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  - big,
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  - nonprofit for profit systems really lean into that
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  - more and more,
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  - as no doubt. To your point, Scott, we're
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  - seeing,
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  - quite a few... Arguably the most difficult reimbursement
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  - landscape we've seen in quite some time.
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  - So a lot to come. I'd be curious
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  - just to see what we see as the
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  - for profit systems report their q three results
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  - in a couple of weeks' time, which will
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  - give us a little bit of a better
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  - indicator of what lies ahead.
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  - Right. No. But truly fascinating to see this
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  - sort of change in dynamics.
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  - The number's going better than I think I
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  - would have anticipated. I mean, obviously, the common
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  - spirit loss is a big loss,
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  - but they they do attribute a lot of
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  - that to a onetime cutting of the contract
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  - to the conifer. But the ongoing operations can
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  - be moving in the right direction. And, hopefully,
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  - that holds true and continues to be the
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  - case. Because if so, that's a big move
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  - in the right direction for common spare particularly
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  - if they can get behind this Conifer
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  - contract loss that they had. But fascinating to
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  - watch. You know, and anything else that's absolutely
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  - top of mind currently that you're keeping an
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  - eye on?
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  - Yeah. I think,
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  - we saw a ton of,
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  - m and a activity, I think, October 1.
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  - Going a little bit, we saw a ton
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  - of activity across the country, really. Some big,
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  - big systems,
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  - entering new markets,
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  - some some smaller systems, some larger systems also
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  - offloading to hospitals in in noncore areas. I
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  - think just to kind of call out one
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  - or two of the most notable deals that
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  - we saw, I would say first and foremost
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  - would be,
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  - UPMC,
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  - has a finally acquired
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  - Trinity Health System. Now that's not the the
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  - nonprofit large national Catholic system headquartered in Michigan.
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  - This is a four hospital health system headquartered
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  - in Ohio. So UPMC has acquired this four
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  - hospital system from CommonSpirit.
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  - That deal is done and dusted over the
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  - line October 1. I think what's really interesting
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  - about this deal is it marks UPMC's
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  - first move, its entry into the Ohio hospital
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  - market.
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  - So on the other hand of the spectrum,
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  - when we look at CommonSpirit, which was just
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  - touched on their financial results there,
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  - deal obviously comes to CommonSpirit, continuing to pursue
• 9:06
  - hospital sales amid amid some of these ongoing
• 9:08
  - industry headwinds. CommonSpirit sold a 25 bed critic...
• 9:11
  - 25 bed critical access hospital in North Dakota
• 9:14
  - earlier this year to, AltruHealth, which is is
• 9:17
  - headquartered in North Dakota. It also plans to
• 9:20
  - sell three more hospitals in North Dakota to
• 9:22
  - the same health system,
• 9:24
  - hoping to square that deal away by the
• 9:25
  - end of the year. But this four hospitals
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  - sale to UPMC. So,
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  - there's a tally of seven hospitals coming spirits
• 9:32
  - offloading in this year alone and, potentially some
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  - other, hospital sales coming down the pipeline as
• 9:37
  - we heard in the investor call last week
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  - as well. So I think that was a
• 9:41
  - a very, very interesting deal. And then just
• 9:43
  - pulling back a little bit and just looking
• 9:45
  - at
• 9:46
  - Minnesota. In general, I think Minnesota's a... Really
• 9:49
  - a hotbed of m and a activity.
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  - Few states have seen deals as
• 9:54
  - large or maybe as strategically
• 9:58
  - significant as Minnesota this year. When we think
• 10:00
  - about,
• 10:01
  - Sanford Health in in South Dakota acquired North
• 10:04
  - Memorial Health.
• 10:06
  - Essentially, Sanford now has 60 hospital system in
• 10:08
  - multiple states. Sutter Health in California, of course,
• 10:11
  - still pursuing this proposed merger acquisition with, Minneapolis
• 10:16
  - based Allina Health.
• 10:18
  - That is a huge, huge deal that many
• 10:19
  - many have their eyes on. We created $26,000,000,000
• 10:22
  - system with 39 hospitals
• 10:24
  - in multiple states. And then just lastly and
• 10:27
  - most recently, Scott, we saw also Minnesota Health
• 10:30
  - Partners
• 10:31
  - and Essentia Health announced that they plan to
• 10:34
  - merge into a 22 hospital
• 10:37
  - nonprofit system. So adding another major combination to
• 10:41
  - an already really, really active market. So Minnesota,
• 10:45
  - a ton of activity going on, a lot
• 10:46
  - of interesting deals in the works,
• 10:48
  - we should be keeping a close eye on
• 10:50
  - at the end of the year and into
• 10:51
  - next as well.
• 10:52
  - Thank you. No. I think that's fascinating to
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  - see these systems get more and more strategic
• 10:56
  - about thinking they don't have to be every
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  - single place, and they'd rather be in place
• 11:00
  - where they've got some concentrations, some synergies.
• 11:03
  - And and when I look at UPMC expanding
• 11:05
  - into Ohio, well, it's right next door to
• 11:06
  - Pittsburgh. Pittsburgh's right on the border of, Eastern
• 11:09
  - Ohio, so it makes a lot of sense.
• 11:11
  - And I see common spirit getting out of
• 11:12
  - some of these markets. They don't have market
• 11:14
  - strength or don't have market synergies, and it
• 11:16
  - makes a great deal of sense towards the
• 11:18
  - streamlining operations, trying to be more strategic,
• 11:21
  - and and make sure that margins work. So
• 11:23
  - I... Makes a lot of sense to me.
• 11:24
  - It's fascinating to watch. And as always, I
• 11:27
  - wanna thank you for joining the the Becker's
• 11:29
  - Healthcare podcast.
• 11:30
  - Literally the best in the business at what
• 11:31
  - you do. Thank you so much for joining
• 11:33
  - us today. Scott, always a pleasure. Thanks so
• 11:35
  - much.