healthcare providers: a break in the clouds · 2020. 5. 15. · 3 kpmg, healthcare 2030: the...

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Healthcare providers: A break in the cloudsSurprisingly, the COVID-19 outbreak may present new opportunities for growth

IntroductionThere is no doubt that the COVID-19 outbreak has had a profound impact on healthcare. Across the U.S., hospitals have been converted to COVID-19 treatment centers, and elective procedures have been put on hold by government mandate. The American Hospital Association estimates that treating COVID-19 patients from March through June will cost the industry $200 billion.1 Some $130 billion may be offset by CARES Act funds, but the shortfall underscores the urgency to find new sources of revenue.

There are legitimate concerns about a second wave of the virus, as well as the number of individuals who have lost their health insurance in the economic downturn. However, as the economy opens and bans on elective procedures lift, the healthcare industry will certainly rebound.

At the same time, care delivery will look quite different in the new reality. The industry must adapt to changes in consumer expectations that have been taking hold during COVID-19. Specifically, there will be a move away from traditional sites of care, a major uptick in virtual care, and new uses of technology to improve the patient experience—all of which should underpin healthcare organizations’ forward-reaching growth strategies.

In this paper, we seek to help healthcare organizations determine avenues for growth, and make changes to their business models, assets, and supporting capabilities. Ultimately, companies with capital, agility, and well-calculated growth strategies will be able to effectively shape their post COVID-19 futures and position themselves to win in the new reality.

1 Jeff Overley, What to watch as COVID-19 cash crunch fuels hospital M&A, Law 360, May 15, 2020.

1© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Demand will return...Although a second wave of COVID-19 may deter some patients from returning to hospitals for elective procedures, we are confident that demand for healthcare services will return to historical levels over time. Exhibit 1 shows the major impacts of the COVID-19 lock-down on healthcare and the signposts that will indicate that conditions for recovery are in place.

Exhibit 1. Stages of healthcare recovery

Signposts for recoveryCOVID-19 impact Recovery

1

— Significant decline in GDP and employment

— Uncertainly about future state of economy

— Businesses are able to rehire, allowing individuals who may have temporarily lost their health insurance to reschedule medical visits and procedures

U.S. economy begins to rebound

2

— Businesses face cash flow challenges and retain cash they generate

— Limited investments in future ventures economy

— Credit spreads shrink and move towards pre-COVID-19 levels

— Healthcare organizations that moved to cash in March and April begin to redeploy investments further out on the risk curve

Access to debt markets increases

3 — COVID-19 contained through

shelter-in-place orders

— Evolving timelines for reopening

— Confidence that any future outbreaks can be contained

— Concern about infection is minimized

— Chronic disease patients begin to reschedule doctors’ visits, as shelter-in-place orders are relaxed

Shelter-in-place orders are reduced or

eliminated

4

— Elective procedures cancelled or delayed as patients avoid crowded hospitals

— Capacity to perform nonemergency procedures limited due to staffing, equipment, and PPE shortages

— Hospitals and outpatient centers rehire clinical and non-clinical staff and perform critical elective procedures as demand increases

Nonemergency surgeries resume

5

— Rapid decline in physicians’ office visits

— Patients anxious about possibility of infection

— Physicians expand office hours

— Patients seek in-office treatment on a more regular basis

Physicians’ offices reopen and/or return

to pre-COVID-19 operations


Critical imperatives

…but consumers will have new expectations.COVID-19 has driven some significant changes in healthcare delivery, largely because the outbreak has empowered patients to make more reasoned decisions about when, where, and how they receive care. This has three major implications for healthcare providers: they should continue to explore new sites of service, be prepared for a large and potentially permanent shift to virtual care, and seek to improve the patient experience through partnerships with technology companies.

New sites of service

Even before COVID-19, there was a movement toward lower-cost, more convenient sites of care. Retail and urgent care clinics have been evolving from a focus on acute care to a greater role in helping patients manage chronic illness.2 During COVID-19, patients utilized retail and urgent care for more accessible and lower-risk COVID-19 infection and antibody testing, as well as treatment for non-COVID-related illnesses that would have been addressed at hospitals or physicians’ offices during normal circumstances.

COVID-19 has driven home the need for hospitals to integrate their services with lower-cost, more convenient care delivery models. Ideally, patients will be able to receive care where and when they prefer across a variety of flexible formats, based on varying degrees of acuity,

diagnostic needs, delivery mechanisms, and levels of convenience. Movement between care settings should be seamless, with hospitals having much tighter integration with physicians’ groups and urgent care facilities on the front end, as well as with rehabilitation centers, long-term acute care, and home-care providers on the back end.3

In some cases, this integration can be achieved through strategic partnerships. In others, health systems may want to consider targeted acquisitions of, for example, ambulatory surgery centers, urgent care centers, or home health providers — assets that have come down significantly in price during the COVID-19 outbreak.4

Further, it is important to note that some health systems are building or partnering with continuum-of-care operators as care moves out of the hospital.

— Build a layered network of alternate sites and modes of care

— Consider overall geographical footprint as you consider diversifying your sites of service

— Assess which physical assets you may need to acquire

— Develop a pricing strategy that allows the organization to maximize all its assets while minimizing consumer concern around uneven pricing

— Develop protocols and related technologies for directing patients to the most appropriate sites of care

2 Kryus (2017), 2017 Patient Access Journey Report: What a survey of 1,000 patients reveals about how healthcare consumerism is changing the patient journey to find providers.3 KPMG, Healthcare 2030: The consumer at the center, 20184 VMG Health, Business insight under COVID-19: Financial challenges & opportunities, Becker’s Hospital Review, May 1, 2020.


Major shift to virtual health

Before COVID-19, virtual health technology was used mostly as a way to give patients in rural areas greater access to care or as a supplementary tool for specialty practices such as psychiatry and neurology. As a result, only a small percentage of patient visits were conducted via telemedicine. For example, before COVID-19, a five-hospital health system conducted only one percent of its visits virtually, compared to 80 percent during the outbreak.5

Since the onset of COVID-19, virtual care has become a critical component in the effort to flatten the curve and deliver diagnoses and treatment to patients who could not or would not come into care facilities. In an April survey, half of physicians said they were using virtual health technologies, up from 18 percent two years ago.6

Since both patients and medical practitioners have become increasingly comfortable using virtual health technologies during COVID-19, there will be increasing pressure on the Centers for Medicare and Medicaid (CMS) to lift certain restrictions and expand covered services after the outbreak is over. Virtual care is likely to grow both as a stand-alone offering and a means to serve a larger volume of patients as hospitals acquire smaller entities.7

Virtual care modalities must be more seamlessly integrated with traditional, in-person care. To this end, healthcare organizations can use real-time analytics, predictive modelling, wearable devices, and mobile health apps to help chronic disease patients better manage their symptoms between visits and delay their disease progression.

— Determine whether it makes strategic sense to build, buy or partner when considering a major move into virtual health

— Analyze how the integration of virtual health will impact your workforce, and whether staff will need additional training

— Assign greater responsibility for delivering patient care to nurses and physicians assistants, in order to reduce demand on physicians

— Use change management techniques to help shift the organizational culture toward greater use of virtual care delivery

— Monitor changing regulations governing virtual care usage guidelines and reimbursement parameters

The remote delivery of health services raises some significant tax considerations for providers. For example, treating patients across state lines can trigger state income tax issues that are dependent on state-specific sourcing rules. And while medical services are generally not subject to sales and use tax, the technologies that virtual health providers use to deliver medical services can be. Even tax-exempt hospitals can inadvertently become subject to unrelated business income tax under certain virtual health scenarios without proper tax planning.

5 Health Catalyst Editors, Restarting ambulatory care and elective procedures: Analytics guide safe, pragmatic decisions, HealthCatalyst, May 26, 2020.6 Half of physicians now using telehealth as COVID-19 changes practice operations, Fierce Healthcare, April 23, 2020.7 Laura Dryda, Telehealth may see big long-term gains due to COVID-19: 10 observations, Fierce Healthcare, April 17, 2020.


Virtual Care Tax Considerations


Technology-enabled patient experiences

Even before COVID-19, healthcare organizations were exploring partnerships with leading technology companies to expand capabilities and services, particularly in the area of consumer analytics.

Going forward, healthcare organizations should be more proactive about partnering with technology leaders that can help them provide patients with a more seamless experience that aligns with their preferences coming out of the pandemic, including remote registration and appointment scheduling and contactless payment.8

Further, since the CMS and ONC interoperability rules have now been finalized, there will be a greater push

for providers and payers to exchange electronic health data with other members of a patient’s care team and relevant payers.9 And cognitive technology tools, as well as AI, machine learning, and natural language processing (NLP), can be used to analyze the abundance of data that health systems and payers possess to drive care continuum improvements and help pinpoint the most effective treatments for certain conditions. With these considerations in mind, organizations may want to take advantage of attractive asset pricing to invest in progressive healthcare IT that may have been out of reach before the COVID-19 outbreak.

8 Jackie Drees, Laura Dryda, The tech needed for more contactless hospitals, healthcare, Fierce Healthcare, May 11, 2020. 9 Promoting interoperability, KPMG, 2020

— Assess whether technology investments will enable or hinder growth opportunities

— Explore ways to offer consumers an integrated physical and digital experience

— Consider divesting noncore assets or commercializing other assets to fund technology investments

— Assess current technology capabilities for expansion and enhancement opportunities

— Stay abreast of evolving regulations mandating specific healthcare IT investments



10 Robert King, Payers, providers spar over NEJM study that suggests hospital mergers don’t improve care, Fierce Healthcare, January 3, 2020.

Source: Deal Search Online and Health Care M&A News (Jan 2020), www.HealthCareMandA.com; Merger Market

Post COVID-19 growth strategiesOnce elective procedures return and the industry resets to a new normal, healthcare organizations should be planning for other forms of organic and inorganic growth.

Before COVID-19, some large, not-for-profit hospital systems pursued deals focused on cost synergies, market expansion, and new clinical capabilities—although such deals were often criticized for driving up costs without improving the quality of care.10 Further, some hospital systems had to step back from potential acquisitions of physicians’ practices and ancillary assets, due to high valuations and competition from private equity (PE) funds and other investors (Exhibit 2).

In mid-March 2020, provider M&A deals in progress were put on hold as hospitals faced volatile cash flow due to postponement of elective procedures and spikes in labor and supply costs. Further, the flow of private equity deals slowed as well. That said, deals in the areas of infusion and behavioral health still transacted — driven by such industry tailwinds as the move toward lower-acuity sites of service and emerging networks supported by national payer contracts.

Exhibit 2. In 2019 healthcare deal volume fell as multiples jumped

Exit multiples for U.S.-based healthcare transactions across all

subsectors, excluding outliers

Pre-COVID-19 drivers of provider M&A activity

Overall healthcare M&A across all subsectors

Exit multiples for hospitals and health institutions

2019 vs. 2018

Q4 2019 vs. Q3 2019

Q4 2019 vs. Q4 2018

Total Deal Value

26.6% 17.8% 137.1%

$73

$25$17

$10

$31

$15$20

$24

Q3Q1 Q1Q2 Q2Q4 Q3 Q4

2018Total Deal Value

= $125B

2019Total Deal Value

= $90B

1.1x

10.7x

9.4x

2017 2018 2019

1.4x 1.5x

13.0x

Median Revenue MultipleMedian EBITDA Multiple

Cost synergies1

Access to patients3

New clinical capabilities

5

New market expansion

2

Expanded share of wallet

4

Talent and workforce pools6

Access to disruptive technologies7


Exhibit 3. Refining the Growth Strategy by Subsector

When M&A activity resumes, many small community and not-for-profit hospitals, ambulatory centers, primary care physicians’ practices, and specialty practices will be looking to merge or be acquired.11

These deals should be attractive to more stable health systems that had been in the market for such assets

before COVID-19. Overall, healthcare entities’ short- and long-term value and viability for M&A will vary based on the subsector’s position in the care-delivery value chain and the degree to which it is impacted by digital and virtual health technologies (see Exhibit 3).

11 Gary W. Herschmann, Zachary Taylor, Industry Voices—How could the COVID-19 pandemic impact transaction activity? Fierce Healthcare, April 9, 2020.

*Digital/Virtual Care capabilities include e-visits, remote monitoring, pre-procedure education, and verification, etc.

No Impact Minimal Impact Moderate Impact Significant Impact Transformational

Industry Subsector

Challenges and OpportunitiesOutlook Digital/

Virtual Care Impact*

Short Term

Long Term

Hospitals / Health Systems

— Traditional business temporarily disrupted by COVID-19, leading to moderate to severe cash-flow challenges

— Demand to resume elective surgeries, although persistent shortages in supplies and labor may slow the process

— CARES Act will provide short-term relief to some, although there will likely be insufficient funding causing some to struggle to rebound and/or survive

Urgent Care

— Clinics are seeing less traditional demand as they treat more time- and resource-intensive COVID-19 patients

— Demand will likely rebound and/or increase as patients continue to avoid hospitals/ERs

Ambulatory Surgical Centers

— Non-urgent & elective surgeries have been postponed, although demand should rebound due to the ongoing industrywide push toward lower-cost sites of care

— Centers that employ physicians are experiencing extreme cash-flow challenges and may be ripe for acquisition

Home Health / Hospice

Care

— PPE shortages, as well as the ability to serve patients with contagious diseases, impact short-term volume

— More patients, including recovering COVID-19 patients, are choosing home care to avoid crowded hospitals

— Technological improvements allow for better home-care services, which are also more frequently reimbursed

Primary Care Physicians

— Office visits have declined, although demand is already beginning to return

— Some offices have closed, more than half have furloughed staff, and the ones that remain open may be ripe for M&A

— Primary care physicians will continue to increase their usage of remote staff and virtual care options

Specialty Physicians

— Office visits and procedures, as well as ancillary services, have declined— Revenue and cash flow continue to be a challenge and many practices

may be ripe for M&A — Demand will likely return, although staff shortages & fewer optional/

cosmetic procedures may slow growth

Payers

— Many seeing short-term decrease in members’ high-cost procedures, which is leading to favorable MLRs

— In the future, demand will likely rebound and drive a slight shift in payer mix away from commercial payers

— Payers may need to provide cash flows to health systems in advance (similar to CMS)


The need for speed

Connect with current and potential partners: Considering

new growth levers now will allow

organizations to assess potential collaborators and

ensure that current partnerships are well situated for

the post COVID-19 environment.

03

As health systems survey the landscape of potential acquisition targets, it is more important than ever to move rapidly to ensure that deals align with organizations’ longer-term growth strategies. In all industries, companies that make bold—but thoughtful—strategic moves in a downturn tend to jump ahead of competitors that simply “hunker down.”12 First movers in healthcare M&A could reap the largest strategic and financial rewards.

Capture market share: Pioneering new initiatives and

care-delivery methods will generate a larger

patient base and position businesses

well to adapt to patient needs.

01

Understand and adapt to market

needs: Making bold moves ahead of the

competition can enable an organization

to quickly get a pulse on the market and pivot to meet patient needs and

preferences.

02

Attain favorable pricing: Acquisitions

that were out of reach prior to the outbreak may be within reach

now. Being a first mover enables

an organization to capitalize on deflated valuations and select

optimal targets.

04

Gain first access to limited capital:

Since post COVID-19 debt markets may be relatively constrained,

first movers can quickly lay claim to

limited capital.

05

12 CEO Mission: Lean into the unknown, KPMG, April 2020.


Narrowing in on where and how to playWhile priority should be given to strategic growth initiatives that will help organizations thrive in the future reality, there are some quick wins that can be achieved in the short term: implementing pilot programs to test the viability of large initiatives; assessing providers, payers, and technology companies for future collaboration; and divesting or monetizing noncore assets to fund focused growth.

In the longer term, growth strategies will span horizontal mergers, vertical deals, and strategic partnerships, and

will include both new targets and strategic initiatives that were halted during COVID-19. Below we highlight strategic opportunities and operational capabilities that should be considered (see Exhibit 4 on the next page).

Further, deciding where and how to play will be dependent on a number of factors. Following is a list of critical questions to consider as an organization develops its growth strategy.

Critical questions:

— What does market-leading look like in the new reality?

— What current assets/offerings/capabilities can we leverage to grow?

— Do we have hypotheses on the kinds of assets and capabilities that will help us grow and meet long-term strategic objectives?

— How do we prioritize organic vs. inorganic growth in light of our overall long-term strategic objectives?

— How large is our budget to grow, and how will we fund this growth (buy/build/partner/lease)?

— What will be the impact on our financial results?

— What does acting now afford us, given that asset prices may not increase directly from here?

— Will there be competitive responses in the market?


Exhibit 4. Strategic opportunities & operational capabilities to inform growth strategies

How

to

exe

cute

Technology

Operations

Organizational Capabilities

People and Culture

Measures and Financial

Reporting

Technology investments should enable potential growth opportunities, whether in new sites of service, virtual health, technology-enabled patient experiences, or other strategic objectives.

Operational changes should only be made if there is sufficient capacity within the organization to handle the additional work.

Resources within the organization should be able to manage and grow the new capability

Organizations should guide employees through the change and ensure that their perspectives are heard and reflected

Procedures and protocols should be put in place to evaluate and communicate impact of proposed actions on strategic opportunities

— IT operations — Cyber security

— Revenue cycle — Supply chain & vendor management — Patient access

— Workforce transition & strategies — PMO

— Physician alignment — Clinical support staffing model

— Access to capital and cash flow — Public disclosures — Board awareness

Considerations Illustrative Examples (Hospital Point-of-View)

Horizontal Integration

Wh

ere

to p

lay

Vertical Integration

Creates economies of scale and access to new patients within the same areas of the value chain

Develops wider array of patient care and health services that result in greater share of wallet and/or ability to take risk

— Density in existing markets — New market expansion — Service line strategies / COEs

— Physicians’ groups — Urgent care / retail care — Ambulatory surgery centers

— Post-acute care — Other hospitals (LTACH,

behavioral)

New Business Models

Diversify the revenue base by allowing the organization to enter into new businesses, novel partnerships, new revenue streams, and asset commercialization

— Payer model (capitation, PSHP) — Provider alignment models — Technology, care and other

partnerships — Retail Products

(consumer, senior living)

— Research hospitals, GME, other academic

— Asset commercialization (IC, telehealth)

There are a number of considerations healthcare organizations should keep in mind when prioritizing where they should focus their growth efforts: the relative market attractiveness of a particular asset in light of COVID-19 impacts, the degree of valuation change due to COVID-19, whether the asset is priced appropriately, how well the asset aligns with your current and planned capabilities and strategic objectives, and whether the asset will support your diversification efforts and development of new revenue streams. Once the organization prioritizes the areas that will best facilitate growth, there will be a number of potential models to pursue, e.g., build, buy, partner, or lease. Following are structuring considerations for determining which model is most appropriate:

— Competitive balance: Determine the relative supply and demand of the service or capability in the market

— Affordability: Assess the degree of valuation change due to COVID-19 and assess whether the current price in the market is reasonable

— Expertise: Evaluate the sophistication of the asset’s technology capabilities and personnel related to its business model and operations

— Size: Consider the breadth and scope of operations and whether those factors align with your needs

— ROI: Gauge the likely return on investment and duration to recoup any investment


ConclusionThe healthcare industry as a whole is bound to survive the COVID-19 outbreak. However, the new reality will look quite different. Hospitals and health systems will need to address the trends in consumer expectations that were building before the outbreak and have now accelerated. Initiatives should include developing new sites of care, virtual health offerings, and technology-enabled patient experiences. The most forward-thinking providers will pursue strategic growth initiatives that position them to provide a more seamless and flexible approach to care delivery as we enter the new reality.

The KPMG Healthcare Strategy practice serves corporate and private-equity players from strategy development through implementation and across all phases of the M&A lifecycle. Our integrated, multidisciplinary approach provides clients with critical insights into value opportunities—and obstacles to value—at deal speed. The ability to go beyond standard diligence methods will be increasingly important in the post COVID-19 M&A market, where assets that come to market may be affordable, but also troubled.14 Further, KPMG has a proprietary set of tools and methodologies to help healthcare organizations undertake rapid analyses of potential assets that can help further their growth strategies.

How can we help?

— Strategic options and redesign of portfolio of assets— Deal theses and partner prioritization— Commercial, synergies, operational diligence (in tandem with

KPMG’s financial, tax, coding/ compliance diligence, valuation, and corporate finance)

— Integration and separation, including Day 1 planning, PMO, and value capture and post-close strategy

— Enterprise-wide transformation and performance improvement— Operating model re-design— Technology strategy, including digital mobility

— Market assessments and white space growth— Strategic planning and growth strategies— Physician alignment, funds flow, continuum of care, service line, quality and

payer risk strategies— New business model development and asset commercialization

Performance transformation

M&A/Partnerships

Strategy and growth

HCLS team with extensive industry

experience

14 Differentiated diligence after COVID-19, KPMG, 2020.


Authors

Ross Nelson is a principal and KPMG’s National Healthcare Strategy leader for the provider and payer sectors. He has 20 years of experience developing strategies for more affordable, patient-centric care for integrated delivery systems, health systems and hospitals, physicians’ group practices, payers, and other care delivery providers. He helps clients develop and conduct market assessments, growth and enterprise strategies, portfolio and care continuum strategies, M&A or collaboration strategies, synergies diligence, commercial and operational diligence, and integration planning, management and implementation, He holds an ScB in Chemistry from Brown University; an MBA from Northwestern University; and an M.D. from the Feinberg School of Medicine at Northwestern University.

Ross Nelson, M.D.

Dion Sheidy is a partner and serves as KPMG’s U.S. Healthcare Advisory leader. He has more than 25 years’ experience delivering high-value business advisory and assurance solutions to healthcare provider and payer clients nationwide. Representative client engagements include strategic planning and growth; development of centers of excellence; preparation of efficiency studies; market- and service-level demand analyses; revenue cycle operations and effectiveness; supply chain operations and effectiveness; design and operation of clinical documentation programs; due diligence procedures; evaluation of reimbursement, managed care and commercial contracting issues; evaluation of tax issues; and evaluation of alternative integration levels. He is a graduate of Penn State University with a BS degree in accounting.

Dion Sheidy

Jeff Whitcomb is a managing director in KPMG’s healthcare strategy practice. He has more than 18 years of healthcare consulting experience, during which time he has facilitated deals between hospitals, physicians, and payers; performed financial and operational due diligence; led pre-merger strategy and post-merger integration efforts; conducted strategic planning and growth analyses; developed physician compensation and employment agreements; and performed other strategic and financial analyses. He has led a wide variety of enterprise-wide and service line–specific strategic planning initiatives for hospitals, health systems, academic medical centers, and pediatric facilities. He is a graduate of Butler University with a BS degree in finance.

Jeff Whitcomb

We would also like to acknowledge the contributions of Aaron Matuseski, Brad Floyd, and Donna Ceparano


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. DASD-2020-1982

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

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Dion Sheidy Partner U.S. Healthcare Advisory Leader 615-248-5519 [email protected]

Ross Nelson, M.D. Principal National Healthcare Strategy Leader 630-207-7728 [email protected]

Jeff Whitcomb Managing Director Advisory, Strategy 317-402-6518 [email protected]

For more information, contact us:

healthcare providers: a break in the clouds · 2020. 5. 15. · 3 kpmg, healthcare 2030: the...

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