Based on AHLA’s annual Health Law Connections article, this special series brings together thought leaders from across the health law field to discuss the top ten issues of 2021. In the sixth episode, Michael Ramey, PYA, speaks to Torrey McClary and Ranee Adipat, Ropes & Gray LLP, about how the pandemic has affected health care transactions, specifically among hospitals and health systems, and what to expect going forward. They discuss impacts to hospital deal flow, changes to structuring and execution, emerging trends in hospital and health system deal making, and advice for transaction advisors. Sponsored by PYA.
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The American Health Law Association is pleased to present this special series highlighting the top 10 issues of 2021, where we bring together thought leaders from across the health law field to discuss the major trends and developments of the year. Support for A H L A in this series is provided by P Y A , which helps clients find value in the complex challenges related to mergers and acquisitions, clinical integrations, regulatory compliance, business valuations, and fair market value assessments, and tax and assurance. For more information, visit pya pc.com .Speaker 2:
Welcome everyone to the A H L A podcast series. I am Michael Ramey , a principal and leader in transaction services at P Y a . I am joined today by Steam Legal counsel Tori McClary , a partner at Ropes and Gray and Ronnie <inaudible> , council at Ropes and Gray . Both Tori and Ronnie focused their legal practices on healthcare transactions. They recently wrote an article titled Resilience and Reinvention, partnering in a Pandemic, which was published as part of a h l A summary of Top 10 issues in health law in 2021 . Today we will learn more about Tori's and Ronnie's perspectives on how the pandemic impacted healthcare transactions, specifically among health systems and thoughts on what is in store for the health system transactions in 2021 . Tori and Ronnie, welcome. Thank you for participating in the podcast series.Speaker 3:
Thank you for having us.Speaker 2:
So clearly a lot has unfolded over the last year. We entered 2020 with a robust capital market and a lot of m and a activity, including some proposed mega mergers of large health systems. And Tori is , as you reflect on the last year since the pandemic start, what are your views on the impacts hospital health system deal flow during that time?Speaker 3:
Well, it is, it is clear that the pandemic had a, an impact on deal flow and , and did in fact reduce the number of deals that that transpired in 2020 as compared to 2019. Uh, the current statistics are showing there were 79 announced deals in 2020 as compared to 92 in 2019. I think that what was really interesting about 2020 in the first quarter as , uh, nobody was really sure what was going to happen with, with pandemic and it was setting in, I would say deal flow was pretty gangbusters. And we felt, you know, absent pandemic, it could have been a really record year with , uh, health systems and providers, you know, everybody talking to everyone, so many different kinds of, of deals happening. And it was just , um, kind of an incredibly interesting and exciting period of time for transaction , uh, a attorneys to be doing that kind of work. However, you know, we get to march April, the pandemic , um, hits full force. At that time, we really saw pencils down on, on all our deals , uh, for at least a couple months with things starting to resume a little bit mid-year. Um, we had some pause deals from the beginning of the year pick up again mid to later in the year. Uh, we are seeing now a lot of conversation and discussion. I don't know that that has translated yet into the numbers that are being reported because a lot of these conversations are in the more preliminary stages or, or pre-announcement stages. Um, I believe Kaufman Hall just came out with a report , uh, you know, within the past day or two showing that q1 we are seeing some bounce back in deal flow, but it's still below 2020 Q1 levels. Um , so I think we're gonna continue to see an acceleration of deal flow as , uh, the pandemic gets more and more under control, or I should say, assuming the pandemic gets more and more under control and , uh, transactions are, are , uh, more developed and announced publicly.Speaker 2:
Great. Thanks, Tori. That's insightful. Um, I'll say from, from my vantage point, at least, our pharmacist , uh, a lot of healthcare organizations with due diligence efforts including financial due diligence and, and quality of earnings. Um, and it has definitely been harder to assess , um, as things continue to come out of, of covid kind of what the, the new normal is. Um, uh, and when I'm talking about Norma, I'm talking about, you know, take , taking a look at an entity and understanding what is , uh, really a , a reasonable amount of, of financial , um, returns that are being generated as well as what the operations are look like, how quickly those are rebounding. Um, so I would be curious, Ronnie , from, from your vantage point in facilitating deals, what did you see as as impact on, on deal structure and, and execution given those challenges?Speaker 4:
Well, I think we saw, you know, at the beginning of the year, deals that had started , um, sometimes took a pause and then people had to reevaluate , uh, maybe purchase price, other terms and, and you know, sort of as you mentioned for valuations, now our clients are looking backwards and, and trying to figure out how to treat 2020 in the covid year and whether, you know, it should be disregarded or normalized. I think that's a conversation that's happening now. When we were in the middle of , uh, the pandemic, you know, late spring, early summer, people were just rapidly renegotiating terms and a lot of that, you know, was, like I said, price, but it was also , um, you know, reps and warranties and uh, SBA loan provisions and different , uh, there were different deadlines that were influx and everybody was trying to figure out how to apply for loans and then how to provide for notice or consent if there was a change of control. So I think there was a lot of realtime , um, deal , uh, provisions that needed to be addressed while it was all happening. I think it's settled down a little bit now and we've had some time to catch our breath, but I think it's, it's a very interesting year , uh, to be negotiating in the middle of a pandemic about terms related to the pandemic .Speaker 3:
I just added that. I think Ronnie , that's a , a great , um, summary and insight <laugh> of our, and , uh, a diplomatic way to describe the chaos of, of our experience doing deals in the midst of pandemic. I think it was also interesting at the time thinking about provisions like material adverse effect and outs on transactions, and at what point in the pandemic, you know, it was sort of accepted we were in a pandemic and that was not an unforeseeable, you know, circumstance that could cause a buyer to walk away as opposed to something that has now an accepted, well understood risk in doing a transaction , um, as, as pandemic developed. So that was kind of a real-time interesting , uh, development to watch. I I would also just add in terms of the impact of the pandemic on deal structure and execution, that we're also seeing kind of a focus in different kinds of deals and, and the way providers are approaching them . And I think, you know, one example is you'll see, or at least one area that's getting a lot of press, is the focus on telehealth services and a lot of deal activity in that area is a new , um, there's been such an increase, obviously in use of telehealth since prior to pandemic and a lot of transaction activity there, a lot of focus on new clinical protocols , uh, some transactions around providers starting to provide their own P P E and not being dependent on, on old supply chain and access as a result of the shortages that occurred. And I think that's similar to, to arrangements like Civica , um, where providers got together pre pandemic and started to think about how to, how to get together and manage , uh, generic drug shortages and how to, to better access those. So I think we'll see sort of similar activity with P P E . Uh, I also , uh, have heard , uh, that the limitations exposed by pandemic on fee for service payment structures, the shift in in attention and focus on value vet based care models, there may be an increase in provider payer relationships as a result. And I think finally a lot of conversation around social determinants of health and, and the disparities that , uh, in terms of, of the impact of, of care and preexisting conditions that , uh, predispose certain populations to a worse outcome as a result of pandemic. I think that puts a lot of these stronger, larger health systems in the position of really focus on managing those issues going forward and, and putting efforts in in that area. So I think those are some interesting , um, areas that we're, we're gonna see some focus in as a result of, of pandemic.Speaker 2:
All great points. Clearly we're living in a dynamic environment right now. Well, thank you for , uh, giving us some perspective on, on what has been. Um, and when I think about what has been , uh, reflect back this time last year, there were a lot of predictions going on, it seemed like about every day my email was hit with some , uh, group that was making various different predictions as to how covid was gonna change healthcare or for that matter, how transactions were gonna be affected. Uh, as we were just getting into , uh, the , the , the pandemic. Now, some of those came to fruition, some of 'em are still materializing, some of them are better characterized as while prognostications. Um, so I'll, I'll ask you all now , uh, fast forward one year, I'll, I'll put you on the spot a little bit , um, pull out your crystal balls. I would be curious for our audience here, what are you seeing as emerging trends in hospital and and health system deal making , and what predictions do you have for the upcoming year? Tori, I'll, I'll let you comment first.Speaker 3:
Yes, and, and , um, I think when Ronnie and I wrote this article , uh, at the, at the end we said something like, if there's one thing we learned about making predictions from pandemic, it's that we should never make any predictions. And then we went ahead and made them. So I'm gonna , you know, go ahead and do the same thing here , uh, and just say what we're seeing and , uh, anything that happens in the future, <laugh> , um, I, I take no responsibility for, for , uh, for things that we, we can't predict that that might obviously impact and change , uh, what what we're seeing and what we're expecting. But as of today , I think that there are a few kinds of , of deals and trends that we're, we're seeing. I, I would say at a high level, there is always the, you know, continued focus on consolidation and growth. And I think that continues. I think especially in a, in a situation like pandemic, when you do have some more distressed independent providers that maybe did not weather the pandemic storm as well as some of the larger , uh, well-resourced systems, I think you're gonna still see those, those providers potentially looking for partners or to join larger systems for access to capital , um, financial security, economies of scale , uh, additional managerial and other resources. So I think you're gonna still see consolidation, I think for really distressed hospitals, including, you know, some in the rural areas. It's possible consolidation might be the only alternative to closure. And I think that preservation of access to care is important and I think that consolidation done well , uh, is important for that reason. We're also still , we're seeing an increase in mega transactions where large scale transactions are still occurring strategically critical transactions are occurring where you're getting systems from different geographies , um, consolidating and gaining access to new markets and new capabilities. And I think that's also gonna have , um, a potentially beneficial impact in strengthening value-based care. Um, and, and those kinds of models. So I think that's one we're still gonna see. I think continued con consolidation , um, I think, you know, some health systems we're seeing have come out of Covid financially intact, and they are able to be well positioned to take advantage of new opportunities. That includes acquisitions of assets being divested by others, and they can grow their capability and expand into new markets. As I mentioned. I think there are also gonna be potential good partners for other kinds of, of parties that are entering the healthcare space. And you know, maybe that's private equity and maybe that's some commercial players, but people, you know, and we talked about payers, but coming into the market and looking for, for really good partners to, to develop new and innovative transaction relationships. So I think we're gonna see that. Um, on the point of partnerships, Ronnie , Ronnie and I talk about this a lot, but we, we continue to see for some of our clients that are looking at a bigger ticket, ultimate relationship with a party, taking a more incremental approach. So I think we're gonna continue to see some affiliations, discreet joint ventures, partnerships around a particular service line or activity. Um, in some cases those will, you know, be what they're going to be and they'll just be the best partner for that particular activity. In some cases, we think those are gonna be entrees, kind of like the dating before marriage, but opportunities to get to know each other, learn, you know, confirm cultural compatibility and then move forward towards something , um, more comprehensive in the future. So I think we're gonna see that. And I think we are still hearing about, you know, divestitures , um, distress sales and I think that's gonna continue to occur. I don't know if it's gonna occur at the level that people were predicting when pandemic hit, you know, it's gonna be disastrous. We're gonna have all these , uh, you know, health systems going under, everyone's going bankrupt, it's gonna be terrible. I think that has not occurred at the level that, that some people were initially expecting. Um, but I think, you know, we just had Common Spirit announce the sale of 14 hospitals to e Essentia health. I think there still will be a trend of divestitures. Um, some are predicting there'll be divestitures of non-core assets as some health systems seek to focus on their core strengths or to monetize , um, their, you know, some of their, their arrangements. And I think that we're gonna continue overall to see an increase in, in deal flow as these transactions that we've been all working on and, and working through with our clients continue to be developed and, and announced in the coming months. So I think it's still gonna be a really exciting time to be in this space.Speaker 2:
Great. Ronnie, anything to add to that?Speaker 4:
Um, yeah, no , I think Tori covered a lot of what we've seen at a macro level. I think maybe, maybe the more a hundred foot view though is something I thought has been interesting over the past year of seeing how our clients have been really flexible and innovative and how they've addressed this. I mean, I think, you know, they've been forced to, out of necessity, really stretch, and everybody has, you know, we read about hospitals and health systems overnight rearranging their triage system , so they use parking lots and other unused space and, you know, different , um, different providers flexed to do one thing that they, you know, didn't normally do, which is emergency services. And I think these innovations in scheduling and all of a sudden everybody had an app and an online way to schedule covid tests and now it's for vaccines. I think people were rapidly innovating and now that they've done that and sort of flexed that muscle, I think, I hope we see more of that in the future and that that doesn't necessarily mean more transactions, but it could mean more creative ways of thinking about how to partner, even if it's like , uh, it e h r sort of agreement with another system or , um, bolstering your telehealth platform because now you realize reimbursement is stronger, the waivers are in place, maybe they'll stay in place through next year or permanently. Um, there are , you know, there are other waivers allowing different providers to practice across state lines. Maybe the powers that be will decide that that's something they want to see continue. And so I think all, all of these rapid changes, even once the dust settles, people might look back and think, oh, that was actually really great how we quickly addressed this problem. And, and maybe it will lead to more of that in the future, even if we don't have a massive global disaster happening. <laugh> .Speaker 2:
Great. Thanks Ronnie. So Ronnie and Tori, you've covered a lot of ground today. This is very insightful. Um, as we close, I'm just curious, what's the one, one piece of advice each of you would give to transaction advisors , uh, at this point in the pandemic?Speaker 3:
So I do think that now as picking up on Ronnie's theme of, of flexing and innovating and adapting, I do think now is a really good time for providers to be creative and innovative and strategic about potential opportunities. And, and I, I do believe that that is what I'm seeing with, with our clients and, and with, with our peers that , um, it's, you know, we're , we're, we're kind of for now out of the storm and, and now it's a time to think about how to best provide quality care at, at a lower cost and, and to think dynamically about the continuum of care for the patient and, and doing, doing the right thing. Um, I do think also it's in a good time to evaluate existing relationships , um, that providers have with , with other parties. And I think that's been a a an interesting , um, situation that I, I don't know if I wanna call it a trend yet, but maybe an emerging trend, at least in my practice, is, you know, looking at some relationships that have been in place for, for some period of time with other, with other providers and, you know, are those really working? Are they working the way that they should? Can they be improved? And kind of thinking about whether, you know, ESP and especially with some of these are long-term relationships that have been going for years or even decades. Does the , do those models and do those mechanisms still work today? So I would say think about new opportunities, but also think about how to improve some of your existing relationships. And I would also say the key is to be thoughtful as you think about what transactions you wanna pursue, but also to be really efficient and to be in a position to move quickly, to take advantage of the opportunities. And I think that requires , um, good advisors. It requires organization and it requires an , an efficient and well thought through approach. But I think, I think thoughtfulness and speed are gonna be the key to getting deals done in the coming months. And so that's my, my advice, have a great team to be in a position to execute on these opportunities as they, as they arise.Speaker 2:
Great. Ronnie , what's your biggest piece of advice to transaction advisors at this point?Speaker 4:
I , I echo everything Tori said. I think being in a position to move quickly , um, as all of these pieces are falling into place is really important. And I think we sort of talked about how the rules of the game have changed over the past year and, and no one single human can keep up to speed with, with all of these changes. So just positioning , positioning yourself in the best way possible to make sure , sure you can take advantage of any of these new gains and realizations and innovations , um, I think would be a great way to come out of a very terrible situation and sort of make the best of it.Speaker 2:
Great. Well thank you again, Tori and, and Ronnie for your time today and your insights into healthcare deal making during the pandemic. I'll also invite , uh, our listeners to tune in to the future sessions of the A H L A podcast series on the top 10 issues in health law in 2021 as they become available. Thank you and have a great day.Speaker 4:
Thank you. Thank you.