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Navigating the Healthcare and Health System M&A Landscape: Strategies for Better Deal-Making 7-8-26
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- [00:00]
A
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B
is Scott Becker, founder and publisher of Becker's Healthcare. We're here today with a special edition of the Becker's Healthcare Private Equity and Business podcast. We're joined by two remarkable leaders from VMG Health. VMG Health is built one of the best sort of consulting firms in the country in healthcare and just remarkably high integrity and smart good people. I'm thrilled today to be joined by John Zemski and Chad Zoratek. We're going to talk about navigating the healthcare and health system M and a landscape strategies for better deal making. And it's right now again quite a busy time in deal making and growth and systems looking at growth, the largest systems getting larger and lots of concerns about some of the smaller systems being able to find partners and be able to stay aligned and stay in great shape. So we'll talk with John, head of strategy and partnership advisory at VMG Health and Chad Zoratek, Managing Director of VMG Health. Let me start. Can I ask the two of you, Chad and John, to take a moment to introduce yourself and show them about your roles in the work that you both do and VMG Health does with hospitals and health systems. John, let me tee you up first and then we'll go to Chad.
- [02:17]
C
Thanks. Thanks Scott for having us. So my name is John Pizzemski again. I'm the head of strategy and Partnership advisory at VMG Health as you mentioned and obviously a natural synergy I think in this current environment between strategy and partnerships and m And A as VMG Health as we view the world, we see a lot of opportunity across that entire partnership continuum that starts with developing the right strategy and business case to support a variety of different kind of partnership models and structures all the way through the deal advisory and the integration strategy pieces as well. And see our clients kind of taking each part of that process more seriously and much more deliberately. And so excited to talk a little bit about what we're seeing here in the market environment.
- [03:11]
D
Thanks John. And I'm really excited to have John's leadership at bmg. Me personally, I'm the practice leader for our partnerships mergers and acquisition practice that focuses on financial due diligence, coding and compliance diligence RCM assessments, all connected with M and A activity. But it also serves as a pathway for items like acquisition optimization which we'll probably touch on later on in our discussion today.
- [03:43]
B
Thank you very, very much. I'm going to ask one of you to kick off with this question. What does the Healthcare M and A landscape look like today and what types of transactions are you seeing the most and what's driving those decisions? So why don't you two lead off and give us an overview of the Healthcare M and A landscape today.
- [04:02]
C
Scott, I'm happy to get started. This is John, I'm happy to get started on that. And Chad can layer a few things in so maybe I can offer up a few general observations on the Healthcare M and A landscape and partnership landscape as well. We like to think of it as not just M and A, but also also partnerships piece because I do think there's a big, you know, strategy element to everything that organizations are trying to do right now. So, so I think the first observation is, is that we have clearly have exited this period of what we call growth at all costs. There was of course a period of time where organizations were pursuing inorganic growth very aggressively and rapidly and we've clearly kind of exited that that market model and are in a very new, I think model today. It's a model that is much more quality over quantity at this point. There's still a lot of deals getting done, but I think the quality of the deal much more important. And when I, when I speak to quality there's a number of factors that go into that, but I think it comes down to two deals and opportunities that are accretive financially and operationally to organizations. Deals related to assets that have a clear path to profitability and a strong business case associated with them being really critical right now as well. And so I think that's the first observation that, that I think frames the partnership and deal landscape right now. The second observation I'd offer up is that there's a focus on what's core to the business versus what's non core. And obviously the core things kind of winning the day. Whether that's core to the current business or what clients believe and organizations believe is kind of core to the future business operation. And anything that's kind of a core adjacent right now I think is being looked at a little bit differently and maybe not as accretively right now. And so I think every organization really trying to understand what is going to be core going forward and how they can, how they can add and protect their core business over, over time. We do see deals on opposite ends of the spectrum. Scott, you kind of mentioned this a little bit in your opening. And so two kind of polar opposite ends. There's obviously the larger mega mergers occurring across the country. There's a number of larger systems and players in general who are still looking to grow inorganically and enter new markets and expand into new territories. And so we're seeing those larger mega mergers on one end of the spectrum. But we're also seeing on the other end of the spectrum a host of kind of smaller tuck ins, things that we would call strategic platform acquisitions that folks can tuck in that add capability and competency in certain areas that maybe organizations are missing or perceived gaps. And so we're seeing kind of two versions of deals right now at both ends of the spectrum. The last thing I'd mention here, just from a macro market perspective, and again Scott, you alluded to this, is that there are creative deals emerging as well. And the creative deals, you know, joint ventures and things of that nature are I think being driven by, by strategic imperatives primarily. And those strategic imperatives can vary, can vary and can involve things like the new market entry and markets that are perceived to be really important. I think we're seeing some of that right now. It can be again kind of capability plays where organizations are looking for a specific set of competencies that may not exist today and many other factors kind of driving the creative deal formation. And Chad would welcome you to layer anything else in.
- [08:16]
D
Yeah, there are a lot to unpack there. Agree with everything. I think just another just common theme though. It's the, when involved in the M and A activity, it's not about like necessarily highest purchase price wins it. There's a lot more, I believe, evaluation of the actual parties involved and who is the best partner to make it, to make it all work to make, you know, what are the best pieces of the jigsaw puzzle that fit together to fill out the puzzle and to create a more, you know, optimized success rate as well as, you know, better quality of care. So I think there's, you know, we'll refer to quality of earnings later in this discussion with financial due diligence. Right. I think there's also more emphasis on quality of operations too. Both historical, but how do you get it better? So I think that's another just common theme and that's driving a lot of the M and A activity is who do we partner with to help optimize and create better free cash flow and better quality of care for our patients? And let's stick with the experts. Right. In certain cases. So it is really, it's been very fascinating to just see how the partnership model has been evolving in the current landscape.
- [09:43]
B
I think that's a fascinating take. There's a couple of different things that each of you said that I think are just so interesting and right on first, this movement back towards really focusing on operational efficiency as easy transactions are hard to do without great operations. Something that John said about more of a focus back to the core versus things a few adjacencies away I think is also so important and sort of careful deal making and specific, thoughtful deal making versus dealmaking just for scales size. The John. Chad, is that a fair assessment of some of your thoughts on this? And are you talking mostly about the hospital and health system deal universe? Because you guys also do deals in M and A outside of that too.
- [10:30]
C
Yeah. There's obviously deals in the health services space that we're involved in and obviously the payer space as well, and could break down each of those. But Scott, I like the way you framed it, which is just really careful deal making. I think that that's the perfect way to do it or the perfect way to characterize it. We find our clients just when doing deals, applying a lot more rigor and discipline to the deals. And it ranges from everything we've talked about that I mentioned around building the business case, understanding the synergy analysis, really understanding the risks and benefits of each deal. And then all the things that Chad mentioned as well in terms of quality of earnings and. And due diligence. And we just see a lot more discipline being applied. And I think that reflects, Scott, kind of the importance of getting these deals right in this current market environment.
- [11:31]
B
And I love that. I think that's right. Chad, did you want to follow up with any comments There as well on specifics you're seeing in the, in the deal market and how much work of it's in hospitals health systems versus what you're observing in some of these other adjacent areas like practice and technology transactions in healthcare.
- [11:49]
D
Oh gosh. I mean one of the things is just it's a bunch of worlds colliding too. So like it's you mentioned like focusing on health systems versus maybe a private equity platform versus private equity involvement. The truth is with all the partnership evaluations we're seeing more and more, I guess commingling if you will, of these different worlds colliding. And so it has forced the sophisticated M and A operators to be a lot more holistic with their overall analysis to address like not only the operational, immediate operational concerns and optimization, but also on the legal side of the fence too, like with regulatory approval so that transactions don't get hung up or ultimately sidelined due to some last minute like regulatory hold up.
- [12:51]
B
Thank you. Let me ask you another question. Particularly in the not for profit area, we're seeing many transactions that aren't traditional acquisitions, for example, with a cash purchase price or merger purchase price, but corporate member substitutions. You know, a big system acquiring or merging with a small system or a single hospital where they're not really paying money, rather they're doing a member substitution where the corporate member takes over the smaller institution and helps to assure that the smaller institution stays viable and it's rural or other community for the longer run or otherwise adds value to the larger system. When you do these types of transactions where there's not necessarily a quote unquote purchase price. Talk about why financial due diligence remains so important. Because I know that's a lot of what you folks do is really digging into what's going on in a system that's part of a transaction to make sure it's what people expect. But talk about financial due diligence in these non cash transactions.
- [13:56]
D
Yeah, sure, it's just as critical, just as important. You have to know what you're stepping into. You have to know what you're taking responsibility for. Really truly understanding not only the financial reporting, but the free cash flow, the debt covenants. What is missing? Is there any missing gaps immediately out of the gate that you're going to have to address effectively, particularly in a distress situation too. You are obligated now and so you're on the hook. So understanding the potential impacts of what you're stepping into is incredibly important. Even if there's no quote unquote, you know purchase price attached to the transaction. So it's all the same basic nuts and bolts that you have to be doing and should be doing with respect of, I'll call it a for profit acquisition. But many of the same things, just really assessing the free cash flow and what it has been historically under the old management or management behavior, but also what should it be and how to stabilize it and what should it be in terms of trying to push it to where it should get to under your watch? Also in like if it's more of a JV type situation too, you really need to understand the level of your partner, meaning it takes two. Right. And so if you're healthy but your partner's not, it can create a really, you know, risky situation and especially as you start commingling more and more from a JV perspective. So understanding each other's, each other party's financial stability I think is pretty critical from a JV perspective.
- [15:57]
B
Thank you very, very much. John, anything you'd like to add on to that and maybe you could also comment on? John, how does due diligence and approach to due diligence differ depending on the type of transaction? Because let's say somebody's doing a member substitution versus spending a billion dollars to acquire a health system, people are going to spend different amounts of money on diligence based on the size of transaction, the scale of transaction, type of transaction. Are there different types of approaches to diligence depending on the type or size of transaction? John?
- [16:35]
C
Yeah, I'm kind of with Chad on this. I think overall we're seeing organizations just put more effort and discipline into the due diligence exercise again because of some of the pressure that that is being experienced from a market and operating standpoint. And, and really also the fact that not every deal that gets done is a good deal. And, and I think that there's been some exposure on that on that end as well. And so like I mentioned, just getting it right is, is extra critical. I mean Scott, in a member sub model there are still plenty of organizations that maybe there's not a purchase price per se, but they're still committing a certain amount of capital to, to the organization that they're partnering with or acquiring. And, and, and it can't, it's not just capital. There may be other, other commitments obviously that, that the organizations are making, well,
- [17:27]
B
it's so important commitments.
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C
One last thing, those commitments are tied to performance typically. So in order for, for organizations to access those capital commitments that the business case they develop needs to, needs to be realized. Right. And a big part of that is again understanding diligence, understanding the launching point of the organization and making sure that again, that business case is as strong, as sound as possible.
- [17:57]
B
But you're so right because you know, we've been approached in a bunch of different worlds on boards and so forth where somebody says this is just a small acquisition, so you know, just talk it in and don't worry about it. But the reality is the most precious resource that most big systems have is their talent in their teams. And if they can't allocate their talent and their teams to it, or if there's disasters hiding in that, they're going to be claim wasters for resource wasters. That's a huge price to pay, isn't it? Aside from unexpected liabilities or exposures, just putting your team on something where even the largest systems have limited amount of great executive talent can be a real loss, a real challenge. Any comments there, John?
- [18:42]
C
Yeah, I think you've nailed it. I think, you know, inorganic growth m and A partnerships can be a real boon to an organization strategy, but it's not without consequence. And so, you know, getting these things right is more critical now than ever. You know, I would argue, and I think it's a fair statement to make that there's no deal has 100% likelihood of success. We could argue what that percent that success rate is historically. But, but what's most important is how do you enhance that success rate, right? How do you raise the rate of success so that more often than not these deals are successful and, and do achieve their stated objectives and do realize, you know, the business proposition that has been been created and like I said, I mean not to reiterate it, but I just think there's, there is a lot of consequence associated with those deals. I think it is clear to boards and leadership groups right now that it's important to get these things right.
- [19:48]
D
Yeah. And I would just further add that on the word consequences is very real. So, so don't get lazy on the smaller tuck ins. You're only as strong as your weakest link, right. So you know, some of these small tuck ins, especially on it perspective or even coding and compliance, you know, can open you up to increased exposure. So even if it's smaller, you gotta do the homework to make sure you know what you're getting into.
- [20:18]
B
Could not agree more. And let me ask, want you to lead on this question. Health systems doing transactions, where do you sometimes see them fall short in their diligence and overlook certain things? That could expose them to risk or could uncover opportunity. Let me ask you, one of you, John or Chad, take on that question and then I'll tee up the next question after the next. The other,
- [20:43]
D
at least get us going. So I think, you know, I think most, most folks that are involved in M and A on the health system side or any side really have some level of diligence. So it's not whether or not they're doing due diligence. I think it's really more about the level or the depth of what they're doing and is it deep enough and is it really unveiling, you know, all of the risks, you know, to the, to the attention that that is needed. I also think that sometimes there tends to be a focus, you know, certainly a heavy focus on historical financial due diligence. What is the real revenue? What are the, you know, what are true clean collectible receivables, you know, from a historical perspective. And maybe not enough is done on. While we might get the answer to that, maybe not enough is done on. Well, what should revenue be once we fix some of the denials or increase clean claims, or what should the cash conversion cycle be not what it is after we make some improvements. So I would challenge folks to really go into going deeper and not just using due diligence as a historical look back, to also use it as a basis to make a proactive view to the near term future. The other thing too is a lot of folks focus on big ticket items and you have to have some level of prioritization. But sometimes there are smaller things that aren't focused on until too late in the equation or not too late, but later on in the cycle and it holds up the deal from closing. And again, this can happen on the legal front where maybe you've addressed a federal regulatory concern, but didn't address the local state jurisdiction and any additional notices needed, particularly in states like California or Oregon as an example. So I think just being mindful of everything that has to get covered and prioritizing efficiently and effectively, but knowing that everything does need to be covered before the deal can close.
- [23:15]
B
Thank you very, very much. John, let me ask you this question and I think this is great. And I remember doing a ton of diligence back in the day on health care deals. And we're going to talk in a second about misconceptions about diligence. And I remember some of our junior people doing diligence and essentially giving the client almost boxes of documents versus something that was actually useful. Take a moment and talk about diligence, whether it's in partnership discussions, M and A discussions. And what's a misconception about diligence that you'd like them to rethink, that you'd like them to think about in terms of diligence?
- [23:59]
C
Chad, I'll let you jump in on that.
- [24:01]
D
You want me to go? All right. Well, one thing that I'd like folks to think certainly from the financial due diligence perspective is it's not just about checking all the boxes and it's not about just having a team of accountants go in there that have their head stuck in the past. Like I really. The misconception about diligence is that everything should be used as great diagnostics at the end of the day that can serve as a platform to really driving new strategy and transformation toward, you know, again, improving the quality of care of patients as well as improving or having better or more solid financial positioning for the company itself. So I think the misconception that I'd like to change about due diligence is it shouldn't be all about finding the quote, unquote bad guys or the negative adjustments. Sure, it a lot of it is about mitigating your risk and making sure that you understand the historical cash flow that you're buying into. But it's also about, you know, objectively thinking about the upside, objectively turning, or maybe not objectively, but positively thinking about some of the lemons that you find. So how do you make the lemonade out of the lemons? By fixing a systemic problem in billing and coding, as an example. If you can fix it, there might be revenue upside. So just have that misconception changed about just due diligence involving a bunch of check the boxes, but really use it to be strategically, you know, beneficial for the go forward and day one and beyond, you know, post acquisition.
- [25:54]
B
Thank you very, very much. And we've talked a lot about diligence. We're seeing a lot going on in the healthcare M and A landscape. But let me ask John, Chad, if you have a few sort of thoughts on sort of takeaways on diligence or takeaways on the health system M and A environment. Can I ask each of you, John, maybe a couple takeaways on the health system M and A environment, somewhat of a recap, what we talked about before. And then, Chad, for you, just a couple quick takeaways on diligence and take home thoughts people should have. John, if that's okay with you, I'll turn it to you on just a quick summary overview of the hospital M and A market, maybe a recap what we talked about earlier. And then Chad, I'll ask you to do the same thing on diligence.
- [26:40]
C
Yeah, yeah, no, I really at a really high level, Scott, and appreciate that. I mean I think, I think again it's still a very active market. So that's I think important to understand. I do think it's a very selective market as well to the points that, that we've been making about how consequential dealmaking is in this current environment and how important it is to, to get a good deal done. And so I think that's, that's the other thing. And then you know, to Chad's point around financial diligence, I think it also helps organizations think about scenario planning and, and different kind of future state outcomes associated with these deals. And I think that's really important to understand is that every deal has a range of outcomes and being able to understand those and understand what, what could trigger a different, you know, different outcomes along the way is helpful because I can tell you, having been in this business a long time, you know, not every deal ages well and sometimes the reason it doesn't age well is because we didn't do a good enough job really thinking about what that range of scenarios and outcomes might be and how to kind of manage toward those. And so that would be, I think the last point I'd make.
- [27:56]
B
Scott, thank you very, very much. And Chad, anything you would like to add in on diligence and takeaways?
- [28:04]
D
Yeah, I think from a diligence perspective in terms of being holistic, implementing a kind of a collaborative care approach to due diligence, where the various diligence streams are working together so that you can weave the findings together as well as come out with the best strategy from a go forward, you know, post day one perspective. So that's what we're really implementing here at BMG as we help out our clients is a collaborative approach where you're tying together the financial, operational, coding and compliance due diligence all together to obtain better results not only with assessing with where the company's been or where the operations have been, but helping it get to where it should be or where the board wants it to be. So that whole collaborative care, we're taking that approach to helping out our clients.
- [29:02]
B
I want to thank the both of you. Beckers Healthcare and myself have had just the longest, best relationship with VMG Health. We're the biggest fans of your firm, John and Chad we're so thankful for you joining us today on the Beckers Healthcare and the Becker Private Equity and Business Podcast. Thank you.
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D
Thank you. Take care.
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E
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