It was quite a summer for Tenet Healthcare.
Late last month, two board members from Glenview Management stepped down, citing "irreconcilable differences regarding significant matter impacting Tenet and its stakeholders." Shortly thereafter, CEO Trevor Fetter announced he would step down by March 15, and the for-profit operator said it would "refresh the composition of its board." Next, Tenet announced plans to sell eight U.S. hospitals in four markets and all nine U.K. facilities to reduce its $15 million debt load.
And that was all within a 30-day time period. The Wall Street Journal recently reported Tenet is exploring a possible sale. One potential buyer has emerged among an echo chamber of speculation: HCA. The provider has already purchased hospitals from Tenet but some are skeptical that an acquisition would make sense for HCA. It could prove difficult to squeeze profits out of every Tenet asset and the Florida market acquisitions could invite federal trade regulators to review the deal over antitrust concerns.
Because of its financial hardships, Tenet is facing investor pressure. But it isn't the only high-profile healthcare company facing such activity. These developments are a reminder that, as businesses, healthcare companies need to pay attention to and compete within a changing market. If a company isn't able to evolve or measure up to its peers, then investors will lean on a board or C-suite to try and get more fiscally favorable results.
Companies are facing increasing investor pressure
Last quarter found Tenet disclosing a net loss of $56 million, in part due to weaker-than-expected patient volumes.
At the time of the board resignations last month, Glenview — Tenet's largest shareholder — stated it “may evaluate other avenues to be a constructive owner of Tenet.” Shortly after the board changes, Tenet enacted a shareholder rights plan to stave off Glenview from acquiring a controlling stake. The program allow shareholders to buy stock at a 50% decrease if an investor acquires 4.9% or more of the company's shares.
The shareholder rights program, CEO resignation and a board refreshment all point to damage control in the face of increasing investor pressure.
Tenet isn't alone in this regard. Large healthcare companies such as CHS, Athenahealth and Advisory Board Company recently experienced varying degrees of investor activity. In CHS' case, ASL Strategic Value Fund sent a letter to its board of directors after a poor Q2 stating "it is time" to replace CEO Wayne Smith.
Investors are expecting better performances from healthcare companies and they're taking action. In general, investors and shareholders are becoming more empowered than in the past, according to Terry Ward, partner, Governance Insights Center at PricewaterhouseCoopers (PwC). And it's true, at least according to a recent McKinsey & Company analysis which showed an increase in activist campaigns since 2010. Across 272 activist campaigns, management won less than a third, McKinsey noted.
Because of this, the dynamics between investors and the C-suite are changing. "Investor empowerment is really at the heart [of why] the bar is being raised on directors these days," Ward told Healthcare Dive.
To get ahead, companies will need to ask hard questions regarding their overall operations and spending, performance against their peers and whether the organization has the ability to take advantage of the shifting trends in the industry. "You have to come to grips with the idea that investors are going to be more active going forward," Joseph Cyriac, partner at McKinsey & Company, told Healthcare Dive.
Companies should acquaint themselves with being able to quickly answer for investors — without too much industry jargon — why the business deserves to win in a market and why an investor should bet on it for the future. "You may not like their tone and you may not like their style, but I think [investors] are rational,” Cyriac said.
As investors continue to make their way to the board room to influence company outcomes, C-suite executives need to be abreast to the changing healthcare landscape and how it affects their business and the markets they compete in more than ever.
The business model of a health system is changing
It's been challenging for care delivery providers to deliver returns on investment, particularly in the last two years.
Hospitals and health systems experienced boom years in the wake of the Affordable Care Act being implemented. More individuals received health coverage and began entering the care delivery environment. However, many of these patients were sicker and costlier than expected. The additional trend toward high deductible plans led to the inability for some patients to pay for the services they received (though uncompensated care for hospitals did decline since the ACA was implemented). After a couple of years, organic patient growth has tempered where health systems have seen weaker-than-expected patient volumes. These trends have coalesced into struggling financials where public health systems' stocks have declined in the past two years.
While the level of insured individuals and patient volumes certainly play an important part in the health of a system's financials, that's hardly the only change providers have to deal with. Consumers are demanding more in terms of price transparency and convenience. In addition, younger generations such as millennials don't have an attachment to primary care provider relationships. Because patients are taking their business elsewhere if they aren't receiving the care they desire, the industry has seen a rise in low acuity settings such as urgent care centers and retail clinics.
To add more onto providers' troubles, U.S. medical costs are outpacing inflation (causing individuals to forgo care) and insurance-spending growth rates are declining (causing flattening reimbursement rates), forcing organizations to find ways to take costs out of their system. Fortunately, many providers are actively working on this, but the industry's famously fiscally conservative bent causes providers to often shy away from new ideas.
That strategy worked for some time, but certain actors like insurers and investors are no longer happy with the status quo and are pushing care providers to change their behavior to drive profits.
Healthcare companies should expect more investor pressure if they aren't performing
Underlying hospitals' recent poor financials is the fact that the healthcare industry can't keep conducting business as usual.
Tenet and CHS' investor activity should act as a wake-up call to other healthcare companies, according to Dr. Rita Numerof, president and co-founder of Numerof & Associates. Changes in the regulatory environment, technology, market expectations and competition (both new and existing) are altering the market dynamics for providers, according to Numerof. "When you have one of those four factors, it creates a transition," she told Healthcare Dive, adding these influences have caused companies to rethink their balance sheets.
For example, MedStar Health envisioned an action plan to change their business model to a distributed network system before the ACA was implemented to be able to combat the increasing co-pays and deductibles they forecasted at the time. Noticing the shift to low-acuity settings, HCA recently announced it was building three freestanding EDs and four urgent care centers in Florida.
"You may not like their tone and you may not like their style, but I think [investors] are rational.”
Partner, McKinsey & Company
Hospitals have been historically seen as serving a public good by helping sick individuals, but they are still businesses operating in a capitalist system in the U.S. In that regard, "demanding accountability for senior leaders, growth and quality of product is essentially important," Numerof said, adding she doesn't think board members at private or public healthcare organizations have done enough to advance that part of their role.
Healthcare providers are generally conservative and that very trait can be a detriment to business if and when their business environment is changing. Thus, healthcare companies would be well served to assess themselves like an activist investor might and assess its strategies, operating performance and market comparison to understand if and how it's appropriately changing with the market.
"You almost have to take what you as a management team may think of as an unfair comparison" and accept that's how the market will compare peer-to-peer performance, Cyriac said.
The need to focus on costs, access, transparency and quality over volume will be imperative moving forward. If not, with activist investor pressure increasing, it stands to reason more large, legacy healthcare companies could be gearing up for boardroom brawls. And with management winning less than a third of the time, an eye on a changing healthcare landscape could prove more valuable in the long run over short-term market gains.