There will be many lessons from the Healthscope saga for healthcare operators and investors, including to understand the long-term trends in the delivery of care and to have a long-term strategy to capitalise.
At the height of the global financial crisis in the US, homeowners in negative equity packed up and handed back the keys to their mortgage lenders, disappearing into the ether, chastened by their experience of home ownership.
And so it was, that the Australian Financial Review recently reported that Brookfield is set to exit its disastrous foray into Australian healthcare by handing the reins of Healthscope over to the company’s lenders.
While Brookfield has already done its dough on the investment, there may be further pain to come (absent a white knight) and the only remaining issue is who will suffer most between the company’s owners, lenders, landlords, and staff.
Without relitigating how this predictable car crash unfolded, the question arises as to what’s next.
The sale process appears, prima facie, to be lacklustre despite the habitual media beat-up fuelled by leaky advisors.
It’s difficult to conceive that there will be much joy from the age-old strategy of requiring prospective buyers to take some of the weaker assets along with the star performers. It’s also even harder to contemplate anyone being interested in the whole given the financial performance trajectory, capex requirements, and the general state of the private hospital industry.
Such a move would require a fundamental shift in business strategy, something that none of the other major private hospital operators or investors in Australian healthcare has demonstrated capacity or willingness to execute.
There is a real risk that if the process doesn’t yield a definitive result in the near term, the doctors, already nervous, may seek sanctuary elsewhere. Competitors will already be fully focused on luring away Healthscope’s rainmaking surgeons along with their clinical teams with promises of prime theatre slots and car parking spaces.
Should this start to accelerate, even the stronger performing sites in the portfolio (the minority) will witness material diminution in value to the point that they become “uninvestable”.
The most likely outcome is that acquirers will look to pick off the sites that they want rather than groupings of assets packaged up by the vendor. There will be strong competition for prime assets and the remainder will be shuttered unless there’s interest from state government or local doctors to pick up such assets on the cheap.
None of this is likely to be straightforward, however.
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Strategics will need to overcome competition concerns, easier for some than others, while most are capital constrained and barely solvent in their own hospital businesses. An M&A and broader business strategy underpinned by synergies is fraught with risk, as has been proven on countless occasions, though they may see procurement efficiencies, back-office scale efficiencies, and private health insurance price arbitrage as more tangible than the usual illusory synergies. Not-for-profit operators will also be eyeing material payroll tax savings as a mechanism to increase margins in the short term.
Private health insurers are likely to see real risk in the sale (or administration) process.
If strategics acquire part or all of the portfolio, this will lead to greater bargaining power concentrated in fewer hands as well as potential price uplift as Healthscope hospitals transition to ownership by better reimbursed operators.
A similar scenario occurs if the business folds and the doctors move elsewhere.
As such, PHIs may be tempted to make a play for some of the Healthscope assets, though they themselves will need to overcome the inevitable vertical and horizontal foreclosure issues that will concern the competition regulator.
They will also need to find ways of influencing care pathways, which originate from primary care, a capability which is non-existent at present. This points towards the formulation of vertically integrated systems that I’ve discussed previously but which none have the current capacity to deliver.
It’s difficult to make a case for financial investors, given the heavy lifting required to turn around the business, the capex requirements, and uncertainty over lease negotiations and lender intentions, not to mention sourcing a highly capable executive team (slim pickings).
Brookfield’s reputational hit from the Healthscope investment is also hardly likely to entice other financial players to acquire the asset.
It will be interesting to see how the process plays out over the coming weeks. If I was forced into a wager, I’d have my money on several strategic acquirers picking off specific assets that fit their own portfolio and where they can assuage the competition regulator’s concerns.
Despite their interest, PHIs may find that the competition hurdles and approval timeframe and uncertainty are unpalatable for the vendors.
The remaining assets are likely to be shuttered (or else picked up by the public system) leading to the necessary sector consolidation and improvement in utilisation rates for the remaining operators.
Like Brookfield, I may well lose my bet, as has happened on multiple occasions previously, including when Brookfield and BGH fought over acquiring the asset for far more than it was worth. Irrational exuberance in healthcare investing seems to be the only certainty.
There will be many lessons from the Healthscope saga for both Australian and international healthcare operators and investors (as well as real estate investors), not least of which is to understand the long-term trends in the delivery of care and to have a commensurate long-term strategy to capitalise.
Sadly, most operators in Australia and further afield continue with the same archaic strategy and, sooner or later, will face a similar reckoning.
Marc Miller is managing director of Healthcare Systems Advisory and former chief strategy officer for Medibank.
This article was first published on LinkedIn. Read the original article here.