Not Yet Immune:
The Healthcare sector's continued shake-up by activist funds
May 22nd, 2018
In the past year, the medical-hospital industry has received growing scrutiny. One cause of this attention is talk in Washington of policy changes regarding insurance -- specifically, the current administration's view on the Patient Protection and Affordable Care Act, also known as Obamacare. When Obamacare was first introduced in 2010 it sparked a wave of investment in hospitals and related industries. Investors believed that increased insurance coverage would result in greater hospital visits and that patients would be more likely to pay their bills. However, inefficiencies in hospital management, including inept leadership and outdated technologies, soon frustrated investors. As a result, many turned to a more active investment approach. In the past eight years, a number of the United States’ biggest healthcare companies, including Community Health Systems and HCA Healthcare, have faced growing pressure from investors to increase efficiency and shareholder returns. Deals have continued into 2018 despite uncertainty over healthcare reform, and it remains to be seen how any policy changes might impact investors’ plans.
Glenview Capital Management is a major player in the healthcare sector, despite divesting itself of many investments in the healthcare market in May 2016. Just three years after the ACA passed, Glenview raised its stake to 14.6% in Health Management Associates, a healthcare research firm. In 2016, Glenview asked for two board seats at Tenet Healthcare Corp. with an 18% stake in the company. Later that year, Glenview was granted two more seats. Glenview has exercised its influence by campaigning for leadership changes intended to cut costs and improve shareholder value. Tenet’s recent turn to increasing outpatient clinics, which 55% of hospital executives count among their top concerns, may be attributable to Glenview’s positive influence. The firm has played a long game on the ACA and continues to do so despite concerns about risk, limited options for cutting costs, and uncertainty from Washington.
Glenview is not the only hedge fund diving into healthcare. Shanda Group, a Singapore-based firm, reached a 24% stake in Tennessee-based Community Health Systems in January of this year. CHS is a Fortune 500 company that controls 126 hospitals in 20 states. Although they have been cagey about their plans, experts believe that Shanda will soon make a move to replace leadership at CHS. This is in line with the call by ASL Strategic Value Fund, which holds a smaller stake in CHS, to remove the firm’s CEO. Glenview had actually been trying to arrange a merger of the company with Health Management Associates, before selling his shares in CHS in 2016 after the merger failed.
HCA Healthcare also agreed to significant reforms in 2015 as a result of pressure from investors. As the largest investor-owned hospital chain in the US, shareholders have dramatically changed leadership at HCA, upending its board and working to restructure its operations. HCA, like Tenet, has also been pursuing increased use of efficient forms of medical provision such as outpatient clinics.
Derivative markets such as medical technology are also being affected. Athenahealth, a medical technology firm based in Massachusetts, has been targeted by Elliott Management Corp, which raised its stake to 9.2% in May of last year, and is now seeking a takeover. Elliot claims that numerous faults in athenahealth’s operations have caused the stock’s price to drop 19% in the year prior. Elliott is likely taking advantage of growing interest in medical technologies from hospitals looking to increase efficiency and quality of patient care. Thus far, Elliott has already succeeded in passing key operational changes, requiring the firm to “separate the role of chairman, chief executive officer and president,” and to cut $100 million in costs, according to Bloomberg.
While some investors have pressured unprofitable hospitals to close, which exacerbates the growing issue of lack of hospital access in the US and does not improve patient care, investors generally seem passionate about improving the fundamentals of their companies. Many healthcare systems, such as HCA and Dignity Health, are turning to economic methods of improving patient care, in particular outpatient clinics. Certainly, there is plenty of room for improvement in healthcare: a 2013 Brookings Institute report found that increased investment in therapeutic treatments as an alternative to pharmaceutical approaches would have reduced the cost of healthcare provision by $1.4 billion dollars in 2008 alone. Increased administrative efficiency and expanded provision of outpatient services were also suggested as improvements that would lower costs.
There is plenty of room for restructuring, even though many of the traditional methods of activist investors are not suitable. For example, cutting employees in hospitals actually increases costs by reducing efficiency, and closing inefficient branches -- while cost-effective -- has ethical implications. Although there are challenges in taking an active approach in the healthcare sector, investors have found tools to increase profit; of course, increased patient volume has also helped.
The question now is whether activist investing in the healthcare sector will survive potential policy changes. As a product of the Affordable Care Act, would the removal of the ACA lead to a drop in investment in healthcare? What would this mean for patients and employees? If insurance was made age-based, as opposed to income-based, would the closing of rural hospitals accelerate, potentially leading to increased efficiencies in hospitals as loss-making branches are removed? Although investors do not seem skittish today, an upset from Washington could dramatically change investor outlook.