In its 2022 year-end report, Kaufman and Hall noted that Merger and Acquisition (M&A) activity had regained momentum following a two-year slowdown in the wake of the Covid pandemic. This momentum continued through 2023 with 65 announced transactions, up from last year’s total of 53. Sixteen of the 65 transactions were announced in Q4.

Yesterday it published its 2023 review. One significant change was the increase in the percentage of financially distressed organizations that sought a partner in 2023.

Hospitals and health systems faced one of their most challenging years in 2022, with median operating margins staying in negative territory throughout almost the entire year. Those financial pressures emerged as a key driver of M&A activity in 2023, with financial distress cited as a factor or otherwise evident in 28% of announced transactions, compared with 15% in 2022. And there is an increasing number of larger systems citing financial distress, a change from the historical concentration of distress in smaller hospitals and health systems.

Many organizations continue to struggle, and the search for partners for these organizations is likely to continue. The struggle is quite evident here in California.

Palm Springs’ Desert Regional Medical Center is as the only Level 1 designated trauma center in the Coachella Valley. According to a report by the Desert Sun, the Desert Healthcare District Board must chart a course of immediate action for the hospital’s survival.

In 1997, the Desert Healthcare District Board voted to lease the hospital to Tenet Systems, the nationwide private hospital behemoth, for 30 years. This prepaid lease “positioned the district to meet outstanding debt obligations” and gave the hospital the chance to be part of a national health care company. Tenet currently runs the hospital while the district retains ownership of the lease as well other assets including Las Palmas Medical Plaza.

Tenet submitted a proposal to purchase Desert Regional Medical Center in 2019.

Last September Tenet proposed another 30-year lease. At the commencement of a new lease, Tenet’s terms included an initial payment of $75 million, followed by annual lease payments beginning in 2027. But a wrinkle that the district did not anticipate is the option for Tenet to purchase the hospital at the end of the lease, by making a final payment of $75 million.

With Tenet’s lease expiring in 2027, district leaders and Tenet leaders are stuck in a tug of war as two huge unknowns loom:

1) Will Tenet re-up their proposed 30-year lease? If not, who will take over the hospital?
2) Senate Bill 1953 mandates that by Jan. 1, 2030, all hospitals rebuild or retrofit and must be able to remain fully functional in the event of an earthquake. If a hospital does not make this deadline they will, under current law, be required to close their doors and cease operation – it’s estimated this will cost $222 million – so, who will foot the bill?

Structural seismic retrofits are needed at three buildings – the main hospital and additions, east tower and north wing – and nonstructural retrofits at 20 buildings at Desert Regional’s campus, according to a 2019 report from engineering firm Simpson Gumpertz & Heger Inc.

By comparison, Eisenhower Hospital, as a nonprofit, got big donations and has already completed their retrofits ahead of schedule.

Yet were Desert Regional Medical Center forced to close their doors, Eisenhower cannot absorb the valley’s medical needs and airlifting people in emergencies to Loma Linda is problematic.

The mandate to do seismic upgrades to California hospitals is not a new requirement. Senate Bill 1953 mandating the seismic upgrades of California hospitals was passed in 1994. Thirty years ago.

The district needs to provide Tenet with a proposal and give them something to work with. Tenet is the 10th largest hospital management company in the U.S., but if negotiations fail, here might be other potential service providers. It could be a hard sale at this late date and with the huge cost of the required upgrades.