Happy Thursday, Today we're diving into the Risant Health developing story, including Kaiser's decision to form the new health system and Geisinger's decision to join it. The strategy is interesting - it hits on plenty of things happening in healthcare right now, so I'd love to hear any thoughts from readers on the move! Part 1 will dive into the behind the scenes, some interesting financial implications, and why it's happening when thinking about the broader healthcare landscape. Part 2 will discuss my thoughts on Risant, implications of consolidation and vertical integration on antitrust and patient care / access, Kaiser's rationale for the deal, and potential acquisition targets. If you respond with your thoughts on the deal I'll also include a subscriber commentary section at the end of next week's! |
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Good news: my graphic for the virtual event next week with Yuvo Health is now fixed, and it now reads "FQHCs" instead of "FHQCs." To the dozens of you who reached out to me to fix this, thank you. Now join our webinar next week on 5/24 at 11am CT!! |
Join me and other healthcare folks in Dallas for a casual networking event and community meetup on June 8!
All attendees will receive two complimentary beer/wine tickets and apps throughout the evening. I may or may not get a third! Please feel free to invite friends and colleagues. |
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RISANT HEALTH DEAL BREAKDOWN |
Part 1: Kaisinger. The Health System Strikes Back |
- Kaiser Permanente formed a new nonprofit health system called Risant Health.
- Risant Health will have significant financial backing as a subsidiary of Kaiser.
- Risant's first member is Geisinger, based in Pennsylvania. Geisinger's CEO Jaewon Ryu will lead Risant.
- Over the next 5 years, Risant will target smaller integrated care delivery organizations (e.g., nonprofit health systems with a health insurance offering) with the goal of hitting $35 billion in system revenue.
- The nonprofit health system members will operate independently but hold affiliation with Risant.
- Risant provides a potential lifeline for health systems struggling in the 2023 operating environment to provide population health expertise, capital needs, and capability-based scale.
Note: both part 1 and 2 will be published online next week |
Background and Transaction Overview |
Here are the main takeaways from what the Risant-Geisinger combination, including what Risant is providing to its first member organization: - The transaction is structured as a member substitution.
- Kaiser is pumping significant money into Risant. It's planning to allocate a minimum of $400 million, and up to $5 billion to fund Risant capabilities, future health system investments, and technology.
- Kaiser had to guarantee a lot to Geisinger up front - for one, Risant will make available a minimum of $2 billion to Risant-wide health system members to support expansion plans (building hospitals, ASCs, medical office building, technology investment, routine CAPEX)
- In addition to the $2 billion pool (which includes Geisinger-generated cashflow), Risant will allocate a minimum of $100 million to specifically support Geisinger growth and expansion of its health plans and care delivery services throughout its geographical footprint.
- Risant will also provide at least $115 million in funding to support Geisinger 'research and education' enterprises for a minimum of 10 years!
So from the financial disclosures, it sounds like Risant will pool together member resources and cashflow, then Kaiser as the parent organization will provide its deep pockets to also fund capital projects and provide population health expertise. These promises are exactly why Geisinger joined Risant as the premier acquisition. Geisinger was facing static volumes, competitive threats from the likes of UPMC , and subsequent potential credit downgrades from sustained, low-margins: |
As the first mover into Risant, Geisinger holds an impressive footprint including $6.9 billion in revenue, 600,000+ managed care members, 10 hospitals, 1,700 physicians across 133 clinics, and has been referred to as the 'Kaiser of the East.' It's a smart cultural fit and the perfect Risant constituent: |
Risant Solves Potential Hospital Capital Needs Here's another important factor we should think about - appetite for health system capital in the rising rate environment has plummeted. The Risant deal holds significant ramifications for health system borrowing costs. In February, Moody's hit Geisinger with a ratings downgrade to 'A2.' "The downgrade reflects expectations that Geisinger's will lead to weak operating cash flow for a protracted period." |
Meanwhile, S&P has maintained a credit rating of 'AA-' for both Kaiser and Geisinger. But by joining forces with Risant, Geisinger probably prevents any future damage from a borrowing perspective, keeping it off any agency negative credit watch. Since Kaiser is throwing its might behind Risant, I have to think that Risant would hold a similar credit rating to broader Kaiser, which sits at AA- as of May 12 - potentially allowing for systems to borrow against the Risant-Kaiser rating rather than their own. If the above holds true (and it may not - I'm speculating and am not a nonprofit bond expert), Risant's high grade credit rating would present an enticing opportunity for small to mid-sized health systems to join Risant and lower their borrowing costs during a time of extremely low nonprofit health system debt issuance participation. (image credit - Kaufman Hall; h/t to Gist Healthcare) |
From Kaufman Hall, current hospital capital management strategies are not sustainable. Nobody is borrowing!! Warning signals are flashing: "Good risk management leads to caution in challenging times, but being too careful elevates the probability that temporary problems become permanent. $2.8 billion in quarterly external capital formation ($11.2 billion annualized—pause and let that annualized amount sink in) is not sufficient to maintain the not-for-profit healthcare sector's care delivery infrastructure, especially when internal capital generation is equally anemic." The freeze in the nonprofit capital markets is a significant signal - health systems don't know what to do right now operationally and they're scared to take risks. For that reason, they'll fall behind other well capitalized players that have their strategies formed and their pocketbooks filled with cash. And these dynamics are exactly why right now - however rushed - was the perfect time to announce Risant Health. The Hospital Strikes Back Nonprofit health systems are strained financially. The current dynamics of healthcare that I've covered here (labor shortages, declining payor mix / MA penetration, emerging competitive threats) are causing budget underperformance. In markets with stronger demographics and population growth (Florida, Texas, North Carolina), utilization is coming back and along with it, margins. But that dynamic doesn't exist everywhere. Image credit: Visual Capitalist |
I shared the below slides a few weeks ago as part of a larger healthcare strategic update deck with the Hospitalogy Board Room community. It captures the trends and perfect storm of events happening in healthcare between payors and health systems today - the push-pull that exists. Right now, it's more of a forceful PUSH by the payors. |
Risant Health's formation picks up perfectly where we left off in 2022 with cross-market megamergers (Advocate-Atrium in particular) and the evolution of hospital M&A. And it's a perfect, natural response to current health system headwinds. The old heads in beds playbook isn't working - at least not right now. Health systems don't know what to do operationally - they're stuck. Everything seems too risky. Risant is swooping in at the perfect time to save the day. Kaiser is extending an olive branch to health systems that are likely panicking in the face of uncertainty. Right now I imagine some health system leaders are looking up and thinking "Well, I could create a lot of legwork for my team, involve a bunch of lawyers and consultants, and set up a cross-market JOC for scale or go at our new expansion projects alone… "…or I could join Risant, which is already pre-baked and has Kaiser-Geisinger in the mix, with the promise of guaranteeing some of my future capital needs/project pipeline and expanding my population health growth strategy." I mean, that's what I'd be thinking but I'm not a health system exec! |
Risant Health: the health system of tomorrow, or destined for failure? |
Launching Risant is a compelling move for Kaiser to work with struggling small to mid-sized health systems. Through Risant's growth expectations, Kaiser will gain access to $30B to $35B in incremental health system revenue and will sell population health services and expertise to Risant members operating existing risk chassis. Next week I'll dive into characteristics of potential Risant acquisition targets, more thoughts on the deal, and potential Kaiser benefits of launching the new nonprofit health system platform. |
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Today the Board Room held its monthly executive briefing talking about AI in healthcare - frameworks for generative AI, use cases for AI in payor and provider contracting, and learning more from industry personnel. I wanted to give a special thanks to Sean Sodha from Grafi.ai and Chris Severn from Turquoise Health for fielding questions from the community and sharing their insights on where AI is headed. I really enjoyed the discussion as I'm mid-sneeze or something in the screenshot below! |
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- This weekend I'm headed up to Charleston with the family where we'll be enjoying some vacation and golf. Stay tuned for the vacation golf round recap!
- I wanted to give a shout out to Michael Arvin, who I played golf with yesterday. He shot a smooth 80 with some excellent ball-striking at one of the finest courses in DFW. If you're in the Dallas area, let's play!
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Thanks for the read! Let me know what you thought by replying back to this email. — Blake |
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