Looking ahead to the 17th Annual Not-for-Profit Health Care Investor Conference May 17–18 in New York, we are excited to continue the tradition of facilitating dialogue between leading health systems and their investors.

Over the last several years, the conference theme has tracked the progression of health systems transitioning to a new care delivery model and, importantly, the potential strategic, operational and financial impacts of doing so. Beginning with understanding the shift to value-based care in 2014 to population health strategies in 2015, the conference has evolved to parallel where the industry is headed. This year’s theme “Partnering and Collaborating to Drive Value and Innovation” continues that trend by focusing the conversation on how health systems are executing strategies in various ways to be well-positioned within this changing health care landscape.

For health systems, navigating the current environment remains complex. The dynamics taking place include:

  • The shift to value-based care
  • An increasingly engaged and empowered consumer
  • A transition to site-agnostic care delivery
  • The increased influence of technology

These forces are propelling partnership activity in vertical service lines in an effort to build out the care continuum and population health management capabilities. Some systems have responded by partnering to develop urgent care facilities, and others are coming together to create integrated delivery systems combining provider, physician and health plan capabilities. Still others who do not wish to fully merge their organizations are entering into joint operating agreements to build scale and maintain essentiality, and are developing new technologies like “innovation labs” or venture funds to embrace consumerism and harness the power of an ever-increasing amount of data for both patients and providers.

Partnerships forming

Not surprisingly, health system partnership activity, via merger, acquisition, joint venture or otherwise, remains robust in this environment. According to Irving Levin  Associates Inc., merger and acquisition activity in health care services (which includes hospitals) grew by 22 percent in 2015.

Not only is there diversity in the types of structures being implemented, but also across a variety of horizontal and vertical service lines including hospitals, physicians, managed care, emergency care, surgical centers, laboratory, pharmacy, and long-term care with both nonprofit and investor-owned partners. The rationales to partner vary by circumstance, but often are driven by a combination of the need for specific operational expertise and access to capital.

Investors, for their part, remain focused on understanding the strategic and financial benefits of these partnerships and investments. They continue to seek information on the particular strategies and differentiating factors, why and how they are being implemented and the potential financial and other returns, all to better inform their investment decisions. Investors have noted that they value those health systems that clearly articulate their strategies and the potential returns, even in broad terms, by providing access to management executives via a meeting or an investor call.

Red flags

In contrast, investors become concerned when a strategy is not clearly communicated or changes significantly without notice. Several of them mentioned situations in which the strategy diverged from the historical norm without a corresponding explanation. The concern was less about the divergence than the ability to clearly articulate why. In a few notable instances, investors reduced or eliminated their positions in certain health systems as a result.

On the innovation front, investors are very interested in learning more. Whether internally developed or resulting from groundbreaking partnerships with technology-focused companies, investors would like to hear more about these investments and new technologies, including their potential benefits (financial or otherwise). However, investors readily acknowledged that they aren’t yet factoring this into their investment decisions. Regardless, health systems continue to make significant investments in innovative technologies that will become an increasingly important contributor to patient engagement and, ultimately, future success.

In this challenging health care environment, the relationship between health systems and their capital partners remains dynamic. While management teams are focused on executing partnerships and investing in innovation aimed at navigating the changing landscape, investors are just as focused on understanding how these strategies unfold. Within any partnership, there are clear benefits to both sides if successfully cultivated. For investors, they benefit from access to clear and understandable information. For health systems, they benefit from increased investor interest and, ultimately, a lower cost of capital. The continued focus on cultivating this partnership will be a hallmark of our upcoming conference.

Ben Klemz is a director for Citi, which co-sponsors the Not-for-Profit Health Care Investor Conference with the Healthcare Financial Management Association and the American Hospital Association.