Healthscope owners contributed to its corporate heart attack
To say the collapse of private hospital giant Healthscope was an accident waiting to happen feels like a statement of the bleeding obvious. For Canadian private equity player Brookfield, which paid $4.4 billion for the company in 2019, it was an embarrassing and costly commercial misjudgment.
With Healthscope placed in administration this week, the process of selling individual hospitals or groups of them has begun. Up to 10 buyers, including Macquarie Group, St Vincent's and Calvary and a slew of non-profit operators, are reportedly looking to cherry-pick from the portfolio of 37 hospitals and treatment centres.
Bank funding has been put in place to keep the hospitals open for a period. But the long-term survival of all of them is not assured.
To be sure, there was an element of bad luck for Brookfield with the black swan event of COVID, which delivered a major commercial disruption to all in the private hospital sector.
But for private equity firms, whose strategy largely hinges on buying sick companies, applying their own brand of cost-cutting treatments, amputating their untreatable parts and streamlining their operations, the choice of Healthscope as an acquisition was a head-scratcher.
There was no simple quick fix and a dearth of profit or revenue levers to push.
Brookfield appears to have underestimated the structural challenges facing the industry.
To begin with, there are well-documented and long-running commercial tensions between private hospital operators and the private health insurers that pay their bills.
Private hospitals are very costly to run, and with a range of expenses such as staff, rents and equipment, which have been further rising in the post-COVID era of high inflation, they are in a constant battle to extract more from the health insurance giants.
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