Kaufman Hall & Associates LLC will acquire the consulting firm Claro Healthcare to scale up on the depth of its professional services for hospital and health systems that are navigating ongoing COVID-19 wounds made worse by a labor shortage and high expenses.

Kaufman Hall, which specializes in the healthcare and higher education sectors, said Thursday it has signed a definitive agreement to acquire Claro Healthcare with an expected mid-to-late October closing. Claro will keep its name, but will be known as “Claro Healthcare, a Kaufman Hall company.”  Both firms are based in Chicago.

The 37-year-old Kaufman Hall offers a broad scope of advisory services from strategic planning, treasury and capital markets advice to merger and acquisitions, and performance improvement. The firm last year brought Healthcare Real Estate Capital LLC into its fold to add the niche real estate capital markets arena into its array of advisory services.

Claro Healthcare specializes in services aiding clinical documentation, revenue cycle, hospital operations, and technology.

“Healthcare providers are under growing pressure to achieve and demonstrate excellence in all facets of operations, including revenue management and quality outcomes — in the face of rising expenses, declining margins, and changing payment models,” Kaufman Hall Chief Executive Officer R. Wesley Champion said in a statement.

“This combination provides Kaufman Hall with significant expertise in the revenue cycle and greater scale to its current performance improvement practice, which is a key area of focus given the broader economic environment for hospitals and health systems,” Jason Shideler, a managing director on the health care team of Madison Dearborn Partners, which is Kaufman Hall’s majority investor, said in a statement.

Venanzio Arquilla, chairman of Claro, sees the partnership as a good fit that will benefit the firm’s client base. “Kaufman Hall possesses a deep foundation in helping organizations benchmark performance against their peers. This arrangement will be a strong cultural fit for both of our organizations, given our shared technical and collaborative approach to consulting,” Arquilla said.

TripleTree served as Claro Healthcare’s exclusive financial advisor on the transaction. McDermott Will & Emery LLP is legal counsel to Claro Healthcare. Kirkland & Ellis LLP is legal counsel to Kaufman Hall.

Kaufman Hall publishes a monthly report on hospital margins and authored a report last week published by the American Hospital Association that offered a sobering view of hospitals’ financial conditions this year. While many saw margins begin to recover last year from deep pandemic wounds in 2020, spikes in COVID-19 cases earlier this year, combined with a nursing and overall labor shortage along with inflation and supply chain struggles to strain balance sheets this year.

“Our optimistic projections are for a 37% drop in operating margins, relative to pre-pandemic levels,” Kenneth Kaufman, firm chair, said in a blog post citing the report. “Our pessimistic projections show margins falling off a cliff with a possible 133% decline. And a growing number of hospitals are feeling the pain. More than half of all hospitals are projected to experience negative margins this year, up from 36% in 2021.”

Even in the few categories where expense growth is slowing, such as contract labor, costs remain far above pre-pandemic levels, the report warned. Federal pandemic aid has also tapered off with no new major relief in sight to bolster balance sheets. The firm sees a reduction in costs as providing the only salve and that will necessitate difficult decisions.

“Our industry faces challenges that are structural in nature, not just cyclical (as with the economy) or situational (as with the pandemic),” Kaufman said.

Fitch Ratings forecast the not-for-profit sector’s woes will continue into 2023.

Fiscal 2022 “medians show deceptively strong numerical improvements that are pointing to a cautionary calm before the storm,” Fitch Senior Director Kevin Holloran said in a report. “Hospital medians are likely to reverse course this time next year due to inflation, a very challenged operational start to calendar 2022, and, most notably, staffing shortages to persist well into 2023 and likely longer in some markets.”

The report is compiled from financial data for 218 hospitals and health systems. Fitch recently shifted its outlook on the sector to “deteriorating.”