Consolidation in the hospital industry continues to be strong, with 52 deals in the first half of 2016, up 6.1% from 49 in the same period a year ago, according to a recent analysis by Kaufman Hall.
Of those 52 consolidations, 39 involved nonprofit organizations, 21 involved for-profit organizations, and one was a for-profit/not-for-profit combination. In the biggest transaction of the second quarter, Universal Health Services snapped up remaining interest in Valley Health System for $445 million, gaining control of six acute care hospitals in Las Vegas.
Mergers, acquisitions, and other forms of partnerships continued for a variety of reasons:
- Lower costs;
- Increased leverage at the bargaining table with payers and suppliers; and
- Stronger capacity to drive quality through increased efficiencies and patient engagement.
“The continuing uptick in mergers and acquisitions is not surprising," says Anu Singh, managing director at Kaufman Hall. “The industry is rapidly changing and many organizations are not optimally positioned to navigate the transition to value-based care on their own. Healthcare leaders should thoroughly evaluate the partnership options to help ensure strong, competitive positioning for their organizations into the future.”
In the pharmaceutical and life sciences industry, the number of deals dropped 8% in Q2 2016 versus Q1 2016, but overall value surged 127%, fed by major deals announced by Abbott Laboratories, C.H. Boehringer Sohn and AbbVie, according to PwC.
“Deals will continue to drive growth agendas for life sciences companies,” says Dimitri Drone, global pharmaceutical and life sciences deals leader for PwC. “We are expecting rotation though within life sciences away from specialty and back to larger life sciences companies as well as biotech.”
Rather than purchasing another company outright, many drugmakers are also looking increasingly to partner with organizations that can help them maintain or increase marketshare in a changing healthcare environment, Drone tells Healthcare Dive.
“There’s more and more emphasis, with companies I’m talking to, on what to do with personalized medicine, how do you bring products to market that are approved, put on formularies," he says. "And so companies are focusing more of their efforts on how do we learn more about the patient population that we’re trying to treat, how do we demonstrate that the drugs that they’re taking are as effective or more effective than anything else in the market.”
Time previously spent looking for drug company matches is now being devoted to talking with companies or organizations that can help them understand how to get relevant information and what to do with that information.
“Think academic medical centers. Think technology companies … A growing amount of their time is going to be spent with nontraditional partners,” Drone says.
Meanwhile, the Department of Justice is challenging a number of mega deals on grounds they could hurt competition. Late last month, DOJ sued to block the proposed mergers of insurance giants Aetna and Humana, and Cigna and Anthem, saying they would reduce the field of large payers from five to three and drive up premiums for consumers.
One of the goals of the Affordable Care Act was to give people more choice of affordable health plans by encouraging competition. The fact that the government is going after both insurers simultaneously suggests that it is looking at the mergers’ impact industry-wide, rather than in specific markets, The New York Times reports.
“The Obama administration has had robust antitrust enforcement in the realm of mergers, particularly in health care,” Matthew Cantor, a partner at Constantine Cannon, told the Times. “Any one who’s going to attempt a horizontal merger should take note of that and particularly consider the antitrust merits of the deal.”
The government has quashed mergers among large health systems and pharmaceuticals companies as well. In April, drug giants Pfizer and Allergan dropped a $160 billion deal amid widespread criticism of tax inversions, which allow U.S. companies to relocate headquarters overseas to enjoy lower tax rates.
In June, however, a federal judge rejected federal antitrust regulators’ claim that the merger of Chicago’s Advocate Health Care and NorthShore University HealthSystem would harm consumers, saying its definition of the north suburban hospital market was flawed. The opinion didn’t clear the way for the health systems to complete their merger as it must await a decision by a federal appellate judge, according to Crain’s Chicago Business.
In its predictions for top healthcare industry trends in 2016, PwC said regulators would continue to clamp down on high-profile mergers and acquisitions if they think they are bad for consumers. Innovative partnerships, such as joint ventures and loosely structured alliances, may provide more flexibility in this climate, the report says.
“There’s more and more convergence within healthcare and with other industries in healthcare, like technology,” Drone says. “Those deals aren’t going to be M&A, those deals are going to be alliances.”