Healthcare merger frenzy: A bid for survival?
If done well, the recently announced string of vertical and horizontal integrations could lower costs across the board. The execution required to achieve that, however, is complex and takes time.
December saw a flurry of merger activity underscoring a sense of desperation within healthcare.
A string of high-profile and potentially industry-changing deals surfaced, a mix of vertical and horizontal integrations that could trickle down to smaller companies. If done well, they could lower costs across the board. The execution required to achieve that, however, is complex and takes time.
It started with a bang on Dec. 3 when CVS Health announced a bid for Aetna in a blockbuster $69 billion deal.
A day later, Advocate Health Care and Aurora Health said they planned a merger that would create the 10th largest nonprofit health system in the country.
Two days passed and UnitedHealth’s service arm Optum announced it will acquire DaVita Medical Group, which serves about 1.7 million patients a year at nearly 300 clinics. The final definitive deal of the week was Catholic Health Initiatives and Dignity Health wrapping up an agreement more than a year in the making.
The true bookend of that crazy week, however, was a report that surfaced Dec. 10 of talks between Ascension and Providence St. Joseph Health. If a merger of those two companies goes through, it will create the largest hospital operator in the country with 191 hospitals in 27 states.
Then earlier this week, Kindred Healthcare said it will be acquired by Humana and two private equity firms in a deal valued at $4.1 billion.
If the deals pass regulatory muster (and that's definitely still a big if), the industry will be watching whether they succeed in streamlining care, bringing down costs and pleasing consumers. Also unknown is whether the ROI will be tangible enough to satisfy investors.
One thing is clear: In an increasingly perilous financial landscape, providers and others see joining forces or finding new partners elsewhere in the industry as key to stay afloat and perhaps even thrive.
The industry’s excitement from the recently announced deals “says as much about the desperation with our current healthcare system as it does about the promise of the mergers themselves,” David Blumenthal, president of the Commonwealth Fund, said in a recent op-ed.
The impetus behind recent healthcare mergers has been building for more than a year: depressed patient admissions and reimbursement has providers hunting for cost savings.
Providers and payers always have the goals of improving health outcomes and care quality while reducing costs. One way for an industry player to make bigger strides in this area is moving to create more touchpoints along the care continuum.
“The more a single entity can control that episode of care the more likely they are to lead to better health outcomes, which in theory can lead to lower costs,” said Rich Morino, director of strategic solutions for LexisNexis Risk Solutions Health Care.
There is evidence behind that theory, but it’s not yet clear whether successful pilot programs can be scaled up to the level of such mammoth players like CVS or Aetna. The massive amount of data a combined company would have access to, however, could pave the way for unprecedented large-scale care coordination.
“These deals make sense to me,” Morino said. “If they [are approved], the onus will be on the healthcare industry now to take some of our successes that have been smaller and the trials and we have to scale them up real quickly.”
Mark Nathan, CEO of Zipari, said he expects national and regional insurers to strongly consider acquiring traditional medical groups, as Optum did with the DaVita deal. They could also be looking at deals with retailers, including pharmacies or other health-related businesses like nutritional supplements or weight loss.
“Not only does that allow health plans to start branding, but it also aligns with the overarching goal of improving health by aligning the motivations of payers, providers and members,” he said.
Branding is key, Nathan said, because health plans aren't exactly known for being consumer centric.
“Health plans have been plagued by terrible customer satisfaction scores, yet they need to improve their brands as consumers and employees play a more critical role in selecting and interacting with health plans,” he said. It remains to be seen, however, whether payers will be able to operationalize the changes and become brands more appreciated by consumers.
All of the recent mergers must still withstand regulatory scrutiny. A few of the deals, particularly CVS-Aetna for its sheer size, could see significant pushback on antitrust grounds.
Companies eyeing mergers will be watching how regulators react.
Assuming an alliance is approved, another major hurdle could be shareholders, not known as the most patient bunch, eager to see return on investment quickly.
Cost savings from improved population health and better access to care are achievable, although data from early experiments are decidedly mixed. But it could be years before a real change in the bottom line is visible.
Morino told Healthcare Dive there is also the fact that some health factors aren't particularly tangible. It can be difficult to quantify the benefits of more preventive care, for example. “They’ve always had the problem of how can you measure what didn’t happen,” he said.
Payers and providers are looking to merge in part as a defensive play among rumors that corporate giants like Apple and Amazon may be moving into the space. The disruption those companies could cause would likely be more easily weathered by a multi-faceted organization with a wide and varied footprint.
“I think if CVS-Aetna gets approved it will become a trend and people will be looking for the right partner,” Morino said. “Somebody like Wal-Mart becomes particularly attractive.”
The vertical integrations found in the CVS-Aetna merger and the Optum-DaVita deal aren't new. Optum’s parent UnitedHealth Group and organizations like Geisinger, Kaiser Permanente and UPMC have been focused on streamlining care in a way that improves outcomes and reduces costs. Forward momentum of the move toward value-based care reimbursement is also pushing these agreements.
The question for the newly merging companies and assets, however, is whether organizations that haven’t been molded by this concept can shift and scale to still be successful.
CVS has the retail footprint and the customer base, but it doesn't have strong relationships with providers throughout the country. Aetna can help in the area, but the two companies have to find a way to play off each other’s strengths. That would mean a shift in scale for both, and a way to seamlessly gather, exchange and analyze data.
Pressures all over
Hospitals are facing uncomfortable financial trends, payers are dealing with numerous regulatory uncertainties. All players are looking over their shoulders to watch for an Apple or Amazon to make a potentially explosive and disruptive entrance to the market.
Even if major companies continue to integrate in an effort to tackle the industry’s woes, any expectation of a quick fix is misguided, Commonwealth Fund's Blumenthal said.
“It can take generations for a provider-insurer partnership to develop a culture of trust, collaboration, and value orientation that has made existing examples of these combinations so uniquely effective,” he said.
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