There’s no doubt the healthcare industry is changing rapidly and those changes are shaping business decisions in response to not only the Affordable Care Act (ACA) but also increasing costs and risks, data sharing requirements, care coordination, as well as consumer demands. Mergers, acquisitions, joint ventures and other types of partnerships are viewed as key strategies for healthcare entities to, “enhance competencies and scale to provide coordinated, cost-effective care across the continuum,” according to a recent Kaufman, Hall & Associates report.
The numbers are impressive. In 2015 alone, there were 112 hospital transactions, up 18% from 2014. Healthcare M&A activity reached $241 billion in the first five months of 2015, a year-to-date record, Dr. Kaveh Safavi, senior managing director for Accenture’s global healthcare business told Healthcare Dive. “This is fundamentally reshaping the U.S. healthcare landscape and will have impacts over the next year as well. Looking to the future, it will be important for healthcare providers to be strategic with their growth opportunities.”
Safavi explained such opportunities include:
- Horizontal M&A (hospitals buying other hospitals);
- Vertical M&A (hospital acquiring a payer); and
- Capturing the benefit of rapidly emerging digital health technology.
According to an article written by Paul Keckley, a health economist and leading expert on U.S. health reform, only 30% of the 5,200 U.S. hospitals remain independent.
Hospitals and physician groups are not the only healthcare organizations making deals – a PwC report found by mid-year 2015 healthcare deals broke 2014 records with $400 billion in announced agreements. The recently announced Abbott and St. Jude Medical deal towers at $25 billion and creates one of the largest cardiovascular device companies worldwide.
While all this has been happening, the pending insurance mega-mergers, Aetna/Humana and Anthem/Cigna still remain under federal scrutiny. A final decision isn’t expected until later this year
What’s driving consolidation?
Most experts agree costs are a major driving force behind the M&A frenzy. “You have health systems trying to lower costs under pressure from players from the contracting front,” Stephen Moore, a healthcare M&A partner at PwC, told Healthcare Dive. “Their contractor rates with payers are not keeping pace with cost increases so you’re seeing the need to spread what appears to be a resilient fixed cost base over a larger population or system that’s driving a need for scale. We see that trend continuing over the next few years with the exchange plans. Costs are driving up those rates and commercial rates are increasing as well.”
Michael Dowling, president and CEO at Northwell Health (formerly North Shore-Long Island Jewish Health System), told the Wall Street Journal, “Everybody is getting larger. The big providers are going to compete on quality and service and price.” Northwell recently expanded into Brooklyn via a merger with Maimonides Medical Center. Dowling explained that size matters when it comes to negotiating with insurers. “You want to be able to sit across the table and be in a position to negotiate. You don’t just want to be told what they are going to pay you.”
Risk also plays a big role in partnerships. “All stakeholders in healthcare are taking on additional risk,” Laurie Ringlein, practice director at T2C, a healthcare consulting group, told Healthcare Dive. Larger organizations have the ability to reduce risk by spreading it across more players, Ringlein explained. “Payment is more closely linked to clinical outcomes – value-based reimbursement. The shift away from fee-for-service means there’s more clinical and quality risk because now they get paid for the outcome of a procedure." This has led many organizations to consider entering into an accountable care organization (ACO) arrangement.
Consumers are playing a bigger role in healthcare decisions. Ringlein explained since they pay more out-of-pocket for care, “it will drive different choices of which providers they see and what procedures they get.” In addition, more focus on the consumer experience, she added, “dictates a need for additional data sharing and being able to prove you’re having an impact on higher risk patients. Larger systems are much more powerful negotiators so they can negotiate better deals with suppliers like medical device companies.”
Safavi said digital M&A holds the greatest opportunity for growth this year. “Digital health holds the promise to reinvent healthcare, which can both transform and disrupt business models. We anticipate digital health acquisitions will expand by a multiple of 8 – from 1% of overall acquisition volume in 2014 to 8% by 2018.”
Different types of partnerships
Hospitals are diversifying their partnerships and acquisitions, which in fact, Moore said is a growing trend. “I think they’re reaching out in multiple directions,” Moore said. “One trend we see is many more partnerships between payers and providers – either hospitals are thinking about their own provider-sponsored health plan, or starting one.” One example Moore provided is the recent Anthem deal with Aurora Health creating a health insurance company – Wisconsin Collaborative.
“I see other payers thinking the same way – we have to integrate with the provider and work together if we’re going to hold down medical costs trends,” Moore said. These types of partnerships require a broader coverage of all medical costs “from end-to-end” since “a lot of investment and interest is in all the post-acute care: Outpatient surgery, home health, home care, etc,” Moore explained.
More scrutiny from regulators?
The Federal Trade Commission (FTC) has challenged some recent hospital mergers like the pending Chicago-based Advocate Health Care and NorthShore Univeristy Health System deal, which, if approved would create the 11th largest nonprofit hospital system in the U.S., according to Modern Healthcare. Last month, both companies presented their case to a federal judge who will decide whether the merger moves forward. Moore said the agency is paying special attention to mergers where there is market share. “They clearly don’t buy the argument that even though the healthcare system has to become more efficient, that it has to come at the expense of something that has the appearance of being anti-competitive.”
However, Ringlein hinted that the move towards more joint ventures and strategic partnerships might garner less scrutiny by the FTC. “These partnerships tend to fly under the radar of that scrutiny.” Another benefit, according to Ringlein, is those types of agreements, “are easier to get out of if benefits aren’t realized within the timeframe they’re expecting them to. I think we’re going to start seeing more strategic-type partnership alignment and fewer formalized changes of ownership.”
Both Moore and Ringlein foresee healthcare partnership activity remaining active throughout the year. Moore said partnering and joint ventures will increase between providers with more state-wide and regional networks in the non-profit space. “A lot of state-based organizations are very aggressive now in the market and growing their footprint nationally.”
Ringlein said she expects fewer transactions among payers but expects provider partnerships to increase because “there is a lot of pressure on providers to reduce costs, provide more coordinated care, and expand their networks so they are performing team-based coordinated care and data sharing.” She also expects larger hospital systems “to start carving out chunks of their ownership of hospitals in non-profitable markets or markets that are difficult to serve.”
There’s little doubt healthcare consolidation will continue as demand increases and the population ages. However, it remains to be seen whether the potential cost savings trickles down to consumers.