Health care industry consolidation
Creating innovative combinations
A roundtable conversation with EY Transaction Advisory Service health care leaders
EY's Transaction Advisory Services (TAS) practice provides guidance and support throughout the transaction lifecycle, from early stage to execution and post-deal activities. In this conversation, TAS health care leaders Chip Clark, Gregory Park and Gregg Slager discuss the current M&A environment in health care and innovative combinations in the market.
Q: The health care reform law has been affirmed, additional regulations on ACOs have been implemented and states are making decisions on expanding their Medicaid programs. With this march forward, do you think we’ll see significant M&A activity in health care over the next two years?
Greg Park:In a word, yes. Over the last few years, we’ve seen a significant volume of transactions involving providers and payers. Much of that activity falls into two categories: first, scale transactions, where organizations are enhancing existing service lines by adding similar lines, and second, conversion transactions, where sectors that have historically been separate are coming together.
Gregg Slager: We’re also seeing a movement from utilization- based models to outcomes-based models. Given that providers would control only a portion of the continuum of care where outcomes are measured, vertical integration — such as hospitals buying physician groups — is accelerating.
Greg Park: The ACA’s focus on moving from volume to value is driving a lot of this activity, particularly on the convergence front.
Chip Clark: I certainly agree that the ACA is driving activity. Another reason I think we’ll see increased activity is that stronger health care providers have plenty of cash, and credit is readily available.
Q: Do you anticipate increased interest in acquisitions of health insurers by health care providers?
Chip Clark: Yes, I certainly do. We may see transactions in which a larger organization might not be the controlling organization upon combination because the smaller organization operates a valuable health plan. Based on the perceived higher-value health plan, the smaller organization may have just as many seats at the table as the larger organization.
Q: What are some of the most innovative combinations we've seen to date? What might we see on the road ahead?
Greg Park: We’ve talked about payers buying providers and going back to quasi-staff-model HMOs. We’ve talked about providers expanding the waterfront by creating a broader continuum of care. We’re also seeing companies in other industries focus on health care.
Chip Clark: Some of our larger clients in the payer and provider sectors are setting up their own private equity or venture capital funds, or investing in such funds, to capitalize on innovative ideas.
Q: What are some of the key considerations health care leaders should assess before agreeing to pursue a merger, acquisition or other affiliation arrangement?
Greg Park: Make sure that your strategy and integration plans are sound. Make sure, too, you understand what you’re buying from a diligence perspective and you know that you’re paying the right price for what you’re getting with the right contract terms.
Chip Clark: You need to be able to envision and articulate the value that the acquisition or arrangement will create. Then, follow an exacting plan for overseeing the transaction process, and monitor the post-transaction integration and synergies that yield the expected benefits of the deal.
Gregg Slager: Cross-functional communication is critical. Unless teams are meeting and communicating regularly throughout the diligence process, critical information impacting value or risk can be missed or ignored.