7 minute read 26 Apr 2018
father kissing newborn baby forehead

How collaboration can help create a healthier world

By

David Roberts

EY Global Health Leader

Leads global team working for clients in health. Passionate about how consumers change the way healthcare is designed, delivered and funded. Long distance biker – metaphorically and actually.

7 minute read 26 Apr 2018
Related topics Risk Health Growth

Show resources

As changes in health delivery and payment models disrupt the health industry, companies are turning to M&A and strategic alliances.

A seismic, once-in-a-lifetime market shift in health delivery and payment models requires every organization in the industry to rethink its business model, structure and mode of operation.

  • Reimbursement based on improved health outcomes, as opposed to fee for service, is pushing providers to broaden their scope of care across a fragmented system.
  • The growing ability to diagnose, monitor and treat chronic diseases offers an opportunity to maximize outcomes while eliminating ineffective treatment.

Higher standards for health

These shifts require
more sophisticated tools, people and infrastructure. The landscape is complex and competitive and traditional models of delivery are inadequate for today’s standard of care, documentation and billing.

What is the answer for many health organizations? Health companies are increasingly looking at M&A, alliances and joint ventures for a solution. This allows them to expand their geographic footprint to gain the scope and scale of services and infrastructure capabilities needed to survive and compete.

Current and expected M&A activity

Health executives are positive about deal fundamentals, according to the EY 14th annual Capital Confidence Barometer, with almost two-thirds seeing a positive trend for acquisition opportunities.

The most recent EY Capital Confidence Barometer also found that health executives anticipate the trend of increased M&A activity to remain well above historical health sector averages. Overall, 56% of respondents expect to actively pursue acquisitions in the next 12 months. This represents the second highest percentage since late 2010. Almost two-thirds of health respondents indicated they have three or more deals in their pipeline.

The reason for this trend is likely to be the fragmented nature of the healthcare industry. Whilst reimbursement is tied to overall health outcomes, risks increase as providers only deliver a fraction of the care. Leaders see alliances as an opportunity to manage these risks, improve the quality of overall care and lower costs.

And where a merger or acquisition may not be the right fit, health companies are increasingly looking at strategic partnerships and joint ventures to expand their geographic footprint and have more input into the continuum of care. In fact, with 50% of respondents planning to enter into alliances with other companies or competitors, health organizations are vastly outpacing their global counterparts (40%) in other industries.

OUTLOOK

79%

see the global economy as stable or improving.

Key motivators for change

“With the steady move toward value-based care, there continues to be convergence among health care sectors and further
 development of a continuum of care within health care companies,” said Gregory Park, US Healthcare Investment Banking, EY. “Parties that have historically been separate, such as managed care and providers – or subsectors within the provider universe – are coming together in different ways.”

There are a number of key trends that are driving this rise in M&A activity in the health industry. Bolstered by availability of cheap financing and spurred by opportunities that big data might offer, these include:

  • The evolution toward value-based reimbursement — forcing a focus on the full spectrum of care: Organizations are at risk if they are paid based on patient outcomes, yet only provide part of the continuum of care. These reimbursement models also require more results tracking, so health organizations need to effectively adopt and employ better technology and analytics.
  • The move toward consumer-directed health care — adding an incentive for technology and wearables: Organizations must incentivize customers to use new technologies and services and share the resulting data. M&A and joint ventures can help health companies gain the scope and scale to effectively roll out and utilize these technologies.
  • The tension between scaling and consolidating costs: As health providers increase in scale, costs rise and reporting requirements demand a more complex and robust technology infrastructure. Larger players have the advantage of being able to dedicate more dollars to fund IT and clinical systems, improve purchasing contracts, negotiate better deals with large commercial insurers and enhance organizational capabilities. This has led to mergers at across the value chain, including:
    • National healthcare providers and managed care organizations targeting large-scale mergers, as well as bolt-on acquisitions, to better position themselves in the market. The proposed but ultimately rejected megamergers of Aetna – Humana and Anthem-Cigna show the extent of the potential consolidation.
    • Regional consolidation of hospital operators, to achieve scale and scope to drive down the cost per patient. One example is Detroit-based Henry Ford Health System’s acquisition of Allegiance health, a dominant provider in Jackson, Michigan.
    • “Super physician” practice groups, combining to form behemoth practices to achieve scale and market concentration. For example, the Envision Healthcare and Amsurg merger, creating a large physician group.
  • The shift from inpatient to outpatient care: As reimbursements drop for inpatient services, many hospitals are increasingly focusing on other avenues for growth, particularly outpatient services. Outpatient care is often delivered at lower cost sites, and outpatient volumes have risen faster than inpatient admissions over the past five years. Costs are driving established hospital operators to seek M&A opportunities outside of their traditional scope, such as buying smaller community hospitals to develop regional networks or setting up acute care outpatient surgical sites.
  • A focus on technology, tools and digital devices: Although lagging behind other industries, healthcare-related information technology continues to grow, as organizations increasingly adopt solutions to help simplify and streamline operations. Health organizations unable to provide the required capital outlay for electronic health record (EHR) systems are seeking to bridge the gap through partnerships, mergers or acquiring technology companies outright. Those with robust EHRs are looking to boost their scale to maximize value from those investments.
  • Move toward investment in less risky segments of health: Privately funded health organizations in particular are diversifying services and acquiring providers in niche segments to benefit from better, more stable reimbursement. These niche acquisition targets or alliances include:
    • Physiotherapy – Physicians with orthopedic practices are looking for deals to improve the outcomes of orthopedic procedures and reduce the incidence of surgeries.
    • Behavioral care – This large, often overlooked market is gaining support, as both the regulatory and legislative sides seek to provide better mental health coverage for adult Medicaid beneficiaries.
    • Home health and hospice – Demographics, patient preference and meaningful cost advantages suggest more growth in the home health and hospice arena. The percentage of Americans aged 65 or over is expected to grow from 13% to 20% of the population by 2030. Industry analysts also point out that those focusing on quality are likely to benefit as the Centers for Medicare & Medicaid Services continue to move toward outcome-based reimbursement.
    • Ancillary health care services – This includes revenue cycle management businesses, independent specialty providers (such as neonatal, anesthesia, teleradiology, maternal-fetal and pediatric physician services) and independent medical examiners.

Three key steps to thriving in this rapidly changing landscape

The first steps for any organization to adapt and prosper in this new health care environment to are to:

  • Determine its desired strategic outcome or market positioning
  • Identify gaps or risk areas within current offerings
  • Look to financial and operational metrics for guidance on which structures are optimal.

“Knowing these three things will clarify the goal, provide focus on the key issues driving a structural change and help uncover the possible pathways forward,” says Gregg Slager, EY Global Health Transaction Advisory Services Leader. “However, figuring out the best approach is like playing a three-dimensional chess game. You need to examine all the variables simultaneously, including possible organizations to align with, the strategic next step, and the best organizational and financial structure for all parties.”

For instance, if a physician group wants to stay focused on patient care rather than tracking or technology, its strategy might be to find a larger physician group with a more robust infrastructure to either acquire or partner with. An orthopedic practice might acquire or ally with a physical therapy group to ensure more control over surgery outcomes.

What to watch for next

Although companies are adopting all forms of new structures and partnerships, Park expects more consolidation on a local basis, enhancing an already significant middle market. “Expect a continuing relocation from Wall Street to Main Street in health M&A, as companies combat shrinking reimbursement, cut costs and, ultimately, pass those savings down to the consumer.”

Park also expects to see more portfolio pruning: “Drafting behind the life sciences sector, we expect continued divestitures from historically M&A-oriented companies, as service, delivery and reimbursement models continue to be refined.”

Summary

In a disrupted healthcare market, companies look to M&A to create sustainable growth and cut costs for businesses and customers alike.

About this article

By

David Roberts

EY Global Health Leader

Leads global team working for clients in health. Passionate about how consumers change the way healthcare is designed, delivered and funded. Long distance biker – metaphorically and actually.

Related topics Risk Health Growth