As 2017 was coming to a close we started getting many questions and calls (likely triggered by the CVS Health-Aetna announcement) about the possible drivers and implications of what appears to be a recent spike in healthcare merger and acquisition (M&A) activity. So first, let’s look at the numbers. Depending on the types of transactions and healthcare industry sectors one chooses to include, the number of deals in 2017 ranged from over 50 to nearly 1,000. According to Kaufman Hall, 2017 hospital M&A activity was highest in over a decade, while PWC’s broader industry look suggests that year-over-year activity was actually slightly lower than 2016, while deal value was significantly higher.
So, what do we think is going on? While regulatory and general policy uncertainty around the Affordable Care Act is certainly one contributing factor, we believe that key drivers of M&A activity in the payer/provider space are the continuing focus on value (better quality at lower costs) and the potential marginalization of traditional players. A high-level review of 60+ transactions suggests the following general themes:
- Provider consolidation. Payer/provider M&A transaction activity in 2017 was dominated by hospitals and health systems purchasing each other, including several “mega deals”. For instance, the proposed CHI/Dignity merger was to form a new “largest” Catholic health system with 139 hospitals and $28.4 B revenue. Within a few weeks, Ascension and Providence St. Joseph announced their proposed merger, which would make the resulting organization the largest Catholic health system with 191 hospitals and $44.8B revenue. Provider consolidations in general are most likely driven by a) an attempt to use old style market clout to negotiate with insurers both under (the ever declining) fee-for-service, as well as value-based payments; b) a desire to reduce overhead and supply chain costs and c) to provide a hedge against new/non-traditional entrants into the provider space.
- Payers partnering with and/or purchasing providers. As providers continue to take on more risk, some insurers are seeing the writing on the wall and are either developing capabilities to support providers in managing risk and/or getting into the provider business themselves. Optum, a subsidiary of UnitedHealthcare, is the poster child for both trends, with its 2017 purchase of the Advisory Board’s healthcare research and consulting arm, as well as the acquisitions of the DaVita Medical Group and Surgical Care Affiliates. Humana’s recent purchase of Kindred Healthcare, as well as Anthem’s purchase of HealthSun, provide additional examples of insurers jumping into the provision of healthcare.
- Organizations positioning themselves for value-based payments across the care continuum. The pending CVS Health-Aetna merger is a key example in this category. The resulting company would not only offer a range of healthcare services (pharmacy, Minute Clinics, etc.), but also have a strong incentive (and the data) to ensure that customers receive appropriate primary care at a reasonable price. As stated by Kaufman Hall, “Nimble and well-financed competitors see opportunities to cut costs, increase conveniences, and improve outcomes by…bringing more efficient and consumer-friendly business models to the market.”
Looking into 2018, we believe that healthcare M&A activity is likely to continue as incumbents face increasing pressure from regulators and non-traditional players, (e.g., the TBD healthcare-focused alliance between Amazon, Berkshire Hathaway and JP Morgan) to reduce costs and deliver higher value. The recent announcement of a merger between Mercy Health and Bon Secours, to establish the 5th largest Catholic healthcare system in the U.S., provides the first supporting data point for our forecast.
As for the question of whether this expanded M&A activity will help organizations actually deliver better patient outcomes while using fewer resources (i.e., get better value), the jury is still out. Our view is that large size and reduced hospital overhead will not be enough if the clinical care delivered to the patients is not more effective and more efficient. High value care requires new clinical care approaches supported by new models of payment.