Since the past decade, healthcare systems have been expanding their avenues to serve countries around the globe, breaking free from conventional norms. Today, they are on the lookout for well-planned strategies to steepen the growth patterns and increase cost-efficiency. The key to meet these goals necessitates merger and acquisition (M&A) resolutions.
Healthcare systems have set revolutionary merger records in the previous years. In 2017, these institutions were at the forefront of M&A activity with over 115 deals. This pattern continued in the latter years, with burgeoning growth and various high-profile transactions. In fact, despite major economic jitters that shelved global trade, a wave of the “mega” healthcare mergers in the United Stated, each worth over $10 billion, drove the M&A legacy to its fourth-strongest year in 2019.
As the healthcare sector continues to drop its age-old paradigms, it hopes to establish prominence in value-based responsibility and management. In the face of COVID-19, these settings are extending their arms to mergers as a method to bolster their efficiencies. However, there is much more to it than what meets the eye.
Why do healthcare mergers matter?
Today, reimbursement cuts, medical reforms, and depletion in terms of the payer mix have intensified healthcare providers’ challenges. As a result, many had been facing a universal dilemma – what is the road to improve performance and operating margins while fueling the quality of care they deliver?
By now, a whopping number of these providers have come to identify the new economics of healthcare, which has made it important to thrive more than ever. This has occurred by merging or partnering with other providers. In the new era, health business models are metamorphosing from volume to value. Needless to say, its success is usually governed by the ability to offer advanced quality care at the lowest price.
Today mergers are expanding at a booming rate. This is because when you look at the financial future of a healthcare organization, you see the payment methodologies changing. You feel that being with an organization larger than you might be something that has more care or cash available. This might be something that you would be interested in.
The $7.6 merger amid Health Management Associates, Community Health Systems, and Tenet Healthcare’s takeover of Vanguard Health System shows that many providers view consolidation as an excellent way to garner long-term growth. This alliance can deliver progressive services at a lower cost to the ever-increasing patient population.
Furthermore, these transactions can generate other remarkable cost-savings as well. For instance, merging healthcare systems may curb costs by combining back-office billing operations or eradicating redundant roles. Additionally, this may equip providers to reduce costs by sizing their staff by eliminating irrelevant shifts. This is also applicable for deploying technology to optimize the scheduling process of the staff.
The force that drives healthcare M&A
According to many health systems, acquiring another organization or merging with it holds the key to future success. The higher the development rate of any landscape, the more is the grave need to heighten the healthcare sector. Hence, facing intense pressure to cut back on costs, mergers and #acquisitions can leverage the economies at scale.
Professionals in the healthcare industry have been in the odds regarding the non-competitive nature of mergers. However, the proponents of healthcare M&A assert that such structural changes are imperative for survival in the dynamic industry landscape. Moreover, mergers and #acquisitions make it possible for patients to obtain quality care while keeping a tab on spending.
At large, it all comes down to the fundamental challenge of providers grappling with how to achieve more with less. While large-scale organizations cut costs, they learn to become more productive and equate with the payers’ expectations.
There are different types of #mergers. You might do a full-blown merger, you might do some kind of a joint venture, or you might do some kind of a parent-child relationship where you are still a subsidiary, but your board reports to the parent board, and possibly your board has some members on the parent board.
The sweeping mergers and acquisitions trends across the healthcare sector
Through high-value mergers and acquisitions, healthcare organizations intend to take their operations to greater heights. This involves incorporating additional care services, creating a broader footprint across the marketplace, and reducing the ascending capital investment.
However, as the rate of hospital mergers accelerates, stakeholders are speculating what this trend holds for patients, providers, and payers. How do consolidated systems navigate healthcare quality upward? How can M&A transactions add value to the system? Let’s find out.
The healthcare sector remains the top investment avenue
As another year of economic expansion unearths, investment in the healthcare sector will continue to flow. Over the years, healthcare has retained higher returns on equity capital, as compared to other industries. M&A activity is significantly fruitful in provider-based sectors.
Ryan Buckley, a stakeholder at the global M&A firm stationed at Chicago, Illinois rightly mentions, “Private equity will continue to consolidate the physician practice landscape aggressively, as these physician practice management (PPM) platforms are often able to improve patient outcomes at a lower cost while promoting the proven benefits of physician-led care.”. He further states, “Through scale, PPMs can invest in infrastructure, technology, clinician recruitment, and greater clinical support that, in turn, improves care delivery and increases physician productivity.”
The sudden hike in healthcare merger activities
Hospitals and other health organizations are on the move for making M&A deals to enforce value-based care.
Catering to the Healthcare Financial Management Association’s (HFMA) 2016 report, this transition requires major capital investments and sophisticated supervision that persuades even the most independent-minded healthcare systems to consider merger deals.
Value-oriented care demands providers to regulate the outcomes and costs throughout the patient’s tenure. Therefore, accountable care organizations (ACOs) and better payment models also drive providers to be more responsible in terms of patient costs.
This evolution is prompting more and more organizations to expand their network and comprehend a patient’s entire healthcare journey. Thus, while providers join forces to gain insights on how to cut back on costly services and conditions, patients can place their worries in the hands of these organizations.
As statistics show in a 2016 survey by Deloitte, beyond one-half of physicians (53%) stated that they would consider consolidating with other healthcare systems. In turn, this would help them obtain access to the capabilities and skill-set crucial to value-driven care success. Moreover, the firm also anticipated that, by 2024, only half the healthcare organizations would work as independent entities.
Achieving economies of scale
According to the Healthcare Financial Management Association, economies of scale are “the gains provided through the consolidation of effort or volume.” Simply put, organizations can lower the fixed value of their goods by producing them in a greater quantity. Similar is the case across the public and private healthcare sectors.
Through such partnerships, healthcare systems are soliciting economies of scale in diverse areas. These include supplies, support services, information technology, purchased services, and more.
This takes me down memory lane to the earlier years of my career. When I was an executive in a public system, we took over a community hospital, and the cultures were vastly different. The geographic cultures and the organizational cultures had to be really put together. I would say it takes a good five years before an organization becomes one, and there’s a lot of growing pains during that period of time. And one needs to go through those growing pains and decide whether or not they can stomach them or not. If they can, fine, if they can’t, they need to move on to another organization.
Patrick Allen, MD, Kaufman, Hall & Associates, attributes the surge in healthcare mergers to “thinking strategically about how best to build the scale and capabilities needed to remain competitive in a rapidly changing healthcare environment.”
Progressive impact on care-giving
Healthcare mergers and acquisitions carry a massive impact on the quality of patient care. In most cases, M&As occur when an organization is no longer able to function independently. Therefore, a larger healthcare company acquires the former, thereby enabling it to resume its operations. Had this acquisition not taken place, many patients would have lost access to care and treatment.
Today, the healthcare merger graphs are further steepening because it is easier to face the current healthcare landscape challenges with more resources and manpower. This comes from a 2016 testimony by Paul B. Ginsberg, Bookings Institute. He says, “Lifestyle choices by younger physicians lead them to pursue employment in large organizations rather than solo ownerships or partnerships in small practices.”
Healthcare merger proponents advocate that this shift in the industry, from flying solo to channeling consolidated efforts, has led to a positive impact on care-giving. When two entities unite, they are highly likely to streamline protocols. Therefore, this leads to enhancements in the standards of quality care.
Mergers can also curb the event of low-volume surgeries or the custom of patients undergoing operations at hospitals carrying limited expertise. Home care has changed in so many ways that they (hospitals) need to get into working directly as the owner of the patient. Really, when you look at who the owner of the patient is, it’s the primary care organization, it’s the primary care doctor. And then, of course, the type of merger.
Do healthcare mergers truly reduce costs?
The pioneers of healthcare organizations highlight how acquiring or merging with other organizations expands patient access and reduces cost. The question remains, to what extent?
When Mercy Health and Bon Secours Health System declared their project to build one of the nation’s largest healthcare entities, Mercy Health’s CEO emphasized that this merger would shrink costs. Katherine Vestal said, “As consumers grapple with the implications of healthcare reform in a dynamic marketplace, Mercy Health and Bon Secours share a vision to improve the health of the communities we serve as the low-cost, high-value provider.”
As per a study by the Charles River Associated for AHA, hospital M&As can indeed lessen healthcare costs. Acquired healthcare systems and hospitals observed a significant 2.5% drop in operating expenses per admission. This resulted in a $5.8 million in savings at each hospital.
It may take a while for organizations to fathom the cost savings arising from a healthcare M&A. However, around 40% of healthcare owners claim a 25% rise in their cost-structure efficiency goals.
The road ahead
In the new era, healthcare leaders are faced with the relentless need to grow. Through the means of merger integration, organizations may overcome various constraints, such as limited capital and expertise.
Today, healthcare is ushering in a stream of consolidation while realizing the global impacts of an affiliation. Wondering what is next for the healthcare sector? The merger pace is anticipated to further heighten post-2020. This will be influenced by two major factors.
First, technology will continue to be the key force in healthcare, thereby building more opportunities for collaboration. Physicians who currently spend over 21% of their working hours on paperwork will spend their time treating patients. You can expect to witness more merging deals, while the healthcare industries seek to leverage robotics and artificial intelligence to enhance patient-care and cost-reduction.
Second, you can expect a large-scale emphasis on prevention and wellness over treatment. This is because healthcare providers are looking to extend care to cover patients for a lifetime.
By creating value through a union, highlighting the rationale for partnership, integrating hospital customs, and communicating effectively, leaders may have a massive chance of achieving collectively what is unachievable alone. Ultimately it’s the strong leadership, executive staff, culture, and due diligence that are essential to any successful merger.
