Both the health insurance and the hospital business are being reshaped by M&A. Within a few days last December, San Francisco-based Dignity Health and Colorado-based Catholic Health Initiatives signed a definitive agreement to merge and form a nonprofit health system of 139 hospitals, CVS Health agreed to buy insurance giant Aetna for $69 billion, and UnitedHealth’s Optum division announced plans to buy DaVita Medical Group with its nearly 300 medical clinics plus urgent care and outpatient surgery centers. There's more to come, says Gregg Slager, group leader of Ernst & Young’s Global Health Transaction Advisory Services division. This is “one of our best Januarys that we’ve had in years,” he says. “We’re looking for a pretty robust 2018.”
He sees the healthcare sector as about halfway through a ten-year trajectory of M&A that’ll end when the FTC decides things have gotten consolidated enough. Since 2014, each year has been a new record for M&A, though 2017 was flat with the uncertainty of ACA repeal and replace drama.
In EY’s latest Capital Confidence Barometer, 38% of healthcare executives said they expect M&A in the area to improve in the next year, compared to 26% in the last survey (April 2017). 33% expect deal completions to increase, when just 13% did last time. And while 36% said they intended to pursue acquisitions in the previous survey, 43% say so now.
“I think the pace at which it’s going on right now, those fundamental economic and business drivers are not going to change anytime soon,” Slager says.
To address the M&A driver for the hospital sector that is value-based payment, EY recently introduced a new tool to calculate how a hospital’s quality metrics affect its valuation. If a hospital doesn’t meet benchmarks for 30-day readmissions or patient satisfaction or other metrics, it puts an overall number on the revenue lost from dinged CMS reimbursement, the expense of fixing the problem, and additional lost revenue opportunities from not running a tighter ship. “We can take quality info and provide predictive aspects,” Slager says, estimating “what quality will affect profitability and valuation.”
With the continuing wave of consolidation in hospitals, Slager also sees organizations thinking strategically about how to optimize their portfolios, and selling off hospitals that aren’t first or second in their markets, or otherwise high performing. “To have a real plan around portfolio optimization is new frontier for them.”
And as more deals are struck and larger, vertically integrated companies with insurance as well as provider businesses emerge, the challenges increase for the executives leading them. “There’s not a deep pool to draw from” in looking for leadership, Slager says, since it’s rare for executives to cross over from other industries. Managing doctors as the “producing assets” of the industry makes healthcare uniquely complicated, he says. What other industries come closest? Maybe sports and entertainment. Perhaps we'll soon see a health insurer run by a movie studio executive, or a hospital helmed by a baseball team owner. In healthcare, stranger things have happened.
