Monty Hall would be proud. The ultimate dealmaker could look to the $316B in 2018 healthcare M&A activity and see that it is more than double the same period a year ago. As insurance, pharmaceutical, technology, and traditional healthcare companies get in the act, the downward pressure from government regulators, shareholders, and patients to provide more services at lower costs is driving a flurry of activity behind Monty’s old door number one, two, and three.
Vertical integration seems to be the name of the game for the headline grabbers like CVS and Aetna ($69B), Cigna and Express Scripts ($67B), and Amazon and Pillpack (a paltry $1B), but Apollo’s recent acquisition of LifePoint Health ($5.6B) and the proposed mergers between Bon Secours and Mercy as well as South Dakota’s Sanford Health and Good Samaritan are adding fuel to the M&A fire.
According to Healthcare Dive, “The healthcare sector now ranks third behind energy and media entertainment in terms of total deal volume.” To break it down, we asked VertitechIT CEO Michael Feld, a senior level healthcare consultant who has been an adviser and investor in dozens of merger and acquisition transactions during the last decade, to provide some analysis.
Q: Does the increase in M&A activity surprise you?
A: Not at all. It’s a survival mechanism really. A small health system assuredly can’t survive by itself so it’s either going to shutdown or it’s going to be bought or be forced to merge. There’s two kinds of M&A; the little guy being bought up because his options are pretty much limited, and the large size organization growing larger. Like any other industry, as healthcare becomes more systematized, issues of scale and consolidation are the common drivers to M&A.
Q: That explains horizontal merger and acquisition activity. What about the vertical deals like CVS-Aetna and Cigna-Express Scripts?
A: Horizontal moves are much more common but there will be these big vertical plays that make headlines on a more infrequent basis. We seem to be going through a flurry of that right now as new ideas are being tried out and these large national corporations try to grow their ecosystems and control more of the total market. We’ve seen it in other industries and as the healthcare market continues to mature, typical issues of wanting to control the client base are just common business sense.
Q: Is M&A the only way to do that?
A: Not necessarily. At the health system and hospital level, we’re seeing and advising on more sharing of resources rather than flat out mergers. For example, both Mt. Sinai in New York and Thomas Jefferson in Philadelphia are now involved in a partnership of sorts with National Jewish out of Denver and its outstanding pulmonary program. I think we’ll see more of this in lieu of straight out M&A as these institutions take advantage of flagship capabilities. In a way it’s like wholesaling in the business world, growing organizations by adding wholesale and specialized relationships with other hospitals to grow the total picture of your abilities.
Q: Sounds like a wise alternative in light of the large percentage of institutions that fail to truly realize the economies of scale in a merger or acquisition?
A: I’d put it this way. In the majority of cases, the expectations that are set when they decide to merge are not quite what they get when they do come together. And there’s two reasons. Number one is nuts and bolts. Two organizations coming together have duplicate positions and a merger outside of healthcare would result in cuts to the workforce to consolidate functions. Hospitals don’t work that way. Financial accountability to shareholders doesn’t exist on the healthcare side. There’s more leniency for, let’s call it fat and waste. Number two, and perhaps the bigger reason for M&A failure to achieve preconceived goals is an unrealistic expectation of client natures and the payer mix. Assumptions are one thing but when they get down to the dirty details of clinical operations, they find a lack of compromise that often leads to less than stellar M&A results.
Q: So as a long time senior adviser and investor yourself, what’s your primary message to CEOs and boards that are considering a merger or acquisition opportunity?
A: It starts and ends by knowing yourself. Am I willing to take dictation from someone else? Am I willing to change? Can I not only say there are no sacred cows but actually carry it through? You have to realize the abilities of your executives and their ability to get behind and structure their actions behind a long term and detailed vision. Many will agree on the outcome but may not realize the steps that they personally, not organizationally, need to do to make this work. The most successful mergers in history have all centered on internal honesty where there was no fooling themselves. They knew and understood what they were willing to sacrifice and why.
Mike expects healthcare M&A activity to continue to increase as the industry becomes an even more important part of the economy. “Healthcare is now 18 points of GDP,” he says. “But unlike other industries where there are traditionally a few companies that lead the way for everyone else, hospitals operate a lot like multi-billion dollar Mom and Pop businesses that are embedded and committed to their communities to which they serve. It’s an operational model that can only be sustained over time through a merger or acquisition.”
As Monty would say, “Let’s Make A Deal.”