Mergers & Acquisitions: What’s in Store for 2016?
Whether they involved health insurers, payers, healthcare systems or pharmaceutical companies, there were many mergers and acquisitions in the healthcare sector once again in 2015. The Affordable Care Act certainly had an impact. It accelerated the two main changes breeding consolidation: competition for individual consumers and the move from fee-for-service to value-based reimbursement.
However, these mergers would have happened anyway, notes Steve Krupa, CEO and a managing director of Psilos Group, a NYC-based healthcare venture capital firm. They might have just been less dramatic.
Bret Schroeder, healthcare expert for the PA Consulting Group, agrees. “For providers,” he says, “it appears the ACA has been the catalyst for M&A activity. Since its enactment, hospitals started merging with competitors at unprecedented rates. In 2009, pre-ACA, there were 52 announced transactions involving 80 hospitals. That number more than doubled by 2012, with 107 announced transactions involving 244 hospitals.”
For payers, Schroeder believes the current wave of mergers were an expected outcome of the dynamics of the healthcare industry—declining revenues, large stranded cost structures and demographics. “ACA has accelerated these issues due to changes in reimbursement, individual choice in plans and penalties.”
He predicts this boom to continue, at least through next year, for two reasons. The first is market share capture. For the most part, he says, the market share is fixed, and to capture more generally means stealing it from an existing player.
“In any M&A scenario, firms are able to expand their footprint versus competing organically,” Schroeder says.
The second reason is “scale to play.” There is a notion that larger entities achieve greater cost efficiency through scale, says Schroeder.
“While this logically makes sense on paper, in practice it rarely happens, and the efficiency gains rarely happen due to the organization’s inability to take action,” he says. “Combining two inefficient organizations does not create efficiency.”
Rob Fuller, an attorney at healthcare firm Nelson Hardiman, ran a 199-bed hospital as chief operating officer for 12 years and now advises healthcare clients on all aspects of hospital management. He says with the healthcare sector poised for more mergers and acquisitions, hospital activity, including closures, will be prevalent, with acquisitions of skilled nursing facilities, home health and physician groups to remain apace as well.
“Look for more and more regional and subregional full-service entities to emerge,” he says. “Look for more provider entities to skip into the insurance realm as well, given the potential of the insurance company mergers to undercut payments to them.”
According to Fuller, most states have a “mini-Clayton Act” that allows them to enjoin what they perceive to be anticompetitive mergers. Many states also regulate the merger of nonprofit hospitals through their attorney general charitable organizations acts. Practically all of the state-level activity is directed at horizontal mergers, and very little is done about potentially anticompetitive vertical arrangements.
“The FTC at the federal level has recently been very aggressive, actually in one case ignoring an antitrust settlement between merging hospital parties and the state of West Virginia and asserting that the behavioral restriction remedy available in West Virginia was insufficient to protect consumers,” explains Fuller. “Overriding the West Virginia action, the FTC brought its own federal case to stop the merger.”
Krupa expects a continued wave of hospital systems acquiring other hospitals and physician practices to try to respond to the wave of acquisitions at the payer level, as well as to the pressures of value-based reimbursement being placed on hospitals by the government. “Ancillary services, such as nursing homes, subacute care and postacute care facilities and rehabilitation centers, are feeling the same pressure,” he says. “All these players need to operate more inexpensively.”
This consolidation of the healthcare and healthcare insurance industries is not good for consumers, adds Krupa. And to the extent the government is a significant consumer, it’s not good for it either.
“Consolidation limits competition and choice and is not ideal in a segment of the economy that already struggles to be competitive,” he says. “My guess is that we’ll see the federal government try to make a case against larger payer mergers and politicians arguing for action against healthcare consolidation. This may or may not go anywhere, but expect to see noise here given we are in the midst of a presidential election cycle.”
Daniel Casciato is a freelance writer and social media consultant from Pittsburgh, PA. He makes his living writing about health, law, social media and technology. Follow him on Twitter at @danielcasciato.