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60 statistics and thoughts on healthcare, hospital and physician practice M&A

As healthcare M&A activity reached new heights in 2014, it is vital to understand both the underlying causes and the ramifications of the flurry of activity.

More than just financial tools to effect robust growth, mergers and acquisitions may be paving the way towards more collaborative, more efficient healthcare delivery systems. Below are 60 statistics and issues regarding healthcare M&A that capture the sheer magnitude and potential of the industry today.
 
Volume of healthcare M&A
1. The number and dollar value of healthcare sector mergers and acquisitions grew to "record-breaking" proportions in 2014, according to a report from Irving Levin Associates.

2. The volume of transactions increased by 18 percent, from 637 transactions in 2013 to 752 transactions in 2014.

3. The dollar value of the mergers and acquisitions also grew substantially, from $52.7 billion in 2013 to $62 billion in 2014.

4. The healthcare services sector contributed 58 percent of the year's combined 1,307 deals.

5. Despite comprising the majority of the year's deals, the services sector made up only 16 percent of 2014's $387 billion in spending.

6. M&A activity in behavioral healthcare, home health and hospice, hospitals, managed care, physician medical groups, rehabilitation and other services all posted gains over their 2013 totals.
 
7. The behavioral healthcare sector saw more transactions in 2014 than in the previous four years.
 
8. The physician medical group sector saw significant interest from outside companies, with nearly $3.2 billion spent on physician groups in 2014.
 
9. The laboratories and MRI and dialysis sector experienced a slight 8 percent decline in deal volume between 2013 and 2014.
 
10. The hospital sector experienced a deal volume increase of 14 percent in 2014, to 100 transactions; however, the number of hospitals involved in transactions decreased by 40 percent, to 178 in 2014.
 
11. Of the 100 hospital mergers and acquisitions in 2014, 65 of the transactions involved nonprofit hospital buyers while 35 involved for-profit hospital buyers.
2015 activity: Hospitals, managed care and more

12. Overall in the first quarter of 2015, healthcare deal volume was up 19 percent and disclosed value was up 92 percent compared to the first quarter of 2014, according to the "PwC Health Service Deals" report.

13. Hospital M&A activity in the first quarter of this year was slightly down compared to the first quarter of 2014. There were 23 total hospital transactions in the first quarter of 2015, compared to 25 in the first quarter of 2014. But, deal value was up from $608 million in the first quarter of 2014 to $693 million in the first quarter of this year, an increase of almost 14 percent.
 
14. A growing trend shows a shift away from traditional mergers and acquisitions toward affiliations, joint ventures and partnerships, according to the report.
 
15. Managed care had a significant amount of deals in the first quarter of 2015 with a total value announced of $15 million. The true value is much higher as most of the 10 deals announced did not disclose a value.  
 
16. The 10 managed care deals announced for the first quarter of this year is double the amount of transactions in Q1 2014.
 
17. The first quarter of this year matched the prior year period when it comes to post-acute care deals; both quarters had 65 deals. But, the published deal value dropped significantly from $5.7 billion in the Q1 2014 to $1.7 billion.
 
18. Deals were down in the home health and rehabilitation sector with 16 deals, compared to 19 deals in the first quarter of 2014. In spite of the dip in deals, value was more than double, largely driven by Extendicare's $83 million acquisition of several home health branches.
 
19. Physician practice deal activity nearly doubled with 21 deals in the first quarter of this year compared to 13 deals in the first quarter of last year. This quarter of all of the deals announced, 18 were led by physician practice management companies. Hospital and health system practice acquisition appears to be slowing, but practice management companies show no such signs, according to the report. Anesthesia groups accounted for 6 of the deals announced this quarter.
M&A challenges

Although hospital and health systems pursue mergers and acquisitions that are logical on paper, they often face challenges in execution and realizing the benefits of the relationship. Below are thoughts from Mukesh Gangwal and George Whetsell, managing partners with Chicago-based Prism Healthcare, about the challenges of M&A between hospitals and health systems.

20. When organizations merge to form regional systems, they often combine certain services to reduce redundancy and gain economies of scale. "A lot of regional systems with two to five hospitals have been consolidating and combining general administration, finance, general accounting, payroll, information technology, planning, marketing, supply chain and material management and revenue cycle. It's logical and intuitive," says Mr. Whetsell.

21. However, as logical as this reorganization may be, many hospitals struggle to implement it due to the workforce changes involved. Decisions about layoffs are difficult for hospitals and health systems. Mr. Whetsell and Mr. Gangwal attributed this to several factors and pressures, including the hospital's role in the community, local community leaders serving on the board, a service-oriented mission, lack of management depth or experience, and difficulty benchmarking to assess staffing needs.

22. Despite these challenges, Mr. Gangwal said organizations face pressure today to gain scale and grow. "Size matters," he said. "That's the big mantra in healthcare right now. First, a $1 billion organization was big. Then $2.5 billion. Now critical mass is $5 billion or more."

23. Another challenge organizations face as systems expand? The relationships between individual hospitals and a shared corporate office. "Functions like planning, marketing, IT, payroll, so on — they basically pull out of hospitals and centralize in a shared support office," says Mr. Whetsell. "There is often a huge amount of unhappiness with the level of service provided by the shared functions. We've been seeing that for years. The formerly individual hospitals give up resources to the shared office and are not happy with the level of support they receive, nor how much of the cost allocation comes back to them."
 
M&A execution
According to a Deloitte survey, healthcare companies have varying levels of engagement with, and different rationale regarding, M&A.
 
24. The most motivating factors for engaging in M&A area: competitive pressures (48 percent), portfolio diversification (40 percent), health care reform (29 percent), increased scale (27 percent), revenue/reimbursement pressures (27 percent), and patent expirations (20 percent).
 
25. The types of transactions that a company is most likely to be engaged in over the next three years are: collaboration agreements (57 percent), licensing agreements (44 percent), mergers and acquisitions (42 percent), and joint ventures (35 percent).
 
26. Among companies worth $1 billion or more, the extent to which they plan to use M&A for growth over the next three years is: extensively (20 percent), somewhat (65 percent), and not at all (12 percent).
 
27. Among companies worth less than $1 billion, the extent to which they plan to use M&A for growth over the next three years is: extensively (13 percent), somewhat (34 percent), and not at all (42 percent).
 
28. When it comes to the kinds of investments they are making, companies are also sticking to what they know best. The largest portion of respondents (49 percent) indicates that companies with complementary or similar product portfolios are the most attractive M&A targets.
 
29. The greatest challenges to a company's international expansion goals are: knowing the market and target (35 percent), regulation (33 percent), increased competition (30 percent), ability to identify a target (29 percent), cultural differences (19 percent), and intellectual property rights (11 percent).
 
30. The greatest challenges in evaluating or executing M&A deals in the past three years were: competition with other strategic buyers (35 percent), deal execution, negotiation, and valuation (30 percent), realizing expected synergies (26 percent), integrating operations and workforce (23 percent), target identification (20 percent)
 
31. The number of M&A ventures that the average company has completed in the past three years is: fewer than 5 (75 percent), 5 to 9 (16 percent), 10 or more (6 percent).
 
Health system consolidation and population health
Consolidation is playing a key role in preparing health systems for population health. The following are insights offered by Jordan Shields of Juniper Advisory, a leading investment bank focused solely on the hospital and health system sector.
 
32. The Affordable Care Act has played a role in facilitating consolidation. "Healthcare reform has been an impetus in shifting the tide towards a population-based health model, which has the overarching effect of lowering costs and improving the quality of care. Smaller hospitals are having issues enacting this new paradigm alone. Hence their inclination to become part of a larger, and therefore more efficient, network."
 
33. "Changes in Medicare and private insurance have altered the reimbursement environment. We're seeing a move away from the current predominantly service-oriented industry, in which profit is tied to utilization. Now, what's being rewarded is high quality, a low rate of inefficiency, and low costs."
 
34. Utilizing complex technological systems has encouraged smaller health systems to latch onto larger ones. "Tracking patients, seamless transitions from inpatient to outpatient, improving care for chronic illness, among others, are all population health strategies that benefit from a large scale," says Mr. Shields. "These systems, once in place, can leverage across a big platform. It's far easier for an independent hospital to join one of these systems rather than attempt to create its own."
 
35. "The relative inefficiency of a standalone hospital is magnified as the health systems around it continue to grow. Temporary partnerships and loose affiliations can be great. However, these are short-term solutions that will not assuage any systematic incapabilities in the long-run."
 
36. Almost all (90 percent) of healthcare leaders reported plans to pursue a population health strategy in a HealthLeaders Media survey.
 
37. Two-thirds of health systems leaders (66 percent) reported intentions to improve population health by becoming adept at data analytics.
 
38. One-third (32 percent) of respondents expect to focus early or pilot population health efforts on a population defined by a chronic condition.
 
39. The top population health management investments over the next three years include integrating clinical care data across the care continuum (66 percent) and adding data analytics capabilities (53 percent).
 
40. Almost two-thirds (63 percent) of respondents reported pursuing partnerships with other providers to share risk while improving population health.
 
41. The most-reported financial incentive to pursue population health management was payer risk or cost-sharing, identified by 29 percent of respondents.
 
42. Healthcare leaders are confident about their negotiating power with payers: 68 percent said they are well-positioned to be among a payer's population health management partners, including 73 percent of respondents from health systems.
 
Impact of consolidation on healthcare costs
Mergers and acquisition activity has taken on a feverish quality over the past few years. Ostensibly, hospital and health system mergers and physician practice acquisitions are a strategic move towards clinical integration and a hopeful safeguard against the uncertainty in healthcare. According to a commentary from Suzanne Delbanco with the Catalyst for Payment reform (published in The Wall Street Journal) and other experts, M&A activity may have an effect on healthcare prices.

43. Across the country, private insurance payments to hospitals have risen 3 percent due to consolidation, according to a 2012 Catalyst for Payment Reform report.

44. Post-acquisition, hospitals have been known to hike prices significantly. For example, an analysis performed by a Federal Trade Commission economist revealed that San Francisco Bay Area hospitals Summit and Alta Bates increased prices by 28 percent to 44 percent after merging in 1999.

45. Historically, competition has been considered a staple of cost reduction. On the flip side, consolidation reduces the amount of competition and causes prices to soar. Research conducted by the FTC's Martin Gaynor and University of Pennsylvania Professor Robert Town suggests consolidation that occurs in already concentrated markets can lead to price increases in excess of 20 percent, according to the report.

46. The WSJ report suggests that the goal of cost reduction can be achieved without consolidation, but rather with the exploration of different structures of care. For example, independent physician practices can play a role in improving efficiency and reducing waste by participating in accountable care organizations. But, consumers will have to be wary of excessive provider market share, even in the case of ACOs.

Trends and predictions regarding physician practice M&A
Jeff Swearingen, Managing Director at Edgemont Capital Partners, made the following observations about the recent past of M&A and what the future may hold.

47. Hospital-based specialties are in a late state of consolidation. Mergers and acquisitions for hospital-based specialty groups were occurring before healthcare reform. The uncertainty about whether the Patient Protection and Affordable Care Act would be signed in 2009 slowed these acquisitions, but then the market became more active again after the legislation passed. "The ACA passing helped accelerate some of the consolidation and helped fuel equity capital investment, both private equity and strong valuations, in the public market," says Mr. Swearingen. "In addition, the credit markets have been open and supportive."

48. New payment models could push independent groups to align or partner with larger providers. "I think the ACA is on independent groups' minds as it relates to bundled payments, quality measurements, IT management infrastructure and all of the investment necessary to effectively lead an organization and not get beaten up by changes going forward," says Mr. Swearingen. "From the independent hospital-based group perspective, there are challenges ahead in terms of how things are paid for and expertise that will be required. Being part of a large organization may be the solution."

49. There will be increased risk sharing, which makes larger organizations even more attractive. The large organization can capitalize on their size to provide stability in an environment where risk is increasing. "Having seen risk sharing in groups out there, if you make a slight mistake per member per month in capitation, that can wipe out your entire profit for a year," says Mr. Swearingen. "If you aren't capitalized to sustain those fluctuations, you're out there on the risk spectrum. You don't see a lot of small independent insurance companies because a slight miscalculation really puts a small organization at risk."

50. For many organizations, the physician practices are acquired to serve the hospital, but practice operations don't change very much. "It's all about third party payer contracting, revenue cycle, benefits of scale, benefits from provider recruiting and scheduling," says Mr. Swearingen. "Those are main drivers of the attraction consolidators see versus making any clinical operational changes."

51. Office-based specialty consolidation, including primary care, is far earlier in a consolidation cycle. "It's more directly driven by the changes mandated on the ACA with hospitals seeking to establish accountable care organizations and increase the market share in their community, and ensure a referral base," says Mr. Swearingen. "I think we are relatively early in that cycle. We are starting to see more than just the hospital-based specialty consolidation in terms of the more competitive dynamic within the payer and hospital market."

52. Consolidation among corporate entities in healthcare is also becoming more common. AmSurg acquired Sheridan and Surgery Partners acquired Symbion this year. There are payers acquiring physicians and other partners. "You have a broader potential universe with which to partner going forward," says Mr. Swearingen. "Figure out which of the organizations are most interested in your practice — a payer, a hospital, a non-acute site provider, or another physician group could all make logical partners in the market. The local competitive environment around the hospitals and their capitalization is often a large part of your potential success."

53. A market with multiple large health systems or aggressive ACOs is extremely competitive. In some markets, providers are offering their own insurance product. "In some markets there is an aggressive move toward acquiring physician groups whereas in other markets hospitals are more fragmented and you are more likely to see consolidation among the hospitals first before they turn to the physician groups," says Mr. Swearingen.

54. Managed care providers may also look to acquire physician groups. Insurers acquiring providers is very geography-specific. "A lot of the largest managed care providers are performing tests in their markets to see how it plays out," says Mr. Swearingen. "If it works in one market, they will have a dialogue with potential clients in others. We expect activity at the managed care level to increase over the coming months well into 2015 for a large spectrum of providers, from urgent care clinics to office-based specialties.

55. There will still be consolidations in the immediate future. "I've seen cycles before where we go through consolidation and then three or four years later the deals are unwinding," says Mr. Swearingen. The same could happen again this time around.

56. The big difference with employing physicians and large group consolidation today as compared to the past is data management and availability. The large organizations can track physician performance and implement numbers-driven goals. "I think all the constituents in healthcare are better armed with data and IT capabilities than they were previously," says Mr. Swearingen. "That evens the playing field a bit so you won't see one particular constituent being bulldozed by another."

Independent hospital M&A
Source: Dixon Hughes Goodman, "What Hospital Executives Should Be Considering in Hospital Mergers and Acquisitions," 2013

57. Only 13 percent of hospitals intend to maintain their independence from alignment with other hospitals and systems.
 
58. Since 1999, the number of hospitals affiliated with a health system has increased by 16 percent from 2524 to 2941 while the total number of hospitals has increased by less than 1 percent during the same timeframe.
 
59. Twenty-five percent of potential hospital mergers did not materialize into a transaction after a letter of intent had been signed in 2011.
 
60. Thirty-three percent of hospital acquisitions occurred between two nonprofit hospitals between 2001 and 2011. Sixteen percent of hospital acquisitions occurred between two for-profit hospitals between 2001 and 2011. Twenty-nine percent of hospital acquisitions involved a for-profit acquirer and a nonprofit acquiree between 2001 and 2011.The remaining 22 percent of hospital acquisitions involved a nonprofit acquirer and a for-profit acquiree between 2001 and 2011.

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