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3 Predictions for the Future of U.S. Healthcare: Retail Models, Population Health & Service Line Acquisitions

The U.S. healthcare landscape is undergoing a unique, transformative period. Many changes, soon to be or already implemented, are affecting the operations and philosophy of the industry.

One area that has witnessed a lot of development is healthcare mergers and acquisitions. Based on deal value, the percentage of M&A deals rose 11 percent in 2011. Eighty-six hospital and health system transactions took place in 2011, up 12 percent from 2010.

Other changes in technology and policy like meaningful use, telemedicine adoption and other CMS regulations have affected healthcare transactions as well. They have altered how healthcare executives view transactions strategically and practically.  

Here, three experienced healthcare professionals discuss changes they believe will continue to face the healthcare industry, specifically M&A, in the future.

Movement toward a retail-inspired model
The healthcare industry will see an increasingly significant intersection with retail, says Matt Montgomery, senior vice president at Buxton, a market planning and marketing services firm for various industries including healthcare. Using the terms retail and healthcare together before may have been equivalent to nails on a chalkboard for some healthcare professionals. However, there is now more of an approach to ensure healthcare organizations are serving patients — consumers — in a more convenient and efficient manner.

"The reality is that healthcare providers are moving to a consumer-oriented approach for care," says Mr. Montgomery. "The consumer-oriented model — convenient access — is really a retail model in terms of placement of services."

While it is important to account for what is unique to healthcare such as payors and demand, many of the analytics traditionally applicable to retail also pertain to healthcare, says Mr. Montgomery. New approaches to analytics will change how transactions are considered. Locations and organizations may be prioritized because of their applicability to retail models.

"We are seeing a blurred line with developers and brokers. They have a space they are looking to develop, and along with potential retailers or restaurants, we now analyze whether there is an opportunity to program healthcare services for that space. It could be anything from an urgent care clinic to an eldercare concept. The point is that those operations are now considered when they may have not been before," says Mr. Montgomery.

Some proactive, forward-thinking providers have already embraced the retail approach, says Mr. Montgomery. The combination of increasing competition in markets and legislative movement is causing the shift in thinking. Healthcare reform, accountable care organizations and patient-centered medical homes are catalysts as well.

Focus on population health
It is no secret that government-funded healthcare programs face deficits. Employers also face budget pressures that, in turn, impact private health plans. The private sector has come to understand that implementing a certain level of reform is necessary, regardless of whether healthcare reform legislation survives judicial review. As a result, we may enter a "new world" that is less hospital and encounter centric, says Joe Lupica, chairman at Newpoint Healthcare Advisors, a healthcare management consulting firm. Healthcare will be more focused on community and population health.

"Today's healthcare CEO is told to fill beds. I think tomorrow's CEO will be told to empty beds. You’ll have to keep your community healthy and out of the hospital," says Mr. Lupica. "Hospitals will have to team up with other providers and payers to transform the service model – again."

The problem, however, is timing. "The public and private payers don’t reward this kind of enlightened community behavior yet," he said. "We still have a system that pays for the number of procedures and admissions you do." Mr. Lupica predicted that those government and employer budget pressures will start forcing payers to reward value, not just volume. "Eventually we’ll get to a rough equilibrium," he said. "How rough? That’s the big gamble."  

Thus, the drive for cost-efficient, evidence-based and outcome-driven care will change the strategy behind consolidations. "What we now call M&A will become just one tool in the box. Alignment structures will be less about who owns whom. Providers can remain independent but must become more interdependent," he said.

Acquisitions of ancillary service lines
Healthcare reform will also influence what types of organizations are targeted for acquisitions. Currently, common types of consolidations are joint ventures between hospitals and health systems, acquisitions of freestanding hospitals and various types of affiliations and mergers.

While these forms of transactions may continue, Thomas Jeffry, a partner in the healthcare and life sciences practice groups of Arent Fox, a law firm with emphasis on life sciences, real estate and finance, believes that hospitals are going to look to acquire additional ancillary service lines as well, such as post-acute care and home health. Some healthcare organizations are already involved in ancillary service acquisitions. Catalysts such as recent CMS rules for lower readmission rates to receive Medicare and Medicaid reimbursements, will push hospitals to consider alternative transactions, according to Mr. Jeffry.

"We may see hospitals and perhaps other providers looking to acquire ancillary service lines to control the post-care continuum more than before," says Mr. Jeffry. "Hospitals will be more incentivized to look at 'strategic' acquisitions making sure they can 'control their destiny' by ensuring the patient gets proper care even after discharge."

In order to "control their destiny" hospitals could increasingly look to acquire post-acute care, home health and nursing facilities. "The profitability of a service line may not be as big of an issue if a hospital is motivated by CMS regulations," says Mr. Jeffry. "An acquisition may be viewed as worthwhile if the hospital saves $75,000 in fees or receives that much in Medicare and Medicaid reimbursements by lowering readmissions."

More Articles on Healthcare M&A Trends, Predictions:

Hospital M&A Outlook 2012: 5 Key Trends
Healthcare Private Equity: Opportunities, Outlook for 2012
The Impact of Healthcare Reform 
on Hospital Consolidation

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