Sponsored by VMG Health | info@vmghealth.com | 214.369.4888

Healthcare transactions in the era of megamergers and vertical integration: Q&A with Jeff Swearingen

Jeff Swearingen, co-founder and managing director of Edgemont Capital Partners, discusses healthcare merger and acquisition activity for 2018 and what to expect over the next three to five years.


Question: What are the biggest trends in healthcare M&A for 2018? What should hospital and physician executives look out for?

Jeff Swearingen: Both vertical and horizontal M&A transactions — horizontal consolidation within a sector, whether it be hospitals, physician specialties or other historically well-defined sectors of healthcare services. This will be the majority of transaction volume and will continue at a robust pace in 2018. Vertical or "transformative" transactions will also occur with greater frequency in 2018 as the delivery of healthcare is fundamentally changed. The historical lines between insurer and provider will continue to blur. The end of 2017 pointed to the types of vertical transactions that we might see in 2018 with the CVS-Aetna transaction and the acquisition of the Healthcare Partners division of DaVita by the Optum Health division of UnitedHealth.

Hospital and physician executives should be acutely aware of their local market dynamics, not only in their historic sectors, but across all sectors —pharmacy, outpatient centers and physician specialties. How are large, well-capitalized national players implementing their strategy in the executive's local market? Are pharmacies offering walk-in care? Are hospitals offering an insurance product? Hospital and physician executives really should have a well-thought-out SWOT[strengths, weaknesses, opportunities and threats] analysis and understand what they need to achieve in terms of strategy beyond just effective operation of their organization on a status-quo basis.

As general inflation and wages rise, healthcare providers are feeling the strain of their labor-intensive cost structure. Healthcare providers, with opportunities to take on more risk andwork with employers directly, should focus on improving care management and optimizing their use of physician extenders and nonclinical staff to help keep costs down.

Q: What factors in the healthcare industry are driving M&A trends?

JS: M&A in healthcare services is being driven by fundamental reimbursement change unique to healthcare in the United States as well as broader trends that are affecting sectors across the economy, both domestically and internationally. Specific to the U.S. are the reimbursement changes mandated by MACRA/MIPS. Organizations are reacting both defensively and offensively to the changes — either defensively seeking to join with a larger, well-capitalized organization with IT resources to succeed under MACRA, oroffensively looking to enter new service markets or expand market share in existing markets to gain scale and negotiate leverage.

More broadly, the "Amazon effect" is real in healthcare as well, with the CVS-Aetna transaction being the most visible M&A transaction that was at least partially driven by CVS' belief that the utilization of their vast retail footprint needed to change as a result of Amazon.

M&A is an increasingly common method for healthcare providers to combat shrinking margins and rising costs. Hospitals and health systems are engaging in M&A and other strategic alternatives to achieve economies of scale. Payer and provider organizations are focused more now than [in the] recent past on increasing their physician networks, expanding their geographic reach and diversifying their offerings.

Q: As consolidation occurs in healthcare, what do CIOs and organization leaders need to consider for integrating technology? What are the operational challenges and associated costs?

JS: Technology investments should be tailored to ensuring access to healthcare while minimizing waste, better engaging patients, improving care management and delivering services in a more cost-effective manner. Providers should invest in technologies that improve staff productivity as a means of offsetting the impact of inflation and rising wages in what will always be a labor-intensive industry. Technologies should be employed that will allow physicians to more accurately diagnose and treat illnesses, thereby reducing costs and improving outcomes.

The issue is that technological advances already strain the limited financial resources of many health systems. In many cases, the costs are prohibitive for health systems to handle independently, further supporting the case for consolidation.

Critically, technology should not disrupt the clinical workflow. Investments in IT are characterized as ensuring productivity and creating better outcomes; however, the integration process can become a nightmare. If the clinicians are hindered by the "clunkiness" and resist implementation, this can work counter to the mission, undermining efficiency and wasting dollars.

Q: Do you expect these trends to continue over the next five years? How should organizations prepare?

JS: Barring some major reversal in the U.S. government's healthcare policy, we are in the very early stages of massive consolidation and change.

Organizations should prepare by having a well-defined understanding of where they are strategically positioned in their market — healthcare will continue to be a local business for the immediate future, although we expect local market dynamics to give way to national trends over time. This strategic positioning is not likely to remain static, however. Recognizing this, every organization will need to constantly reassess the market and regulatory environment, and change its strategy accordingly.



Copyright © 2022 Becker's Healthcare. All Rights Reserved. Privacy Policy. Cookie Policy. Linking and Reprinting Policy.


Featured Whitepapers

Featured Webinars