As we continue to move beyond the initial crippling months of the COVID-19 crisis, partnership, merger, and acquisition (PM&A) activity is playing a critical role in addressing the pressing strategic, operational, and financial realities for healthcare organizations across the country. Healthcare organizations are evaluating their PM&A strategy with renewed interest and perspective, including evaluating new and existing partnership opportunities and risks in the changed operating environment.
Trends that were evolving prior to the initial wave of the pandemic have progressed rapidly. The divide between the “haves” and “have-nots” has widened; some organizations find themselves struggling to regain their pre-COVID financial footing; others see opportunities to acquire assets more inexpensively and move market share easier than before. Many health systems have had to immediately address their financial stability, and in some cases, find a partner to survive. Other health systems are in a strong strategic and financial position, seeking new PM&A opportunities to continue to strengthen their market position and networks.
"A difficult lesson from the pandemic is that health systems need to be better prepared for unexpected crises — whether they be public health or otherwise in nature."
Hospitals and health systems across this continuum seek to build the capabilities necessary to meet the healthcare delivery and health improvement needs of the populations they serve, including the need to promote population health and health equity. A difficult lesson from the pandemic is that health systems need to be better prepared for unexpected crises — whether they be public health or otherwise in nature. For example, hospital-at-home delivery platforms and high-performing, multimodal access centers have become core competencies for all health systems going forward.
Three realities should inform healthcare organizations’ perspectives as they refine their PM&A strategies for the future.
For healthcare organizations seeking to strengthen their market position, capabilities, and community impact via strategic partnerships, the range of options to consider has expanded beyond the traditional transactions among hospitals and health systems.
New objectives: While the objectives for PM&A will continue to include market expansion, clinical service line growth, access to capital, and the addition of new payor networks, healthcare organizations also are increasingly utilizing partnerships to develop new capabilities and patient access channels. We are seeing clients expand the development of differentiated capabilities in digital health, population health, and cross-continuum care management investments through partnerships. We also are seeing a renewed interest in health system partnerships with organizations that provide remote care delivery models (e.g., virtual health, hospital-at-home, and remote monitoring) and insurance products that integrate care delivery and financing for attributed populations.
“The exponential growth of the data-driven, digital environment is bringing together personal tech, consumer goods, retail, and other industries once considered completely distinct from healthcare.”
New entrants: A wide array of healthcare “disruptors” have entered the competitive environment, particularly in the personal health and ambulatory care segments. Many of these disruptors did not exist a few years ago; they are gaining share rapidly leveraging technology-enabled, direct-to-consumer healthcare applications and delivery models. The exponential growth of the data-driven, digital environment is bringing together personal tech, consumer goods, retail, and other industries once considered completely distinct from healthcare.
New funding: A surge of private equity and venture capital investing in healthcare is fueling the growth of these new market entrants. Private equity investment in health services has tripled over the past decade, reaching $74 billion in 2019. Between 2019 and 2020, venture capital investment in digital health companies nearly doubled — roughly from $7 billion to $14 billion, largely propelled by the proliferation of telehealth and other digital start-ups before and during the pandemic. In this rapidly evolving environment, there are exponentially more opportunities for health systems to create novel partnerships. At the same time, business and financial risks abound for health systems that do not develop new capabilities and for those that choose the wrong partners.
New emphasis on accessing the full continuum of options: In this challenging environment, it has become more important to evaluate a full range of strategic PM&A opportunities. Health systems are leveraging well-structured partnerships to compete effectively with new disruptors in their niche markets. Many are fortifying their networks through a variety of partnerships that enhance their ability to compete beyond the traditional hospital setting. Collaborative models can involve limited integration via specific contractual arrangements or more extensive, permanent partnerships under a merger or acquisition.
An increasingly important option to consider is a glide-path partnership arrangement, in which the two organizations explore working together in a limited number of areas with the intent to move to a more integrated partnership option as they achieve success and gain comfort working together.
Creative partnerships can bring financial sustainability and competitive advantage; they also can help the sponsor organizations deliver on their missions to meet the evolving health needs of their communities. Healthcare organizations whose partnership strategy focuses purely on hospitals and health systems are likely to miss important opportunities to build the type of integrated system of care required for success in the future operating environment.
Factors such as heightened regulatory scrutiny, the impact of the pandemic, and rapidly shifting consumer demands toward higher-value healthcare services (those that are affordable, immediately accessible, and provide a superior patient experience and stronger health outcomes) are also shaping the landscape for healthcare partnerships and M&A. The focus has shifted from just building scale and extending geographic reach to building differentiated capabilities to achieve better outcomes.
Clearly defined value: Where organizations might have stated that they could improve quality through a new strategic partnership, they now seek to define what quality means and map out how they will achieve improvement through the proposed partnership. The forms of value sought can be quite diverse, including internal cost avoidance or savings that are passed on to consumers or purchasers via lower prices and/or reinvestment in communities. They might also include improved access and programmatic expansion that facilitates broader geographic reach to a full continuum of care, enabling stronger health outcomes and health equity advancement.
Regardless of the objectives, various stakeholders (including community and regulatory organizations) are monitoring the results achieved and holding partners accountable to deliver the improvements they tout as part of the upfront case for partnership.
“Stakeholders are monitoring the results achieved and holding partners accountable to deliver the improvements they tout as part of the upfront case for partnership.”
Detailed planning: Regardless of which sources of value are targeted, one key is to clearly define the desired benefits, fully quantify and validate the potential, build out a detailed plan for realizing that value, and execute against that plan following the closing of the transaction. As always, measuring the results is crucial — and often required by various oversight bodies.
With today’s pressing economic realities, no health enterprise can afford to leave untapped value on the table. Synergistic benefits (those that were not possible without the combination) need to be analyzed and quantified, diligently planned for, and rigorously pursued in order to achieve the benefits, savings, and growth potential of the expanded enterprise.
“Many organizations have combined their organizations under a new parent but never really integrated their operations in a way that delivers lasting value.”
Tapping the full value potential: Frequently, organizations celebrate when a deal closes but don’t keep plowing ahead with the same energy and focus when they get beyond deal execution. It is critical to commit resources, time, and energy to unlocking the value envisioned when creating the deal. Many organizations have combined their organizations under a new parent but never really integrated their operations in a way that delivers lasting value. This limited kind of “parent aggregation” option is no longer sufficient; organizations must pursue every scintilla of value. The actual results achieved are what truly defines a partnership's success.
A greater focus on the final stage: Mapping out a tailored approach from partnership formation through operational integration helps ensure success. For example, we recently supported two organizations in the development of a partnership plan under which the parties would focus during Year 1 on formulating a number of contractual agreements for specialists to be shared across their two networks. In Year 2, these organizations would create a broader joint venture encompassing several hospitals and the full physician groups. In Year 3, they would pursue full consolidation of the health system and physician groups. This strategy enabled the organizations to take an incremental approach to integration and build momentum over time. Regardless of how the specific integration plan is organized, form should follow function. Each health system should determine the optimal integration approach for their organization.
Revisiting integration: Even organizations that partnered years ago are reevaluating their operating and care delivery models to drive greater benefit in today’s increasingly competitive environment. A prominent example is Mass General Brigham (formerly Partners HealthCare, formed in 1994), which is pressing for greater integration consistent with current industry and market performance standards.
PM&A strategies are playing a vital role as healthcare organizations move forward in the changed operating environment. Organizations can no longer afford to approach transaction planning with the same lens they may have applied in the past. Healthcare leaders will do well to closely evaluate their go-forward approach to PM&A in light of the changing needs of their organizations and the communities they serve.
Healthcare organizations should consider for their go-forward strategies:
Evaluate partners and structures beyond historical transactions of hospitals and health systems.
A more defined approach for
Plan up front and execute against building differentiated capabilities that will achieve better outcomes.
Ensure you are achieving full value and true integration with each partnership — whether past or present.
1. PitchBook, U.S. PE Breakdown Q2 2021, July 9, 2021
2. Kerry Amato, Healthcare Investing Trends Report, Healthcare Information and Management Systems Society, Inc. (HIMSS), Feb. 18, 2021, https://www.himss.org/resources/healthcare-investing-trends-report
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