Hospital M&A today: What we’re seeing, where we’re going

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Hospital merger and acquisition activity has been very active over the last several years with very few health systems and community hospitals that are not seeking to evaluate or have not previously sought opportunities for affiliation. Now, more than in the past, larger multi-hospital systems are combining or considering combinations and several of those cross state lines into other markets. Dignity/CHI is a perfect example. Bon Secours and Mercy Health is another example. Advocate Health in Chicago Aurora in Wisconsin is yet another example.

In addition, we have seen several strategic affiliations driven by the need to achieve scale and financial strength. Many consultants in the healthcare industry have convinced their hospital clients that they must be in a system with $5 billion in revenue from operations in order to survive in the long-term. Some have walked this back a little, but the benefits of having scale and a strong and large base of revenue in the era of changing provider reimbursement drives many M&A transactions in the industry today.

There are a number of recent transactions driven by the need to survive in the long-term and continue to deliver service to the community. We have seen for-profit and private equity backed buyers pursue financially troubled not-for-profit hospitals in asset acquisitions which result in a for-profit conversion of the system. Some healthy hospital systems with strong balance sheets and dominant market share have decided on sales, joint ventures or mergers with for-profit buyers in order to preserve the system’s mission to serve the community over the long-term. In an age of declining reimbursement, questions about the government’s role in healthcare for the uninsured and the long-term survival of state and federal reimbursement programs, significant regulatory oversight, the difficulty in recruiting specialists to smaller markets and the costs associated with electronic medical records, M&A activity has provided some with a solution and means of survival.

While some experts today are beginning to caution against the mindless expansion and growth through combination for the sake of being a bigger market force (at the expense of a well-thought out strategy and plan for creating value in the market), the tide of affiliations and combinations among hospitals and health systems will continue to flow in some form in 2019.

Impact M&A has on the supply chain

Assuming a transaction proceeds to closing and the merger or sale is consummated, the savings and efficiencies in the supply chain become one of several key areas that draw significant attention as part of the integration strategy.

Consolidation has the potential to make the supply chain better and more efficient.  Combinations tend to present opportunities to revisit staffing, standardization, system-wide policies on sourcing, purchasing and distribution. Certainly, group purchasing and direct contracting strategies are evaluated post-combination. The growth in the number of large systems will enhance the likelihood of more disciplined purchasing behavior, reductions in duplicate staffing, enhancement of data quality and data analytic capabilities and ultimately the need and desire to pursue greater accountability in the supply chain including aggressive focus on variations in spending, utilization, and contracting behavior. Consolidation breeds new developments and the prospect of revisiting old ways of approaching sourcing, contracting, distribution and vendor relations. With savings and efficiencies will come more professional supply chain management teams that will look to lessons in other industries outside of the hospital industry. We typically see the development of unique solutions home-grown through systems focused on achieving particular efficiencies and would expect the by-product of certain combinations to be new technology or approaches that can be perfected and even commercialized.

Where is this heading now and the next few years?

We are headed toward change. We see a future that brings more supply chain accountability on standardization, utilization, control over wasteful variance and broader dependence on data and more cooperation among clinicians. Different and more collaborative relationships will be required with the medical staff. We expect that certain accountability under value-based purchasing arrangements and bundled procedures will drive further efficiencies garnered from the use of data about patient outcomes and total costs. We expect that sourcing, ordering, contracting, and inventory management will be impacted by consolidation and may breed patient-specific and consumer-driven offerings sourced through or in collaboration with the supply chain. Patient outcomes data will be used to educate supply chain experts and suppliers on a host of operational improvements that benefit the patient and offer a competitive edge.

Editor’s note: In part two of this series, Neil Olderman will share some solutions for how the healthcare supply chain can prepare to face the changes that lie ahead.

 

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