Mergers in 2020 expected to be more strategic than financial in nature

In 2020, the hospital-to-hospital merger or partnership is about complementary resources - one has a health plan, the other has a value-based focus - put together for the benefit of both organizations, according to Anu Singh, managing director of Kaufman Hall.

Mergers are a way for providers to get the expertise they don't currently have. The wide range of participation includes small community hospitals looking to get more complex, wide-ranging services.

"It's this knowledge component that's needed to transform healthcare, in a less risky way," Singh said. "There's an unprecedented trend of activity, regardless of the numbers. Everyone is thinking of how to think strategically in the healthcare paradigm."

This is creating some formerly unusual partnerships, such as the drive for collaboration between providers and payers.

Kaufman Hall is involved in some of those discussions now, Anu said, adding details will be forthcoming.

"We're seeing more and more activity and discussion," he said. "It's not the traditional demonstration project or narrow network. These are more holistic approaches."

Kaufman Hall this month released its results in the report, "2019 M&A in Review: In Pursuit of the New Bases of Competition."

WHY PARTNERSHIPS MATTER

As health systems face increasing competition from national companies with revenues that dwarf even the largest health systems, seeking partners with high-quality revenue streams helps build competitive strength, the report said.

A trend toward partnerships between financially strong health systems
continues. Three announced transactions in 2019 were "mega merger" transactions in which the smaller partner had more than $1 billion in annual revenue. In an additional 11 transactions, the smaller partner had annual revenue between $500 million and $1 billion.

The continued growth in mega mergers is driven by the strategic focus, revenue and market factors.

Institutions with a minus credit rating, such as those at risk of default for nonpayment of bonds, are merging into a partnership with an organization that has a high credit rating. In five transactions reported by KaufmanHall, the smaller partner had an "A" credit rating or higher. But the number of financially distressed sellers remained low at 20%, the same as in 2018.

Hospital systems are growing and expanding based on the base of the population, rather than geography. They're asking, not where do we go, but where can we be successful in a new environment, Singh said. For instance, a hospital may be looking to fill a gap in behavioral healthcare.

Four transactions in 2019 involved cross-state transactions, the report said.

RETAIL AND TELEHEALTH

One of the biggest mergers has been that of CVS Health and Aetna. CVS Health launched the first of its HealthHubs early in 2019 and by June announced plans to expand these retail medical hubs to 1,500 locations.

Walmart opened the first of its Walmart Health locations in Atlanta.

Most people want the convenience of retail services, the report found. Thirty-six percent of parents would choose a primary care physician for care for their child's minor illness or injury, but 72% said they would opt for another option if they had to wait more than a day for an appointment.

Interestingly, only a small percentage had tried a video appointment, but 80% of those who had done so said they would do it again.

In September, Amazon launched an Amazon care pilot for its employees, combining virtual visits with in-home nurse follow up to reduce the use of the ER and urgent care.

THE LARGER TREND

The number of mega mergers in 2019 was below the record high recorded in 2017.

Despite 2018 seeing a lower volume of mergers and acquisitions, the bigger picture is that M&A is double what it was a decade to 12 years ago, according to Singh.

Total announced deals for 2019 remained consistent with the prior year
at 92 transactions announced in 2019, compared with 90 in 2018.

A study released this month by Harvard Medical School showed the recent wave of consolidations in hospitals has not improved the quality of care among these hospitals. Quality of care has either gotten worse or stayed the same, according to the study published in the New England Journal of Medicine.

Twitter: @SusanJMorse
Email the writer: susan.morse@himssmedia.com