Healthcare mergers take on new shapes

The sea change washing over healthcare is having a profound influence on the way mergers and acquisitions are inspired and configured, industry analysts say.

Between meaningful use, accountable care organizations, Medicare policy revisions and the shift to ICD-10, it appears provider organizations are seeking safety in numbers. Yet conglomerations are taking new shapes, moving beyond the conventional M&A arrangements of the past, says Jim Agnew, managing director for Chicago-based consulting group, Huron Healthcare.

[See also: Healthcare M&A predicted to be robust in 2013 as ACA uncertainty lifts]

“They are looking a little different,” he said. “The operational dynamics are different. Hospitals are interested in acquiring more pieces to prepare for the future, and it may not necessarily be full integrations, but affiliations. There is a greater sense of caution out there and that sets this M&A climate apart.”

To gauge the impetus for the M&A activity going on today, Agnew says it is important to look at recent history. The first wave of major consolidation took place in the 1980s and ‘90s, when investors were out to acquire community provider organizations to gain economies of scale and market presence, but also to create operating and holding companies to consolidate support services, he said.

There are “subtle differences” in the second wave occurring now, which are driven by the desire by larger organizations to define their market footprint in order to serve large populations, obtain greater access to capital, drive operational and financial performance to reduce costs per episode of care and bring in new service lines under one umbrella.

“There is nuance between the waves, but an incredible appetite exists to move toward consolidation,” Agnew said. And to feed that appetite is an increasing variety of models – creative hybrids to fit many needs.

On the hospital front, for example, the ACO initiative is causing hospitals, physician clinics, outpatient centers and post-acute care providers to test the waters with joint-operating agreements. These agreements may lead to deeper relationships in the future, Agnew said. “One of the most interesting observations is that organizations are not entering into mergers just to have one,” he said. “At the end of the day, most of these transactions are about aligning expectations.”

‘Genomic’ approach

Due diligence has reached a new level of detail with the advent of “genomic” research being pioneered by Wolters Kluwer Health, a division of global information services and publishing company Wolters Kluwer. The approach consists of studying the hereditary information of a potential acquisition, said Andre L’Heureux, the division’s vice president of strategy and business development-clinical solutions.

Wolters Kluwer Health has acquired three companies in recent years, using the genomic formula for these acquisitions. The process starts with analyzing the company’s challenges, needs and demands and then determining where gaps exist in its offerings, L’Heureux said, adding that a “strategic path” is followed to fill those gaps, whether through acquisition or internal growth.
 

“Every potential investment is reviewed in terms of how it will affect the entirety of the company’s technologies and services and their ability to resolve customer needs,” he said.

The genomic approach came about six years ago when Wolters Kluwer searched for answers about how to define itself in the marketplace now and in the future, L’Heureux said.

“We know we are a clinical decision support company and we wanted to define where we wanted to be and where we didn’t want to be,” he said. “We have been able to do that by identifying the gaps in the corporate genetic sequence.”

In January, Wolters Kluwer acquired Health Language from George Schwend. By examining the strands of corporate DNA, “we knew that they would be the right fit,” L’Heureux said. Wolters Kluwer also used the genomic process to acquire Pharmacy OneSource and UpToDate.

“All the companies we have acquired were run by passionate, entrepreneurial people,” he said. “We have spent a lot of time preserving the culture they started. We never want to lose that entrepreneurial view or customer focus.”

The REIT stuff

In the long-term care and senior housing sectors, real estate investment trusts have made a forceful M&A impact – especially in 2011 when they put together some multibillion dollar deals. Although they have been quieter the past two years by comparison, the REITs are still a potent catalyst for consolidation, said Doug Korey, managing director for Shrewsbury, N.J.-based Contemporary Healthcare Capital.

“For REITs it falls into two categories – portfolios and new,” he said. “Much of the past couple of years has been about REITs accumulating portfolios of stabilized facilities. Mainly these were the larger REITs that had considerable inexpensive capital. Smaller REITs however, have been aggressively buying newer buildings, and in particular, providing construction financing.”

Acquisition or refinancing capital is available for both assisted living/memory care and skilled nursing facilities, but, Korey said, REITs favor new construction for assisted living and memory care over new nursing facilities. As ACOs gradually re-engineer the healthcare business model from acute care-based to a post-acute environment, there is “considerable discussion regarding a large consolidation play by REITs and private equity firms in the senior housing sector, principally due to the need to create consistency of quality and technology in order for this shift to be effective,” he said.

Even so, Korey expects small and medium-sized operators to resist takeovers by larger organizations, preferring to focus on improving their care models themselves.

“They need to endure this latest cycle of change by investing in their physical plants, technology and personnel,” he said.