Healthcare mergers and acquisitions: What payers, providers will do in 2017

U.S. federal courts’ decisions to block the proposed Aetna-Humana and Anthem-Cigna mergers are raising questions about the future viability of healthcare consolidation among payers and providers. Add to that the resulting news that Cigna is suing Anthem for a combined $14.85 billion dollars, which includes damages and its contractual “break up” fee, and it’s clear that mergers are a complex issue with multiple risk factors for the parties involved.

Matt Fisher, an attorney with Boston area-based law firm Mirick O’Connell, isn’t surprised by the rulings against the mergers, largely because of the level of skepticism that was swirling about the proposed transactions. “The combinations of such large insurers would create a much different market dynamic that would have far-reaching effects. The courts definitely had a lot of questions as to how the mergers would benefit the market and not result in the ability to control it,” he says.

Absent answers to these questions, these mergers were unlikely, he says. Still, while the payers are considering their legal options-Anthem was appealing at press time-Fisher doesn’t anticipate that any resulting appeals will be successful. The primary reason for the payers to pursue their legal options at this point is because “a lot of time and money has been spent,” he says.

At the same time, Fisher doesn’t anticipate that the rulings will have an impact on other payer or provider mergers. He calls out these particular mergers as “somewhat unique in their size,” while noting that the Obama administration wasn’t supportive of such mergers. As with so many hot button issues in healthcare today, it’s impossible to know the Trump administration’s intentions in terms of antitrust enforcement-and, thus, it’s difficult to know whether future deals will be challenged, says Fisher.

Tom Schramski, president and managing partner of Vertess, a healthcare mergers and acquisitions firm, says that “horizontal mergers” such as these will continue to attract scrutiny about market share and the potential negative impact on consumers. “I think this attitude will continue through the Trump administration and, if you look at the rulings, the judges involved were relatively equally nominated by Democrats and Republicans,” he says.

The impact on future mergers in the healthcare space? According to Schramski, many payers may reconsider their growth and diversification strategy.

Where Schramski sees the most merger and acquisition opportunity is in vertical combinations such as Optum’s acquisition of Surgical Care Associates, which operates 205 surgical facilities in more than 30 states. Schramski describes this move as an attempt to more fully manage the care continuum “with an eye on the emerging preference for outpatient healthcare,” which is also more cost-effective for Optum (an entity of UnitedHealthcare Group).

In a statement, Larry C. Renfro, vice chairman of UnitedHealth Group and Optum’s CEO, highlighted that the deal would enable the company to work with “payer partners to implement care models that reward independent surgeons and specialists for quality and care efficiency.”

Announced in January, the deal is expected to close in the first half of 2017; the transaction will be revenue-neutral for UnitedHealth Group, according to the announcement.

Next: A flurry of activity

A flurry of merger activity

While 2016 was an “active year” for mergers and acquisitions in healthcare, it didn’t achieve the volume witnessed in 2015, according to a report from PriceWaterhouseCoopers. The consulting firm shows that the total reported deal value was $71.7 billion in 2016, a decrease of 59.6% from 2015.

Rii

One city that has seen a dramatic uptick in this type of activity over the last several years is Chicago, where Ethan Rii, an attorney and shareholder with the law firm Vedder Price, practices. Historically, Chicago had been a diversified market with about two dozen academic medical centers and safety-net hospitals. But that has changed over the last decade.

One such example is the University of Chicago Medical Center’s acquisition of Ingalls Health System, a community health system in Harvey, Illinois, in late 2016. Another combination occurred between Northwestern Memorial Hospital, an academic medical center in Chicago, with its affiliation with Lake Forest Hospital, a community-based hospital, in 2010.

Rii notes that this type of activity has been going on nationally for years as well. He cites examples such as John Hopkins’ 2010 acquisition of Sibley Memorial Hospital in Washington, D.C., and Partners HealthCare’s founding as a result of the combination of Brigham and Women’s Hospital and Massachusetts General Hospital in Boston in 1994.

Rii expects a slowdown in this type of activity, as regulators consider whether further consolidation will result in better quality of care or a reduction in costs.

Next: The Trump effect

The Trump effect

With a new president in the White House-in particular, one who has set repealing the Affordable Care Act as a priority, it’s difficult to know what the future will bring. Some experts say this uncertainty could result in a slowdown in merger and acquisition activity, whereas others insist that savvy investors are always looking to apply smart business know-how to fix some of the nation’s most intractable problems, even in a heavily regulated industry such as healthcare, says Rii.

Rii anticipates that health systems and regional providers will continue to grow and expand their footprints. While he projects that the market might take a “slight dip”-largely due to the uncertainty associated with the Trump administration and the impact of repealing the ACA could have on enrollees-he still sees the merger and acquisition market as a “ripe” one.

And there’s a difference between payers and providers in this regard. There’s more “near-term uncertainty” among providers than among payers regarding how Trump’s presidency will impact them, says Zach Hafner, a partner at The Advisory Board. That’s why he expects more providers to take a “wait and see” approach in terms of their merger and acquisition activity.

Taking a historical perspective, he characterizes the big shift in value-based care, financial risk, and population health management during the Obama administration, which he describes as “an encroachment into payer territory” to one where there may be a shift in power back toward the insurance industry during a Trump administration.

Partnership as an attractive alternative

One area that has captured a lot of buzz is partnerships between well-established healthcare providers, such as between Advocate Health Care in Chicago and SSM Health in St. Louis, Missouri, both of which are partnering separately with Walgreens. These partnerships involve the provider organizations running the retail clinics, which Hafner says will also allow them to attract new patients to their primary care physicians.

What’s driving these strategic moves by providers is the increasing role of patients as consumers, says Hafner. “As we continue to move into an era of consumers who are looking for much more of an engaged and activated consumer experience, health systems and payers are in a race to win.”

That’s why health systems, in particular, are focused on whether they have the right footprint that allows patients to access their providers. He says that the options providers will continue to consider include partnering with retail health providers, virtual access to care, walk-in clinics and urgent care, and same-day visits with specialists. “That’s how [providers] win with consumers – by thinking of access first.”

Issues top of mind for payers as they map out their strategy for the year ahead include, firstly, the need to demonstrate their value to their customers, since there’s some risk of being commoditized. “This has always been a problem for payers,” says Hafner. He anticipates that payers will continue to focus energies on price transparency initiatives, enabling convenient access to care, and communicating with patients about their financial obligations.

Since patients increasingly have higher deductible plans-some as high as $5,000 for the year-that’s going to influence how products are priced and the decisions that consumers make when choosing their health plan, he says. This reality will force payers to look at strategic partnerships in an effort to respond to the evolving demands of consumers.

Next: Shared-service approach

The shared-services approach

In addition to full-on mergers, health systems and hospitals are pursuing joint operating arrangements where they’re able to share operating expenses. While these arrangements don’t require the healthcare entities to affiliate completely, they have the benefit of sharing costs, revenues, and capital risk, says Rii.

One such arrangement is between Centura Health in Denver and Catholic Health Initiatives in Englewood, Colorado. Centura Health is one of a handful of “joint operating companies” around the country. In these types of arrangements, says Rii, two independent health systems come together to retain their separate identities and governance boards, and a measure of autonomy. The two organizations also shift significant management and financial authority to a separate joint operating company. The agreement between the two organizations outlines the intended legal relationship between the parties while addressing various governance, management, and financial issues, in addition to ways to terminate the agreement.

Specifically, Centura Health was created in 1996 when PorterCare Adventist Health System and Catholic Health Initiatives chose to collaborate on the delivery of hospital services, says Rii, who notes that Centura Health is one of Colorado’s largest hospital networks, with 15 hospitals and revenues exceeding $2.5 billion each year.

Catholic Health Initiatives is currently in talks with Dignity Health, which won’t materially adversely affect the Centura Health structure, he says. “It’s been one of the most successful [joint operating companies] and, given the national scope of [Catholic Health Initiatives], [Catholic Health Initiatives] will continue to function in its role as the one of the parent organizations of Centura Health.”

Fisher is also witnessing smaller physician groups join with larger practices as they grow concerned about achieving the regulatory requirements that come with running an independent physician practice. Smaller practices are looking to pass off much of the administrative burden of reporting on quality and other measureables to a different entity, he says.

While partnerships, affiliations, and acquisitions are driven by similar motivations-largely, the desire to centralize administrative burdens and responsibilities-a partnership or affiliation is looser than an acquisition, says Fisher. “The partnership is akin to an initial step and typically based on a contractual relationship of set up as a joint venture. This means that the parties in the arrangement can also back out more easily if it’s not going as expected. In an acquisition, one entity sells all of its assets or equity to another entity. The selling entity is therefore fully tied to the buying entity and could be subject to penalty to leave or [it] would need to reacquire its assets. From this perspective, an acquisition is ‘going all in.’”

For example, this could translate to developing a coordinating vehicle where independent practices could work together to focus on improving the quality of patient care. Practices that decide to combine in this way will have the added benefit of collective action when it comes to negotiating with payers, he says.

Practices that want to pursue this route would typically create a managed services model or independent physician association, which would employ administrative staff and provide a variety of services, such as billing, compliance, contract negotiation, and human resources, says Fisher. Independent practices that are interested in these services would either contract with the managed care organization or become a participating member in a more formalized arrangement, he adds.

Aine Cryts is a writer based in Boston.