M & A deals reach record high under reform

January 21, 2015

From Blue Shield of California's recently-announced purchase of a Medicaid plan to Partners HealthCare's hard-fought effort to fold more hospitals into its Massachusetts health system, the volume of mergers and acquisitions in the healthcare sector has steadily climbed and now exceeds M & A activities in all other U.S. industries. The surge is being fueled by payers and providers seeking new business opportunities in the post-ACA healthcare market, and 2015 is on track to be another record-breaking year.

From Blue Shield of California’s recently-announced purchase of a Medicaid plan to Partners HealthCare’s hard-fought effort to fold more hospitals into its Massachusetts health system, the volume of mergers and acquisitions in the health- care sector has steadily climbed and now exceeds M&A activities in all other U.S. industries.

Growth is being driven by payers and providers seeking new business opportunities, says Steven Valentine, MPA, president of The Camden Group, a national healthcare consulting company. “Plans, medical groups, hospitals-everybody’s shooting for leverage,” he says.

As a result, 2015 promises to be a year of “partnering to win,” asserts PricewaterhouseCoopers (PwC).

“Joint ventures, open collaboration platforms and non-traditional partner- ships will push healthcare companies out of the comfort zone in 2015 toward new competitive strategies,” the firm’s Health Research Institute predicts.

Estimates vary on the volume of 2014 healthcare consolidation activity depending on how it is tracked, but there is con- sensus that spending on healthcare M&A is robust and rising:

  • Dealogic, which analyzes investment banking trends, reported 898 transactions totaling $308 billion in the U.S. healthcare sector through December 16, accounting for nearly one in five M&A deals. Of 11 subsectors tracked, the firm cited 166 deals among hospitals and clinics worth nearly $4.2 billion.

  • Irving Levin Associates, Inc., a market analysis firm in Norwalk, Connecticut, reported 1,208 deals across 13 healthcare sectors in 2014 through December 19, up 17% from 2013. Acquirers committed more than $386 billion for the term, a 136% increase over 2013’s total of $163 billion. The firm cited 21 managed care M&A transactions in 2014, up 40% from 15 such deals in the previous year.

Against this backdrop, various industry experts echo PwC’s forecast.

“It’s hard to say by how much, but (2015) should be a busy year,” says Jordan Shields, MBA, a vice president at Juniper Advisory LLC, an investment banking firm that specializes in M&A activity for the nonprofit hospital industry. Shields anticipates that the volume of such deals will be up in 2015 compared to 2014. He also expects to see non- transaction hospital activity, including cost-sharing affiliations and management agreements, carry over from 2014 levels. As an example, Shields cites three major health systems in North Carolina-Vidant Health in Greenville, Wake Forest Baptist Medical Center in Winston-Salem and WakeMed Health & Hospitals in Raleigh- that formed a shared services operating company in September, 2014. While not a merger or acquisition, the deal combines back-office operations and some quality initiatives.

“They’re not sharing governance or ownership, but they’re trying to achieve more scale,” Shields says. “We’re seeing more of (this activity), and I think it will continue.”

Such deals provide a short-to-medium-term, less than 10-year fix, he adds. “It can be hard for strong organizations to give up governance, to give up control, so these affiliations fill a need... But they only get you part of the way there. They’re reliant on your partner continuing to feel the same way. They’re not stable over the long term.”

NEXT: Payers focus on Medicaid

 

Payers Focus on Medicaid

Medicaid expansion is opening up opportunities under the Affordable Care Act (ACA), at a time when commercial HMO enrollment is declining. As a result, with payers, “What we’ve seen recently is an example of Medicaid plans being acquired by large health plans, and this will continue to occur and probably accelerate,” says Valentine of The Camden Group.

Valentine says that Blues and other payers are also pursuing people dually eligible for Medicare and Medicaid, as more states consider joining California and Ohio in shifting eligible Medicaid recipients into managed care programs.

In December 2014, Blue Shield of California announced an agreement to acquire Care1st Health Plan, a provider-founded managed care company in Los Angeles County. As of November 30, Care1st had 473,000 Medicaid members, 46,000 Medicare members and 5,300 dual- eligible members.

“Acquiring Care1st gives Blue Shield entry into the Medicaid program, thus furthering its mission of providing access to quality care at an affordable price,” Blue Shield spokesman Sean Barry says. “This acquisition grows our Medicare membership (which currently includes Medicare Advantage, Medicare supplemental and Medicare prescription drug plans), and allows us to invest in capabilities to serve the growing dual-eligible membership group of Medicare and Medicaid.”

The deal is subject to approval by regula- tors and L.A. Care Health Plan, which contracts with Care1st for Medi-Cal, the state’s version of Medicaid.

Valentine explains that payers generally buy Medicaid plans to gain the critical mass needed to survive, but a Medicaid acquisition also en- hances the network and enables the buyer to access people in bronze or silver plans in health insurance exchanges who may churn in and out of Medicaid coverage. “These are good opportunities. That’s why there is this growth and expansion. Medicaid gets to duals and enhances the delivery network, so we expect this trend to continue in 2015,” he says.

Medicaid enrollees, similar to the general U.S. population, are aging into Medicare, says William MacBain, MHA, senior vice president at consulting firm Gorman Health Group LLC, in Washington, D.C. “So, if you’re looking for a growth segment, that’s definitely a growth segment,” says MacBain. Most Blues insurers are committed to exchanges, he says, and a significant number of people buying plan coverage through exchanges will be heavily subsidized and close to Medicaid financial eligibility. “So you want to follow your members as they go on and off Medicaid. You don’t want to lose your in- vestment in care management,” notes MacBain.

The bottom line, according to MacBain, is that businesses follow markets-and expansion into Medicaid and coverage of duals “is a logical market for Blues insurers, particularly those operating in one or two states, because they’re looking for growth in their existing footprint.”

Anthem ‘does a clever thing’

But it’s not all about Medicaid. Anthem Blue Cross in California, recently “did a clever thing” by developing an ambitious partnership with several major providers, says Valentine. Specifically, Anthem’s HMO product entered into a joint venture with seven hospital systems in southern California to form Anthem Blue Cross Vivity, an integrated health system, with the in- tent of capturing market share and delivering it to the health systems.

Under the arrangement, the seven hospital partners and Anthem will share in any profits and losses. The California Public Employees’ Retirement System, the nation’s second-largest healthcare buyer, signed on as Vivity’s first major customer for coverage that began January 1.

“There will be some markets where it works and other markets where it doesn’t,” Valentine says. In this case, the move will allow Anthem to take market share from Kaiser Permanente, the market’s dominant player, by creating better economies of scale.

Valentine describes the deal as giving Anthem a strong network, a tiered benefit package, and financially robust provider partners. “I think people will say, ‘hats off to Anthem,’” he adds.

NEXT: Seeking long term survival

 

Seeking long-term survival

Providers everywhere are confronting challenges and “looking at how to handle resources to survive long term: Do they need to get bigger? Affiliate? And they’re trying to guess what others are doing,” says attorney Stephen Libowsky, JD, a partner in the antitrust practice for the law firm Dentons in Chicago.

“It’s not just mergers and acquisitions,” adds Libowsky, who works primarily with large hospital systems and independent physician associations. “They’re also looking at joint operating agreements, out- sourcing various services...To some degree, it’s a fight for talent. Hospitals are trying to bring in the best oncology or cardiology group...Certain services are very lucrative.”

Libowsky also cites ongoing discussions throughout the U.S. hospital sector about whether to combine services and medical staffs. “Little stories are playing out everywhere, particularly in towns with two, three or four hospitals (where) one or more of them are in real trouble,” he says.

Several years into the healthcare industry’s overhaul under the ACA, hospitals are turning to M&A activities as a way to improve quality of care, expand services, better manage risk and access capital, and address a changing regulatory landscape.

Even when they’re not officially merging, many hospitals are seeking affiliations with academic medical centers: Baylor Scott & White Health, the largest not-for-profit healthcare system in Texas, for example, is joining The Cleveland Clinic’s cardiovascular network. From there, some observers say, it’s only a short step to forming accountable care organizations (ACOs) as large players collaborate with like- minded organizations.

By offering affiliations, academic health systems are able to extend their brands across the U.S. and better attract national employer contracts without bearing the costs associated with actual acquisitions. While some industry experts describe such affiliations as a potential first step toward formal acquisition, many affiliates-and the Cleveland Clinic and Mayo Clinic have dozens-stress their independence and prominent clinical roles within their regions.

Medical groups, in turn, view M&A as a way to maintain independence and create greater stability amid healthcare delivery and finance changes that often require them to assume more financial risk and become more operationally efficient.

Health systems have focused on buying physician practices to expand their referral networks and better align with doc- tors to prepare for population health man- agement-along with its financial risks and rewards. Such alignment is expected to be at- tractive to payers forming selective networks and to consumers as systems form their own managed care plans.

NEXT: Increasing cooperation, stirring up animosity

 

Increasing cooperation, stirring up animosity

A major goal of the federally-led effort to create a value-based U.S. healthcare system is to increase cooperation among stakeholders.

Indeed, the relatively new collaborative concept of the ACO has taken off in the past few years to encompass 405 such plans in the Medicare Shared Savings Program in 2015 and hundreds more ACO-like ventures in the commercial market and Medicaid. ACOs are being touted for their population health management efforts, al- though the jury largely remains out on cost savings and quality. By 2017, 130 million-plus Americans are expected to receive care from ACOs, up from about 40 million in 2015, according to a Parks Associates study from July, 2014.

But U.S. healthcare consolidation also is stir- ring up old adversarial relationships between payers and providers, as insurers increasingly try to sell individual consumers and employer groups on the idea of buying lower-cost plans with narrow provider networks that allow them to exclude large health systems.

As the industry moves toward high-performance, more-selective networks, health plans and providers alike are negotiating for clout, says Valentine. Some insurers feel threatened by providers joining together and partnering with some plans and not others, he notes. And as providers merge at unprecedented rates in efforts to gain scale and increase market power, payers are not the only ones getting nervous: Regulators also are taking notice.

Recent judicial decisions in markets as disparate as Toledo, Ohio, and Boise, Idaho, are shaping the future of hospital M&A, industry lawyers say.

In December, attorneys for Toledo-based ProMedica Health Systems, Inc. urged the U.S. Supreme Court to overturn a Sixth Circuit Court of Appeals ruling that blocked its acquisition of nearby St. Luke’s Hospital. In April the appellate court upheld the Federal Trade Commission’s (FTC) decision requiring ProMedica to divest itself of St. Luke’s because of concerns that such a merger would increase prices.

ProMedica contends that the appellate court’s decision sets a dangerous precedent at a time when healthcare consolidation is often needed for economic survival. “The decision... injects profound confusion into fundamental aspects of merger law, while simultaneously handing the FTC unbridled discretion to block local hospital mergers almost at whim,” Pro-Medica lawyers argued in a writ of certiorari filed December 22.

In the Idaho case, the state’s largest hospital system purchased the states largest doctor’s practice, leading to an antitrust suit. The trial court ruling in January, 2014 agreed with the FTC that the purchase would have anti-competitive effects. The FTC said that the ruling is a reminder that, though the ACA promotes collaboration, it’s not an open invitation to flout antitrust laws.

Regulators insist there are numerous ways to build integrated healthcare delivery systems without running afoul of the law, but “there are no answers and everyone’s trying to do their own thing here,” says Libowsky. “Whether healthcare payers or providers, everyone is trying to figure out how to keep their market share, get bigger and stay within the boundaries of the (antitrust) rules.”

While the FTC seems to be pursuing anti- trust enforcement activity, officials told a conference in April, 2014 that the agency challenges fewer than 1% of healthcare transactions, and Libowsky says he sees no dampening effect on activities.

The FTC is looking at transactions “through very traditional competition models,” Libowsky explains. “In the healthcare world, (regulators) are looking at what it would do to price, quality and availability-to see whether the deal is anti- or pro-competitive. If you can show the three ( factors) will stay the same or go up, you’ll stand a good chance of getting a total pass.”

NEXT: Hospitals' worries lead to large system mergers

 

Hospitals’ worries lead to large system mergers

As healthcare stakeholders try to “do their own thing,” worries abound. “What hospitals are re- ally scared of right now is the formation of nar- row networks...and being kicked out of narrow networks or given less-favorable terms within the network,” says Shields of Juniper Advisory. “They’re thinking, ‘Even though we’re performing well, we could be locked out, but we could leverage a larger system to improve quality and be better positioned because it’s harder to lock a larger company out.’”

Moreover, he says, hospitals are realizing that exchange plans are going to create downward price pressure because patients seem to prefer lower-cost plans over broad provider access.

Shields explains that since the ACA’s enactment in 2010, the pace of hospital and health system consolidation has accelerated to a level not seen since the late 1990s, at a time when hospitals were reacting to the formation of HMOs. Transaction volume was down significantly in the early 2000s and largely confined to struggling hospitals.

While struggling hospitals continue to pursue mergers to keep their doors open, there are different catalysts for hospitals’ M&A activities this time around, says Shields. Current hospital mergers are as likely to occur between financially strong partners to help support healthcare within their communities.

To illustrate, Shields cites Advocate Health Care’s partnership with NorthShore University HealthSystem, which resulted in the largest integrated healthcare delivery system in Illinois. The merger, announced last fall, is expected to close soon. He says there is no near-term need for NorthShore, which has a dominant market position in an affluent part of Chicago, to join Advocate. “But they’re doing it because they’re looking at the idea of population health and providers taking on responsibility for the continuum of patient care,” Shields says. Advocate is adept at tracking patients across inpatient and outpatient settings, has 1,000-plus employed physicians, and is known for working well with independent doctors, he says.

Shields also points to Geisinger Health System’s own managed care company that is merging with AtlantiCare in eastern New Jersey. “Neither AtlantiCare nor NorthShore had to do anything, but they saw the future as larger hospital companies that can manage large patient cohorts,” says Shields.

Both are very strong partners on the clinical and financial sides, so their selection is not surprising, he adds. NorthShore is a $1.8 billion sys- tem with “a commanding market share and extraordinarily high National Institutes of Health grant funding even though it’s not an academic medical center.

“If you’d asked me last year whether North- Shore would join someone, I’d have said, ‘No way,’” he says. “The sense in the industry had been the insurance companies were happy to raise their rates as costs went up...and the sense today is that has changed and companies are working with providers to keep costs down.”

Another change over time is that geography is less of a barrier as regional health systems pursue M&A deals, Shields says. He cites Duke LifePoint Healthcare’s two major acquisitions outside of North Carolina: Conemaugh Health System in Pennsylvania in September, 2014 and, previously, UP (Upper Peninsula) Health System in Marquette, Michigan. He describes Duke as “a really strong player, thinking about how to grow its footprint nationally....and Conemaugh is a $500 million system that 10 years ago might have joined Geisinger [Health System], UPMC [University of Pittsburgh Medical Center] or Allegheny,” all Pennsylvania-based.

According to Shields, the predominant transaction type for merging not-for-profit hospital systems is membership substitutions, analogous to a stock sale transaction: The seller transfers ownership to the nonprofit acquirer, which becomes the new “member.” The seller’s corporate structure typically stays intact, but ownership and control shift to the new parent, which typically assumes the seller’s debts.

But, driven by robust hospitals with the power to define a deal’s parameters, there has been innovation-and an expanding array of strategic alternatives and hybrid structures available for hospital-to-hospital M&A, says Shields.

NEXT: Fighting for vertical integration

 

Fighting for vertical intergration

In western Pennsylvania’s competitive health- care market, vertical integration is also at play. Shields describes the longstanding dispute between Highmark, as the region’s dominant commercial health insurer, and UPMC, as the dominant health system, as the best example of a payer pushing down into the provider space.

Highmark, a Blue Cross and Blue Shield in- surer, was worried about what the loss of UPMC hospitals and doctors would mean to its bottom line. As a result, it reorganized its corporate structure and launched its own integrated delivery network after acquiring West Penn Allegheny Health System-a deal approved in 2013.

Highmark bought the relatively small, financially weak system because that is what was left in a region dominated by UPMC, market experts say, and while Johns Hopkins and The Cleveland Clinic are making inroads into Pittsburgh’s market, Highmark’s Allegheny Health Network offers established, local hospitals.

“My sense is that Highmark didn’t necessarily want to own Allegheny, but worried Allegheny wouldn’t find a strong, viable partner...and worried that if Allegheny got weaker, that would just make UPMC even stronger,” Shields says.

Then, there is the issue of hospitals trying to address healthcare financing changes with the help of managed care organizations, Shields says. “Hospitals are struggling to figure out how they’re going to manage risk-as payments be- come closer to capitated (i.e., bigger payments covering longer periods of time),” he says. “Hospitals are trying to figure out how to operate with revenue coming in in lumps like that...and managed care companies have better data, a better idea of how to manage risk.”

Shields points to UnityPoint Health, Iowa’s largest health system, which acquired Meriter Health Services in Madison, Wisconsin, in January, 2014. Meriter has a health plan, he explains, and because UnityPoint lacked a plan in its sys- tem prior to the deal, the Wisconsin plan gave UnityPoint insight into all of Meriter’s health plan data-thus giving the health system a better understanding of how to manage costs across the continuum of care.

Fragmentation continues

Even with all the recent activity, the hospital industry remains “incredibly fragmented,” Shields says, noting there are roughly 4,500 acute-care hospitals in the U.S., and more than 2,000 separate hospital companies delivering care. By contrast, experts note that 80% of the managed care market is in the hands of fewer than 10 firms. Amid such fragmentation, experts say it is no wonder that improving population health, con- trolling costs and delivering efficient and coordinated care are elusive goals.

Nationwide, there were a total of 72 hospital M&A transactions in 2014, down from 84 such deals in 2013, reports Irving Levin Associates. To put it into context, Shields says recent volume represents a significant increase over the median number of transactions (58) completed each year between 2001 and 2011. But he de- scribes hospitals’ M&A transaction volume as still “tiny drops in the bucket.”

Shields cautions that M&A volume data must be read in context since stronger companies seem to be taking longer to complete transactions. “Our sense is that 2014 (hospital M&A transaction volume) is down, but overall activity and conversations are up, and likely because these stronger companies are a little slower, taking more time considering whether they want to move forward,” he says.

“They’re slower to choose a partner and slower to negotiate their terms. They have the luxury of more runway versus distressed com- panies which must act fast.”

Looking ahead, UnityPoint, Blue Shield of California, and other payers and providers negotiating M&A deals know that adding to their portfolios isn’t the end-all and be-all. Such transactions must help them to gain the knowledge to deliver high-quality, coordinated care at a reasonable cost in order for them to be deemed truly successful.