Healthcare is still undergoing a large number of M&As – but are they offering the kind of value originally sought? New research suggests not.
The healthcare industry is rife with mergers and acquisitions (M&As). According to PwC, M&A activity in 2018 increased by 14.4% over the previous year-and many experts expect this sort of remarkable consolidation to continue. Yet, despite the uptick in new deals, their individual value has decreased. In fact, PwC also noted, in its US Health Services Deal Insights: Q2 2019, that deal value has dropped by over 30 percent. As many healthcare organizations pursued M&As to better weather the industry’s disruptive and ever evolving landscape-and with luck, cut costs in the process – those numbers are troubling. And, now, a new research study from Accenture, a multinational professional services firm, suggests that health systems are missing out on $30 million per year in potential value.
Kristin Ficery, a North America provider practice lead for Accenture Health, says she and her team wanted to investigate whether health systems were adequately recouping value after consolidations.
“M&A has been front and center for the last two years-peaking in 2018,” she explains. “In the past, I had done quite a bit of M&A work outside the industry and it dawned on me, as I watched some of the struggles our healthcare clients were experiencing, that there was a lot they could learn from other industries like telecommunications, high-tech, and even financial services.”
The Accenture analysts compared typical cost savings, based on publicly available post-transaction data as well as Accenture’s own consulting experiences, in multiple industry verticals, including telecom, financial services, and hospitality. They then compared those to cost savings in an average 1,000-bed health system to come up with a post-merger operating expense reduction percentage. They discovered cross industry savings averaged out to approximately 7%, with financial services showing a 11% decrease, telecom averaging 8%, and hospitality with a 2 percent reduction. Health systems, however, languished at 1% post-merger savings-which, the analysts argue, means that tens of millions of dollars in untapped value are being left on the table. Ficery says the results did not surprise her-especially since health systems are not as beholden to company shareholders as many industries often are.
“When we work with publicly traded entities, there is a relentless focus on savings and synergies and what you can return to shareholders,” she says. “With hospitals, there’s not as much of that kind of outside pressure. Certainly, they are still focused on costs as they pertain to the margin pressures they are under, but, typically, they approach M&A in a very different way and don’t have to be quite as public about what kind of savings you are trying to realize within a particular deal.”
Ficery and colleagues argue that health systems should adopt a “new M&A mindset,” to help recoup those lost savings. And they can benefit by looking at other industries and how they are getting value out of their post-merger situations, find a better way forward.
"Healthcare systems can take an approach where they look very closely at the most critical things they need to tackle first-and who is accountable for those things?” she says. “When I’ve worked in other industries, it was always very clear what the savings targets were and who was responsible for their piece of the map, if you will. In the health system world, it’s not always as clear-and that needs to change.”
Some areas where health systems could find significant cost savings are in areas including supply chain costs, customer experience, and organizational culture.
“These are some quick wins, really,” she explains. “There are areas where you can easily get the savings momentum going. But the challenge, in healthcare, is that there’s a lot of fragmentation. You may still be dealing with older mergers that haven’t been fully integrated yet. Or find ways to cut costs that don’t impact labor, like in the back office. They may seem like small things but they really can unleash a lot of value and opportunities for sustainable cost reduction across the entire organization.”
But, perhaps the most important thing for health systems to realize, says Ficery, is that healthcare is not as much of a “unicorn” that many would like to believe.
“Clinical care is unique, of course-and with any merger situation, you certainly don’t want to negatively impact care,” she says. “But other industries also have sacred parts of their business they know they cannot disrupt. And they include that in their integration planning. Healthcare can do the same by focusing their savings efforts on the back office or in the enterprise aspects of a hospital system. There’s a lot of redundancy there-which means there is also a lot of opportunity. Truly, there’s a lot that health systems can learn from those that came before them.”
Kayt Sukel is a science and health writer based outside Houston.