Don’t (just) Merge
With ever-increasing pressure from healthcare reform on hospitals, it comes as no surprise that merger and acquisition (M&A) activity across the hospital landscape is accelerating. A recent report on merger deal value in a year-over-year comparison indicates hospital merger deal value is up 14%, and overall healthcare M&A activity is up 25%.1 In an industry with famously thin margins, consolidation offers financial and operational benefits, such as a stronger rate-negotiating position with payers, improved bad debt management, strategic positioning of service lines, and improved patient volume and throughput. Given that hospital CEOs rank financial challenges as their number one concern2, M&A activity – including affiliations, joint ventures, and partnerships – has predictably taken center stage in the industry’s response to market challenges. Increasing size, scale, and market share are tried and true approaches, so why wouldn’t M&A be the answer?
Healthcare is Poised for Disruption
Mergers make sense in the traditional view of the healthcare market, but the rise of post-healthcare reform indicates the future will be anything but traditional. One major threat to the status quo is the emergence of innovative healthcare technologies. Venture capitalists have invested record-setting amounts into digital health at $429 million in Q1 2015, a 56% jump over Q1 2014 and $703 million into healthcare technology, an incredible 515% increase over the same period in 2014.4
The ever-growing numbers of technology entrants are striving to turn the traditional model of healthcare on its head. The most significant threat to the market as it is known today are not disease- and condition-specific apps and widgets, which generally enhance the value of current services, but rather technologies that enable novel delivery systems for healthcare. The very definition of market share may change if the market is no longer bound by traditional geographic definitions.
The Oscar Example
Oscar Health is one of the fastest growing insurers in the country. While still small compared to national players such as UnitedHealthcare and Anthem (which generated $130.5 billion and $73.9 billion in 2014 revenues, respectively), it has estimated yearly net revenue of $200M and has experienced 250% membership growth in the past two years, reaching 40,000 members in 2015. Oscar fuels its growth in part through member- and provider-facing services such as a proprietary, agile platform for telemedicine. Members can easily reach a doctor for a virtual consultation, which drives quality and convenience. The company likes to cite its success with bronchitis-related complaints, which were resolved via telemedicine in 91% of their cases and delivered significant savings for Oscar and convenience for members compared to traditional physician office and emergency hospital visits.
Oscar currently has more than 60,000 physician practices in-network spread between New York and New Jersey5 and, with plans to expand to Texas and California in 2016, it is not hard to imagine eventual establishment of a virtual, non-regional network of physicians via telemedicine. If this model is expanded by Oscar or copied by the larger insurers and implemented nationally, health services which reliably drove volume for physician practices and hospitals may experience rapid shifts in volume as delivery becomes non-regional and even moves out of the emergency and inpatient settings altogether.
Innovations in the Market
Healthcare-delivery model innovators are not the only disruptors being backed by venture funding; analytics and Big Data solutions are equally attractive.6 While the applications of analytics are potentially as broad as can be imagined, one area of particular interest for the industry is how payers may influence the provider status quo. For example, payers are developing the capabilities to analyze health outcomes and cost across their networks at unprecedented levels of granularity, down to individual physicians.
Narrow networks, which slice regional markets up into providers based on cost and quality tiers, are already increasing competition among providers as health services are commoditized. Insurers are coupling better analytics with selective tools. These tools can be intentionally selective, such as plans that include or exclude specific providers (even for particular procedures or diseases), or implicitly selective, such as incentive programs which reward physicians for optimizing referrals based on insurer-provided cost and quality feedback.
The emerging model where insurers drive business decisions and negotiations based on robust cost and quality data increases inter-provider competition as one might predict, but also undermines the accepted wisdom that larger scale automatically yields larger revenue and better rates for providers. If insurers explicitly or implicitly segment preferred providers at the physician level, then competition between providers within the same health system ignites as well. Logically it follows that expanding the footprint of a health system will have limited benefit based on how much of the acquired business meets the criteria to be included in the “preferred provider” list of the insurers.
Hospitals are Differentiating through Business Model Transformation
The case that business-as-usual for hospitals is not going to be “as-usual” for much longer is clear, both from the largely known direct impact of healthcare reform changes to reimbursement and data/reporting requirements. This also stems from the unknown impact of disruptive innovation and competition among providers and payers.
If startups and incubators are any indication of where the market is headed, then one should take notice that seven of the top ten (and four of the top five) Health Care innovations in 2015 from the Brigham and Women’s Hospital Innovation Hub are centered on analytics, financial incentives, technology-driven care, and healthcare consumer engagement.7 If the traditional business model was still believed to be the best model, one would expect the list to be loaded with value-added innovations such as improvements to disease care.
While improved reimbursement from expanded healthcare coverage due to healthcare reform has provided some revenue boosts recently for hospitals, the outlook is still tough for providers operating in the traditional business model. Overall inpatient volume – generally the largest driver of hospital revenue – has declined since 2006, and the trend is expected to continue as improved care and technology keeps patients out of the hospital and higher deductibles for patients decrease utilization. On the outpatient care side, retail health is emerging as a critical threat to the traditional primary care model, with mega-national entrants such as CVS and Walmart. Pair the trending national shift out of the inpatient setting with the indicators that competition in local markets will increase for the remaining slices of the shrinking pie, and one can see why management is eager to explore new streams of revenue and maximize current efficiencies.
While some lower-volume or -quality providers will be acquired or shuttered, opportunities are emerging for forward-thinking providers that realize the business model needs to change. The precise solutions being explored depend on the particular position of the provider in the market. There are many possibilities, but consider three common cases of emerging demand for new capabilities:
- Analytics and Big Data
Providers may be exploring their own analytical capabilities, both to better understand their own internal structure of quality, revenues, and costs, but also to assess if merger and acquisition is truly the ideal method of creating financial stability while expanding volume. Providers looking to grow volume through acquisitions must keep in mind that more than 80% of providers have already transitioned to some form of value-based reimbursement.8 This translates into most providers exploring or participating in risk-sharing in some form, which requires actuarial assessment of population health. This is challenging for most providers due to the limited data they can access or collect during their normal course of business with patients. Risk-based considerations further increase the complexities of evaluating acquisition and partnership deals. As an alternative or complement to acquisition or partnership, leveraging population health analytics can point to alternatives for increasing volume and improve financial standing. One example is determining the best post-acute care by analyzing health records at a macro-level to avoid readmissions9, leading to increased capacity and reduced financial penalties. Regardless of the provider’s chosen course of action, the need for better analytics and population-based Big Data solutions is clear.
Providers that want to expand on the traditional idea of market share should exploit their advantages and streamline services in certain specialties; particularly for high-cost conditions. By focusing on providing the best value for a particular service line, payers will enter into contracts regardless of geographical bounds. The Cleveland Clinic exemplified this strategy in 2011, by contracting with Lowe’s a discounted, bundled rate in exchange for cardiac volume for Lowe’s insured employees.9 The overall rate improvements were such that Lowe’s could save money while offering the cardiac procedures free of charge for the employee, including travel and stay costs. Regional providers have also increasingly been contracting directly with local employers to provide exclusive or rate-preferred services, particularly for stand-out niche services such as obstetrics, oncology, stroke, and cardiac care.
- Innovation Partnerships
Both big systems looking to leverage advantages in expertise or scale and small systems which aim to compete through means other than scale may consider bets on innovation. With the plethora of partnerships emerging between providers, innovators, and payers, options abound for business experimentation. Venture capital darlings also require clinical partners to test products, provide feedback, and bring new products and innovation to market.10 Telehealth has long been discussed as the future of healthcare, and mobile computing and internet speeds may have crossed a critical threshold to break the ease-of-use and quality-of-service barriers which have stymied widespread adoption.
With thin margins, high fixed costs, and community-focused missions, hospital management rightfully scrutinizes investments closely, weighing the risks against benefits. The changing healthcare environment demands innovative approaches to the traditional business of keeping people well, but stakes are high to make ventures succeed. Successful implementations must overcome significant hurdles such as regulatory requirements, information technology capability gaps, and highly reactive competitors in crowded markets.
Considering or launching a big initiative and don’t know where to start? Vynamic can help; contact us to learn about how we help clients launch and scale their most complex healthcare reform programs.
- PwC. “Q1 2015 US Health Services Deals Insights.” May 2015. Downloaded July 15, 2015. View in Article
- American College of Healthcare Executives (ACHE). “Survey: Healthcare Finance, Reform Top Issues Confronting Hospitals in 2014.” ACHE CEO Survey. Downloaded July 18, 2015. View in Article
- The Economist “Big and Getting Bigger” [chart]. Downloaded August 17, 2015. View in Article
- Dow Jones VentureSource – venture funding. View in Article
- Oscar Company Website. Downloaded July 21, 2015. View in Article
- Wang, Teresa. “Digital health funding in Q1 2015 over $600M.” RockHealth. Downloaded July 18, 2015. View in Article
- Health Hub – The Brigham and Women’s Hospital Health Blog. “Top Ten Health Care Innovations for 2015.”Downloaded July 14, 2015. View in Article
- McKesson. “McKesson Health Solutions – The State of Value-Based Reimbursement and the Transition from Volume to Value in 2014”. Downloaded on July 29, 2015. View in Article
- PR Newswire. “RightCare Solutions, Inc. Assesses 30,000th Patient for Risk of Readmission”. July 17, 2015. Downloaded July 24, 2015. View in Article
- Chen, Caroline. “Cheaper Surgery Sends Lowe’s Flying to Cleveland.” BloombergBusiness. March 7, 2014. Downloaded July 14, 2015. View in Article