Whitney Palmer

Healthcare’s Consolidation Continues

Published in the Nov. 22, 2011, Billian’s HealthDATA/PorterResearch Hub e-newsletter

By Whitney L.J. Howell

The consolidation of healthcare isn’t a new concept – but doing it well and in ways that strengthen the industry is. Forging partnerships is now a hot trend across all types of healthcare organizations.

The 1990s were rife with disastrous attempts by hospitals to purchase medical groups. For the last three years, however, mergers and acquisitions (M&A) among healthcare entities have grown steadily. And, in today’s atmosphere of coordinated care and accountable care organizations (ACO), pooling resources could help providers meet the needs of a burgeoning patient population, especially with regard to financing new healthcare IT systems.

Whether it’s a partnership between health systems, a hospital and physician group, vendors, or payers, the majority of industry experts agree building these ties strengthens the healthcare system. Expanded clinical resources, updated health information technology, and streamlined payer structures all serve to improve the quality of care.

“We’re seeing a move toward the mega-health system as the one-stop-shop for all care needs,” says Mark Reiboldt, vice president of financial services for The Coker Group. “All segments of healthcare are affected by the same drivers. They’re pursuing integration to enhance their resources and value.”

The Rise of the Deal

Initial 2011 reports indicated M&A levels lagged behind 2010. However, a recent issue of The Health Care M&A Monthly, a newsletter produced by business intelligence publisher Irving Levin Associates, identified a late-blooming uptick in this year’s deals that surpasses 2010 numbers. Currently, 132 hospitals have finalized $6.9 billion in deals. The median value of each consolidation also spiked, rocketing from $12.9 million in 2009 to $35 million in 2011, says Reiboldt, who’s company provides financial advisory strategies and solutions to healthcare organizations.

“Three or four years ago, most of the deals we saw were distressed. Healthcare groups of all sorts were entering into deals just to survive,” he says. “We’re no longer seeing partnerships occur for pennies on the dollar.”

According to Dow Jones reports, medical device companies experienced some of the most substantial growth this year. A 15-percent rise in deal activity to 68 mergers brought $857 million into this sector and placed it above biopharmaceuticals (which garnered $715 million in 78 deals) for the first time since 1998. Medical information technology companies also fared well, finalizing 24 deals for $207 million.

Still, the M&A wave hasn’t yet reached its apex, and Reiboldt says he anticipates greater consolidation in 2012 and 2013 for two main reasons. As more buyers venture into the market and view healthcare as a sound investment, market deal values will continue to climb. Also, the Centers for Medicare & Medicaid Services (CMS) begins accepting ACO applications in January. By giving physicians and hospitals joint responsibility for patient care, the ACO model pushes clinical environments to link, fostering a larger, more diversified patient base.

Offering Patients More

If healthcare reform survives its legal challenges, the industry faces a simultaneous influx of more than 30 million people, and many hospitals and health systems are scrambling to gather the necessary resources to meet future clinical needs. In many cases, this means fusing with a nearby facility, such as the October merger of Olympic Medical Center in Port Angeles, Wash., and Swedish Medical Center in Seattle.

Under the 20-year agreement between the facilities, Olympic patients will have access to Swedish specialists, including endocrinologists, cardiologists, neurologists and sleep medicine experts, at the 80-bed Olympic site. Patients can elect to receive care on the Swedish campus if Olympic doesn’t offer a service. However, there is no mandate that they do so. Overall, this move gives Olympic’s patients greater access to quality care and controls the facility’s expenditures.

Olympic retains its independent, community-owned status. But, according to Olympic’s CEO, Eric Lewis, the complexity of healthcare reform regulations prompted his hospital to pursue the merger.

“If a hospital as small and rural as Olympic Medical tries to go on its own, it’s going to have significant financial problems,” Lewis says. “We now have a large, prominent and well-respected partner that will work with us to ensure our community is properly cared for.”

For Olympic, access to Swedish’s existing electronic health record (EHR) technology – an EPIC system – was crucial. According the Lewis, Olympic was too small to buy an expensive EHR system on its own, and connecting with Swedish helped Olympic fulfill a critical healthcare reform requirement. The facility also joined Swedish and other large Seattle-area healthcare systems in a large buying group to have greater negotiating power with vendors and payers.

Clinical and economic advantages aren’t limited only to hospital-hospital mergers. In many instances, hospitals gain much by acquiring physician-owned medical groups, Reiboldt says. The same acquisitions occurred 20 years ago with hospitals providing the entire purchase price upfront. Ultimately, those partnerships failed, but the purchase process is different now.

“This time, the partnership is true. Hospitals are willing to take all the risk, but the bulk of the value of the deal comes with the future performance of the physician group,” he says. “These deals don’t provide large sums up front. Instead, the deals are structured to pay out over three to five years.”

A hospital purchase of a surgical group is among the most beneficial pairings because it provides a smooth transition for patients. Rather than refer a patient outside the system to another facility, providers can easily recommend a partnering surgeon and, in many cases, facilitate scheduling the appointment.

Hartford Healthcare created this type of patient environment in October when it acquired Connecticut Surgical Group, a practice with more than 40 physicians in 12 locations. The institution, now known as Hartford Specialists, has 68 doctors and offers tertiary care, as well as colorectal, thoracic, podiatry, urology, and general surgery services.

Similar to the Olympic-Swedish merger, the Hartford deal expands services and brings all associated physicians under the umbrella of a single EHR. The partnership is also significant, says Hartford Hospital CEO Jeffrey Flaks, because it increases the organization’s footprint in the marketplace.

Vendor and Payer Consolidation

As with provider mergers, healthcare reform is also the impetus behind vendor and payer joint ventures. The drive for greater cost savings across the industry is pushing companies together as they attempt to strengthen their expenditure control services.

Based on Porter Research data, M&As among vendors and payers swelled by 50 percent in 2010. The trend is still moving toward increased consolidation, says Vik Torpunuri, CEO of CentraMed, and vendors must combine their strengths and resources to help providers meet healthcare reform requirements and standards. CentraMed emerged from the merger of software-vendor Analytix on Demand (AOD), of which Torpunuri was founder and CEO, and business intelligence-vendor Integrated Revenue Management Inc. (IRM).

“Hospitals must integrate technology into their systems in order to survive, but many are 10 to 20 years behind the times,” Torpunuri says. “Vendors that combine software expertise with the knowledge to help providers manage their clinical and financial data relieve a huge burden for facilities.”

In this case, AOD fused its capabilities with those from IRM to create a system to connect a patient’s clinical information across his or her travels in the healthcare system – from doctor to hospital to lab to skilled nursing facility, Torpunuri says.

Vendors aren’t the only organizations acquiring other vendors, however. Payers are also being aggressive in bringing vendors into the fold. The competition is intense, and the goal is to increase market share and bolster the number of enrolled beneficiaries, Reiboldt says.

For example, the 2010 acquisition of Axolotl, a health information exchange (HIE) vendor, by Ingenix, an EHR and revenue cycle management entity owned by benefits company UnitedHealthcare, opened the door for greater information flow beyond internal hospital users. Using Axolotl’s technology, Ingenix (now known as OptumInsight™) has been able to help healthcare clients – even those competing with UnitedHealthcare – share patient data in more secure, expedient ways.

At the time of the merger, Ingenix CEO Andy Slavitt said the partnership would ultimately serve providers and patients to strengthen the healthcare system.

“HIEs are bringing us closer to the point where all the healthcare professionals patients select to oversee their care can connect to share information and optimize outcomes,” he said. “We will work with Axolotl to continue to meet the needs of the multiple HIE stakeholders and to expand its technologies that serve healthcare communities.”

Finding a Successful Partnership

While a partnership between two healthcare entities can be beneficial, that doesn’t mean all mergers will work. There are certain characteristics company leaders and hospital administrators should look for the find the right fit, Reiboldt says.

Potential partners should both be willing to assume some risk in the deal and compromise. But the most important aspect of a mutually beneficial deal, he says, is that each side respects the role of the other organization.”I always tell clients to observe whether the CEO or the administrators are truly embracing the partnership,” he says. “It has to be something that’s completely engrained into culture of the deal or it won’t be sustainable.”

To read the article in its original post: http://www.porterresearch.com/Resource_Center/Blog_News/Industry_News/2011/November/Healthcarexs_Consolidation_Continues.html

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