Finding value in healthcare through mergers and alliances

Finding value in healthcare through mergers and alliances

The Affordable Care Act (ACA) has made a profound change in the healthcare competitive landscape, one that Congress may not have intended. The emphasis on value-based, rather than service-based, reimbursement is shifting insurance risk from the payers to hospitals and other healthcare organizations. There are some that believe that this new environment requires scale to operate profitably. However, most healthcare professionals agree that two strategies are proving critical to survival and prosperity: consolidation and specialization. In this article, we focus on consolidation considerations.

The recent wave of provider consolidations has been driven by the need to protect or grow market share and to achieve critical mass. The current trend of consolidations is more strategic, typically bringing together two or more providers both to maintain solvency and to improve delivery of care.

Providers seeking to improve quality and lower costs are also pursuing other types of affiliations, including joint ventures and joint operating agreements with organizations that have complementary specialties. These alternatives may provide a better way to provide higher quality offerings to patients, as well as increased revenues for the participating providers.

For these ventures to succeed, organizations need to identify their appropriate area(s) of strength and partner with other institutions that complement existing services.

The benefits of partnering (and the risks of independence)

This new environment offers modest upside potential for independent providers: the aging population and projected increase in the insured population will escalate demand for healthcare services, but these factors likely will not compensate for modified referral and utilization patterns, lower reimbursements, and increased costs.

In addition, the current landscape has a significant downside, especially for hospitals, as a result of the following:

  • More care is taking place outside of the hospital (at ambulatory surgical centers (ASCs), outpatient clinics, office settings, diagnostic centers, etc.)
  • Higher co-pays and deductibles discourage visits to hospital settings; care is being directed to less expensive alternatives, such as Walmart and walk-in clinics
  • Higher co-pays and deductibles will result in more bad debts for hospitals
  • Population health management will create continued downward pressure on inpatient utilization
  • Medicare and Medicaid reimbursement pressure
  • Increased competition
  • Narrow networks may restrict commercial payer business

And the risks of remaining independent are steadily increasing as a result of the following:

  • Limited leverage to negotiate favorable managed care rates
  • Exclusion from payer networks
  • Limited ability to retain/attract physician groups
  • Limited ability to invest in infrastructure and IT
  • Limited ability to assume risk and play in the population health management arena (ACOs)

The current mergers and acquisitions activity is driven by quality assurance and improvement concerns as much as by financial gain. Properly executed alignments (mergers, partnerships, and affiliations) can eliminate redundant costs, improve operating margins, diversify risk, and enhance access to capital and funding sources.

But, healthcare organizations need to understand that consolidation isn’t an easy cure for overcoming revenue and market challenges.

Strategic alliances

Alliances or other partnerships are another option being sought after by healthcare providers. These structures allow each provider to focus on their own areas of strength, areas where they’ll be most effective. In essence, partners form a de facto network, offering complementary services to patients.

If structured properly from an integration standpoint, such partnerships can also approach insurance companies and jointly develop key value-based metrics, such as lower readmission rates and improved outcomes across participating providers.

However, it’s critical that partners negotiate agreements that protect their respective interests, an important step that an outside partner can help facilitate.

Factors to consider

Determining the right strategy for an acute care organization involves several components.

Self-assessment. First, an organization must honestly evaluate its current and future market position and compare those to the organization’s goals. How is it perceived in the marketplace? How do its services/products compare to its competitors? How is it positioned for risk assumption?  An unbiased assessment of whether these goals can be achieved is often difficult for internal teams and may require outside assistance.

Market needs. What are the current and future needs of the market? How do those align with the organization’s strengths? This analysis requires input from both clinical leaders and financial experts.

Senior support. Do leadership (operational, clinical, financial) and boards agree that consolidation is necessary and beneficial? A successful outcome requires a strong team to guide the organization through the process.

Identifying prospective partners

Consolidation or alliances based on fear, urgency, or financial weaknesses can result in many challenges. Choosing a potential partner should involve four key considerations:

  1. Service offerings. What is the degree of redundancy or overlap among each organization’s services? Many institutions plan to eliminate redundant costs or services post-merger, but often don’t follow through. For alliance partners, can redundancy be lessened or eliminated by sharing resources?
  2. Operational health. Two strong partners, whether through formal consolidation or as an alliance of specialty providers, can combine to become an even stronger entity. Two weak partners rarely make one strong one. Weak balance sheets, operational deficiencies, or noncomplementary services aren’t typically problems that can be solved via merger, acquisition, or alliance. At best, these unions only delay an inevitable decline under most circumstances.
  3. Risk Readiness. In today’s new healthcare market and with the move from fee-for-service to value-based reimbursement, organizations need to assess whether potential partners have the tools and infrastructure necessary to be successful in a value-based payment environment? Moreover, will the proposed partnership allow the entity(ies) to improve patient outcomes, elevate their ability to accept risk and remain viable organizations?
  4. Cultural fit. The process of consolidating or learning to collaborate as alliance partners can be daunting, and incompatible cultures will add difficulty every step of the way. Do both organizations have similar values and goals? Do they agree on the reasons, importance, and process of consolidation? Do the two organizations offer complementary services? For alliance partners that will remain separate entities, can they communicate and work together seamlessly?

How Baker Tilly can help

With extensive experience in healthcare, investment banking, and healthcare consolidations, Baker Tilly can assist with both the internal evaluation process and the identification of potential merger or alliance partners. We can also help an organization become a more attractive consolidation target or partner, provide due diligence once a potential partner is selected, and oversee the acquisition or merger process to protect the interests of the respective parties.

Ultimately, consolidation offers many benefits for healthcare organizations, as long as they fully understand their strengths and weaknesses and the needs of their markets.

For more information on this topic, or to learn how Baker Tilly healthcare specialists can help, contact our team.

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