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.
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:
And the risks of remaining independent are steadily increasing as a result of the following:
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.
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.
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.
Consolidation or alliances based on fear, urgency, or financial weaknesses can result in many challenges. Choosing a potential partner should involve four key considerations:
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.