Consolidation is sweeping the U.S. healthcare market, from Optum's acquisition of Surgical Care Affiliates to Cigna's intent to take over CVS and Express Scripts.
Here are nine drivers behind the trend, according to Vertess President and Managing Partner Tom Schramski, PhD. Mr. Schramski is a certified merger and acquisition adviser and consultant.
1. Increasing reimbursement pressure and complexity. Payment models are becoming more intricate, which pushes providers to consider consolidation. Value-based care and outcome-oriented strategies combined with long-term care services make providers re-evaluate how to most economically offer services.
2. Increasing reliance on managed care. States now realize managed care organizations can offer more cost-effective services than they can operate, and with "less of the political entanglement," Mr. Schramski said. MCOs' preference for smaller provider networks encourages consolidation.
3. High cost of U.S. healthcare. Through consolidation, providers are looking to address the fact that the U.S. devotes 18 percent of its GDP of healthcare — a number that continues growing.
4. Technology becoming more advanced and costly. Mergers and acquisitions help healthcare providers leverage technology they otherwise might not have the expertise or financial ability to handle.
5. Insurance companies becoming the new provider. Along with leading consolidation of the outpatient pathway, insurance companies give consolidated organizations an opportunity for direct partnership and future growth positioning.
6. Funding environment instability. Consolidation can offset the effects of volatile funding settings, such as Medicaid reimbursement, which varies among states. A multi-state presence can mitigate risk and increase large organizations' diversity in funding sources.
7. Transparency requires a retail mindset. With CMS encouraging providers to become more transparent and several states putting price transparency requirements in place, healthcare will increasingly shift toward a retail mindset. This transition will up the pressure on small providers.
8. Strategic opportunities abound and pent-up Baby Boomer exits. Acquirers are increasingly marketing their interest. Baby Boomers are open to it, whether as CEOs of nonprofit Intellectual and Developmental Disability providers or owners of multi-site durable medical equipment companies, Mr. Schramski said.
9. Abundance of capital. Investors and buyers with a surplus of capital see opportunities in the historically underinvested healthcare industry. They're seeking to create consolidated platforms as the foundation for large healthcare companies.
More articles on transactions/valuation:
Envision blames ambulatory revenue drop on flu, sees Q2 recovery: 5 things to know from Q1
North Carolina hospital opens 1st phase of surgery center — 4 insights
Surgery Partners increased revenues 45.8% in Q1 — 8 insights