Your Primer to Healthcare Mergers and Acquisitions

9 Factors That Are Accelerating Consolidation In US Healthcare

May 8, 2018

by Tom Schramski

by Tom Schramski, PhD, CM&AA

Volume 5 Issue 10, May 8, 2018 

You cannot escape it, not if you have eyes and ears. The US healthcare market is obsessed with consolidation. Optum (insurance) has acquired Surgical Care Affiliates (ambulatory surgery centers), Cigna (insurance) intends to take over CVS (retail pharmacies) and Express Scripts (pharmacy benefits management), and DaVita (kidney care) now runs The Everett Clinic (physician network). To add to the mania, Amazon, Berkshire Hathaway, and JP Morgan Chase intend to form their own healthcare insurance company. Why now?

There are at least nine good reasons for this healthcare consolidation frenzy:

Growing reimbursement pressure and complexity – The combination of value-based care and outcome-oriented initiatives in primary medicine and long-term care services is forcing a re-evaluation of how services can be best provided in the most economical manner. Simply maintaining that you are proving good services will not win the argument. The increasing complexity of payment models encourages providers to consider consolidation.

Increasing reliance on managed care – States have found that, despite a variety of issues, managed care organizations (MCOs) can provide more cost-effective services than they can operate, with less of the political entanglement. This also means a move away from fee-for-service reimbursement toward value-based models. MCOs always prefer smaller provider networks, leading to consolidation.

US healthcare is too damn expensive – The Organization for Economic Co-Operation and Development (OECD) found that the US devotes 18% of its GDP to healthcare, a proportion that continues to grow from 12% just a decade ago. Unfortunately, we are one of the least healthy countries of the OECD’s 34 members. One can argue that this is due to a number of factors, but the bottom line is still costly. Can provider size address this problem?

Technology is becoming more sophisticated and expensive – While technology is driving considerable innovation, it is a big challenge for many healthcare providers who lack the expertise and financial ability to leverage it. Merger or acquisition are viable strategies to take this next step.

The new provider is an insurance company – Insurance companies are leading the way in the consolidation of the “outpatient pathway” and are providing an example of how to rapidly gain a strong footprint in desirable healthcare verticals. They also provide an opportunity for consolidated organizations, whether in home care/hospice or addiction treatment, to partner directly with insurance entities and position themselves for future growth.

Instability in the funding environment – Consolidation can be an antidote for some of the instability in many funding environments, especially Medicaid reimbursement, which can vary considerably between states. A multi-state presence can mitigate some risk and increase the diversity of a larger organization’s funding streams.

Transparency requires a larger, retail mindset – The Center for Medicare and Medicaid Services (CMS) is strongly encouraging providers to become more transparent and several states are requiring price transparency for a variety of healthcare services and products. This retailing of healthcare will likely accelerate and place significant pressure on small healthcare providers.

Strategic opportunities abound + pent up Baby Boomer exits – Consolidation opportunities are expanding as acquirers are increasingly marketing their interest and Baby Boomers are ready, whether as the CEOs of a nonprofit IDD provider or the owner of multi-site DME company. The convergence of these two factors is pushing the envelope of merger and acquisition activity.

Abundance of capital – There is no shortage of investment capital in the US today and healthcare has been historically underinvested, especially by private equity. Investors and buyers not only see the opportunities, they want to build consolidated platforms to quickly build large healthcare companies.

Significant disruption and the factors above translate into opportunity, if an organization can scale its operations and diversify its offerings. Remarkably, nonprofit and for-profit organizations, small and large, see the same thing – the necessity of consolidation in a turbulent healthcare marketplace.

Tom Schramski

Tom Schramski PhD, CM&AA


Tom was the Founder and Managing Partner of VERTESS. He was a Certified Merger & Acquisition Advisor (CM&AA), consultant, and Licensed Psychologist with over 35 years of very successful national experience in the healthcare marketplace, including co-founding and building a $25 million behavioral health/disabilities services company. Tom represented sellers and investors across the healthcare spectrum and was recognized for his executive leadership in the 2005 Entrepreneur of the Year issue of Inc. Tom passed away in December 2018.

We can help you with more information on this and related topics. Contact us today!

Committed to Constant Improvement?

Subscribe to our bi-weekly newsletter – SalientValue

No Spam Ever. We Promise.
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram