Chartis: What are the key trends that you’re seeing in healthcare partnerships? What’s the outlook in 2022 and beyond?
Chris Regan:
First of all, M&A activity is back in a big way all across the healthcare sector as 2021 draws to a close and 2022 kicks off. In the provider world, we are seeing a lot more M&A activity because markets have consolidated to the point where either you’re part of a large system already or you’re not, in which case you probably feel the need to at least consider your options.
There are countervailing forces at play, creating a turbulent environment. On one hand, all stand-alone hospitals and smaller health systems are seeking to secure a sustainable long-term position in their markets. With some anxiety, they also are watching a blizzard of new market entrants seeking to establish direct relationships with patients leveraging digitally enabled apps and other virtual technologies.
On the other hand, the pandemic is forcing many providers to focus on the here and now, rather than the long term. The uncertainty is making Boards more conservative about making significant capital and organizational commitments as part of mergers. There is also renewed concern that new transactions may be challenged by the Attorney General and/or the Federal Trade Commission.
It’s an exciting time for sure. We’re seeing a level of M&A activity that frankly we haven’t seen in 18 months. No doubt it’s going to continue through 2022.
Chartis: What has changed in the way provider organizations are thinking about their partnership strategies and portfolios?
Rob York:
Over the past 5 to 10 years, organizations have been broadening their partnership strategies and portfolios well beyond traditional hospital and health system partnerships/M&A activities. The pandemic and its initial impact have only accelerated the thinking around non-acute hospital partnerships. This partnership activity is a major component of the increased M&A activity Chris was talking about for this past year, as well as the projected activity in 2022.
Many large hospital and health systems have started to characterize themselves as health enterprises extending well beyond the care and services provided within the traditional hospital and health system model. We have also seen a shift in the types of organizations operating and competing in the healthcare ecosystem, including private equity-backed models, integrated payor/purchaser models, and care delivery models. This has all driven a shift in the thinking around what types of partnerships and activities healthcare organizations need to consider and potentially pursue to thrive in an operating model that has continued to move well beyond traditional hospital-based services and delivery.
As one example, healthcare delivery saw a rapid acceleration toward acceptance and advancement of digital healthcare delivery models — digital primary care, virtual components of specialty care access, and hospital at home as some examples. Partnering with organizations that have built platforms and expertise in the digital health space has proven to be a means for health systems to get to where they want to be faster and more economically than pursuing on their own.
Another area with renewed focus is value-based care delivery and payment models. The impact of the pandemic and the ongoing attention on better aligning how the U.S. delivers and pays for healthcare has resulted in a convergence of healthcare-focused organizations (both old and new) looking to create better models and solutions in this space.
Chartis: How might this trend toward value-based care affect how healthcare organizations think about and approach their partnerships?
York:
As we know, value-based care and payment is a significant shift away from the fee-for-service model that has driven healthcare delivery and economics for years. Value-based payment and delivery is less about payment for hospital-based services and more about paying for health, wellness, and value that is created for attributed populations outside the walls of the hospital. This is not a new concept for the industry. The main observation here is that everyone is interested in evaluating opportunities again, which include potential partnerships as a means to advance value-based care at the organization.
For many health systems and provider-based organizations this means looking at a lot of different aspects to building out your enterprise — including integrating the care delivery system with the system that finances it in more meaningful ways. For some provider organizations, this means considering more significant moves into the payor space. For instance, your organization may look at what you need to do for the Medicare population and determine an integrated delivery and financing approach through a Medicare Advantage product is the path forward. There are a number of potential partnerships that can help accelerate this type of move from contracting strategies to payor ventures to potential health plan acquisition.
This resurgence in value-based care is not just about aligning payment and potential payor strategies. The pandemic has highlighted the need to really understand those seeking care outside of the actual visit, procedure, or event. All organizations are looking at and investing in areas required for success in value-based programs such as behavioral health models and capabilities to understand social determinants of health. When you’re thinking about how you care for and provide increased value to a population, partnerships with organizations that specialize in required community services can provide the missing pieces for addressing needs and advancing the solutions for better population health outside of care.
Chartis: Given this evolving environment, what role does integration and value realization play in today’s M&A?
Ann Edwards:
For most health systems that are coming together, there’s no longer the luxury of just acquiring more and not actually seeking value.
And when I say “value,” I mean achieving all of the goals of why you came together. That might be cost savings, but it also might be growth, and it also might be better services to your community — including some of those that Rob touched on with regard to population health and addressing health disparities.
Regulators, both state and federal, are not going to allow partnering organizations to not deliver on the promises of what they said they would be after coming together. We are hearing about more and more deals where regulators are requiring pretty significant measures and outcomes reporting post-close — many are for three, five, even seven years post-close.
Chartis: What are some of the up-front considerations for organizations to be able to deliver these expected results?
Edwards:
Meaningfully demonstrating your ability to execute the goals and deliver the services you identified at the outset is so essential that you must start planning the second you can. And you better hit the ground running on execution in a very deliberate fashion when the deal closes.
First, saving money to reinvest in other ways to provide better services and contribute back to the community is not optional. It must happen. So, the diligence around that planning is essential.
There are two other big considerations coming from the pandemic. One is labor demands, which have driven up the actual cash call of how we’re staffing, and for some, there are issues of even finding the resources to staff to begin with.
The other is one we’ve known for a long time but has become a really, really high priority, and that is the technology considerations of consolidation. They are so significant to the capital call that you’ve got to have those resources to invest.
John Wiest:
A newly combined organization can have the ability to develop a much more integrated IT system and a much more holistic medical record. Opportunities of scale could allow you to implement a command center, embed artificial intelligence, use robotic process automation, and create care interventions closer to real time, deploying different caregivers and different providers to be able to deliver that intervention.
Flags may have existed for a long time about potential complications that could arise, but now it’s taking that information to that next level and really creating that intervention and having a much better outcome for the patient.
That expanded footprint can create the infrastructure that produces better care and better access. I’ve been in healthcare a long time, and ultimately, it’s still all about cost, quality, and access. When we can create better access and better outreach, we have the opportunity to create a much more equitable care solution for our entire community.
Chartis: How can organizations quickly achieve these kinds of benefits?
Wiest:
No. 1 is having clear decision rights and being able to make those hard decisions that will allow you to provide the right care at the right time in the right place at the right cost.
You also need to create an efficient and effective project structure. It is critical to have that structure in place to be able to escalate issues and make sure you’re addressing interdependencies throughout the organization so that you’re not existing in silos and can capture the value from operating as an enterprise rather than a holding company.
And establishing accountabilities for leaders to capture value is really important. Building value capture into the project automatically tells leaders it is important, and we want you focused on it. And then creating a mechanism to hold them accountable on a month-by-month basis makes sure that the value is indeed being captured.
Chartis: What else should organizations be thinking about going forward?
York:
It’s a common thread through what Ann and John were saying — capturing value and achieving integration is especially critical now. Your partnership strategy and portfolio should be set up to enable your organization to do what it needs to do to continue to advance the mission and thrive in the market and with the populations you care for.
Healthcare leaders often focus on net new relationships that provide growth and/or address needed capabilities for success, but partnership strategy and portfolio management should also include looking at the existing partnerships and relationships. For example, two organizations might have combined 10 years ago, but never integrated some of the areas from the business case or maybe never achieved all the opportunities identified. It’s not too late to go back and evaluate existing relationships against the original criteria established to define success.
Organizations should always be thinking about what value any given partnership has captured, what was left on the table, and if the structure and accountability is in place to predictably realize the opportunities and value potential in the partnership. The most important aspect of the partnership process is not about getting the deal done or getting the initial relationship but about achieving what the organizations said they would do and realizing the associated value from those commitments for all the stakeholders involved including the community.
Forces for Change is an annual trend outlook report from The Chartis Group focused on defining the forces shaping healthcare today and outlining what health systems can do to prepare for what’s next.
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