Health­care M& A ac­tiv­ity ex­pected to be flat or down in 2019

Modern Healthcare - - News - By Tara Ban­now

AL­MOST 60% of health­care in­vestors and op­er­a­tors said in­dus­try merg­ers and ac­qui­si­tions will ei­ther stay the same or de­crease in the next year, ac­cord­ing to a re­cent sur­vey.

The sur­vey, con­ducted by Cap­i­tal One Health­care, in­di­cates that 48% of re­spon­dents said health­care M& A will stay the same in the com­ing year as it has been within the past 12 months, while 10% said it will be lower.

Al Aria, a se­nior man­ag­ing di­rec­tor with Cap­i­tal One Health­care, said he thinks those re­sults re­flect re­spon­dents’ re­ac­tions to the cur­rent state of geopo­lit­i­cal un­cer­tainty.

“I don’t think it’s plateau­ing from an op­por­tu­nity stand­point, I think it’s very ro­bust right now,” he said. “We’re see­ing record M& A. I think some peo­ple might be ques­tion­ing how much higher it can go, be­cause we’re al­ready at such a high level.”

There’s “tremen­dous” op­por­tu­nity for com­pa­nies to grow or­gan­i­cally, Aria said. On the payer side, Medi­care Ad­van­tage could pro­vide a huge boost in cov­ered lives. For some providers, M&A deals can help them truly move into the elu­sive world of value-based care, which has been slow to catch on.

Other health­care ex­perts were sur­prised by the sur­vey’s M& A find­ings, ar­gu­ing they have not seen in­di­ca­tions of a slow­down.

Don McDaniel, CEO of Can­ton & Co., a health­care con­sul­tancy in Baltimore, said he thinks the trend to­ward con­sol­i­da­tion will con­tinue. Some fac­tors that could be slow­ing the pace: Health plans are get­ting so big, they could be run­ning out of tar­gets.

“We may see a re­di­rect­ion to­ward en­abling or en­hanc­ing as­sets,” McDaniel said, “be­cause if you’re one of the big health plans, how many more tar­gets do you re­ally have?”

McDaniel said he doesn’t think the met­ric is in­dica­tive of a plateau in health­care deals. “It’s a re­di­rect­ion or a level set­ting,” he said. “You do this crazy con­sol­i­da­tion for a while, and then you have a level set­ting.”

Michael Cole, man­ag­ing di­rec­tor and health­care in­dus­try leader in Al­varez & Marsal’s trans­ac­tion ad­vi­sory group, also said his firm doesn’t see any signs of an M&A plateau on the horizon. “We see a lot of rea­sons for why the in­ter­est in this space is grow­ing,” he said. “Health­care con­tin­ues to grow at a mega level.”

Get­ting priced out?

One hang-up that could ham­per some deals: High­priced tar­gets, Cole said. In­vestors might be wait­ing on cer­tain deals un­til prices come down, he said.

Other find­ings sup­port that no­tion. About 1 in 4 in­vestors who re­sponded to a July sur­vey by West Monroe Part­ners said their top chal­lenge in com­plet­ing health­care merg­ers and ac­qui­si­tions was a short­age of at­trac­tive tar­gets. The top rea­son? They were too ex­pen­sive.

Asked to iden­tify the big­gest health­care growth seg­ment in the next year, 46% of Cap­i­tal One Health­care’s re­spon­dents said health­care in­for­ma­tion tech­nol­ogy. An­other 30% said home health and hospice. Eight per­cent said in­sur­ance providers and an­other 8% said as­sisted liv­ing and skilled nurs­ing.

Health­care IT also took the top spot in a 2016 Cap­i­tal One Health­care sur­vey. That year, 66% of re­spon­dents said health IT would see the most growth.

Cap­i­tal One’s Aria said that all comes back to the on­go­ing shift to­ward value-based care, which providers can’t do with­out data. The ul­ti­mate suc­cess of the pro­posed CVS Health-Aetna union that just won U.S. Jus­tice Depart­ment ap­proval will be a good in­di­ca­tor of how hav­ing data on pa­tients

ac­tu­ally can drive down costs, he said. Aetna will be able to col­lect all of the data on its mem­bers and col­lab­o­rate with CVS to en­sure peo­ple are com­pli­ant with their pre­scrip­tions and ed­u­cated on chronic dis­eases, Aria said.

“If we do end up with a value-based care sys­tem, we need to be able to mea­sure it some­how and there’s no way to mea­sure it other than data and out­comes,” he said. “That’s why you’re see­ing so much in­vest­ment in that.”

Un­for­tu­nately for providers, McDaniel said, the an­a­lyt­ics ser­vices mar­ket is a mess. Tools are pro­pri­etary, siloed, and they’re not shar­ing data, he said. “I think there is a le­git­i­mate ques­tion as to, ‘Who is the com­pany the mar­ket is go­ing to start to rely on to be an hon­est, cred­i­ble bro­ker of these ca­pa­bil­i­ties?’” McDaniel said.

The run­ning joke with hospi­tal com­pa­nies in Nashville, where Cole is lo­cated, is to ask what health­care IT sys­tem they’re us­ing.

“They say all of them,” he said. That’s be­cause most have grown through ac­qui­si­tion, and took on hospi­tals that al­ready had cer­tain soft­ware.

Aria said he’s not sur­prised that home health and hospice con­tinue to take sec­ond place. The cost dif­fer­ence be­tween a hospi­tal bed and home health or hospice is “as­tro­nom­i­cal,” he said. Pa­tients also pre­fer those set­tings over hospi­tals, he added.

Not far with value-based care

More than 60% of the re­spon­dents to Cap­i­tal One’s sur­vey said their tran­si­tion to value-based care is just be­gin­ning. About 30% said they were about half­way. Six per­cent said nearly com­plete, and only 2% said they were fully tran­si­tioned.

Aria said he doesn’t think that re­sponse in­di­cates re­sis­tance to the trend, it’s just be­ing ham­pered by the abil­ity to get re­li­able, qual­ity data.

The sta­tus quo is pow­er­ful, and physi­cians are es­pe­cially leery about tak­ing on down­side risk, McDaniel said.

An­other prob­lem is that in­vestors don’t see that they can make money in a value-based pay­ment model, Cole said. Un­til that hap­pens, it’s go­ing to have a hard time catch­ing on, he said.

On the provider side, it’s hard to nail down a spe­cific def­i­ni­tion of value and trans­late that into a pol­icy that works for dif­fer­ent kinds of providers, Cole said. “You prob­a­bly have a lot of providers that just don’t be­lieve value-based care is a real thing,” he added.

Also in Cap­i­tal One Health­care’s re­sults, 72% of re­spon­dents said they ex­pect their busi­ness to per­form bet­ter next year, com­pared with 68% in 2016. No re­spon­dents said their busi­ness would per­form worse in the cur­rent sur­vey, com­pared with one in 2016.

Cap­i­tal One Health­care com­piled the sur­vey in ad­vance of its an­nual con­fer­ence for health­care pay­ers and providers. This year’s gath­er­ing will fea­ture about 200 health­care in­vestors, bankers, op­er­a­tors—pay­ers and providers—and thought lead­ers, about

● half of whom took the sur­vey.

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