Healthcare Consolidation in US September 2013 BLOG POST
Healthcare M&A Spending Increased in Q2 2013 Health care merger and acquisition activity in the US strengthened in the second quarter of 2013 with 223 deals, increased by 10% as compared to the first quarter. However, the quarter underperformed (15%) in comparison with the same quarter in 2012. The preliminary total for health care M&A activity in the second quarter of 2013 is $52.6 billion, up nearly 252%, compared to the USD14.9 billion spent in the first quarter. Deal value was comparable to the same quarter of 2012, when buyers committed US52.3 billion. Key Highlights: • In the Hospital sector, economic pressures brought on by weakening inpatient volumes and Medicare reimbursement reductions have created an atmosphere of uncertainty, particularly for non-profits • Health care technology sector remained steady, with 78 deals announced in each quarter of 2013 • Biotechnology sector experienced a strong rebound, up 55%, with 17 deals announced in the second quarter. Eleven transactions were initiated by other biotech companies, and five acquirers were pharmaceutical companies hoping to bolster their product pipelines • Pharmaceutical companies were also busy buying other Pharma companies, or certain assets of other Pharma companies. Fifteen of the 30 announced deals in this sector involved the rights to drugs still in clinical trials, rights to commercialize drugs in new geographic markets or the intellectual property rights to promising early-stage drugs Some of Top Deals in Healthcare Industry in 20131 Target
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Bidder
Industry
Sub-sectors
Purchase price (USD Mn)
Onyx Pharmaceuticals
Amgen
Pharma
Drugs and biologics
10,400
Life Technologies
Thermo Fisher Scientific
Medical devices
Diagnostics
13,600
Bausch & Lomb
Valeant Pharmaceuticals
Pharma
Drugs and biologics
8,700
Warner Chilcott
Actavis
Pharma
Drugs and biologics
8,500
Health Management Associates
Community Health Systems
Providers
Hospitals, acute care
3,900
Transitions Optical joint venture
Essilor International
Vendors
Medical devices
1,730
Vanguard Health Systems
Tenet Healthcare Corp
Providers
Hospitals, acute-care
4,300
AssuraMed Holding
Cardinal Health
Pharma
Pharmaceutical
1,940
Modern Healthcare
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US Hospital Consolidation Activity Highest in Decade, Increased by Healthcare Reform Strategic considerations and preparation for healthcare reform were the primary drivers for the highest consolidation activity in the hospital market since 2000. More than traditional factors such as economies of scale, access to capital and market share; expected reimbursement reductions and changing reimbursement methodologies have been forcing providers to operate more efficiently and improve coordination, pushing providers toward consolidation. Some of the Common Reasons for Hospital Transactions include: 2 •
Financial condition While demand for healthcare services continues to rise and healthcare constitutes an ever greater portion of the US GDP, not all hospitals are experiencing robust financial performance. In many markets, hospitals are feeling strained by the increased competition of market consolidation and the pinch of crushing levels of debt and high fixed operating costs. In some instances, this results in a violation of bond covenants, a reduction in bond ratings, or worse, bankruptcy. As a result, struggling hospitals have chosen to align themselves with a more financially secure health system, either as a proactive approach to remaining viable as a going concern, or as a last resort through the bankruptcy process. The high and relatively inflexible fixed cost structure of hospitals necessitates growth in size to achieve economies of scale to remain both viable and competitive. The larger a health system, the better it is in negotiating Payer contracts, contracting for medical supplies and leveraging the costly implementation of information technology systems such as electronic health records.
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Access to capital The rapidly changing landscape of healthcare has taken the need for capital to new levels. As electronic health records replace paper charts, health systems have been required to invest millions in the software, hardware and staff training necessary to implement EHRs throughout their systems. Additionally, advances in medical technology have led to continuing increases in costs associated with the latest technologies available in medical treatment. Consolidation in local healthcare markets has been occurring rapidly in recent years, as health systems have purchased freestanding imaging centers, ambulatory surgery centers, physician practices and other outpatient ancillary businesses. Without adequate access to capital, a health system may find itself unable to participate in this consolidation activity and ultimately lose key services and market share to its competitors.
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Declining and/or changing census Population changes to a specific region have led to increased consolidation among hospitals as well. Certain hospitals have observed shrinking populations in their service area, which may not have been projected when a facility was built or expanded years prior. This is especially true in rural
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Becker’s Hospital Review
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markets and in the Midwest, where several manufacturing plants have closed or been outsourced. By merging with another health system in the local market, a hospital struggling with revenue associated with its low patient census may be able to realize overhead expense synergies and relieve margin pressures. Another population trend relates to a shift of patients to more high-deductible plans with health savings accounts. Health systems generally have a harder time collecting fee-for-service payments from their patients as opposed to payments remitted from commercial Payers. As a result, a shift toward more private Payers will put pressure on revenue and in turn on profit margins. •
Pricing Power Commercial Payer consolidation has been increasing in recent decades. According to IBIS World, in the five years ended 2012, the number of health insurance companies decreased by approximately 1.8% annually due to consolidation, which is expected to continue at a 0.3% annual rate through 2017. This consolidation in the managed care industry has led to Payers having more clout in regard to contract negotiations with regional and community health systems. As a result, health systems have consolidated themselves as a way to increase their size, and in turn increase their own negotiating clout with managed care companies.
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Management Frequently, large health systems have more experienced leadership and greater breadth and depth of management. The benefits of having an experienced and proven leadership team in place for a health system can be easily overlooked, given the multitude of seemingly macro-level pressures. While many of these industry pressures are universally shared, a savvy leadership team can navigate these turbulent industry conditions with a greater likelihood of success. Frequently, smaller hospitals do not have the manpower or depth and breadth of management experience to steer through the many nuances of PPACA and/or prepare for the outcomes the new law will create. Smaller hospitals may also have difficulty with succession planning, particularly as seasoned management teams opt for retirement instead of retooling for the forthcoming industry transformations. Without resources it can be very difficult to train and groom a new set of executive leaders, and it may be more effective to simply tap into an already proven executive team at a different health system.
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Increased Patient Base The quickly changing, and often ambiguous, landscape in healthcare has required health systems to become more dynamic and nimble to remain profitable, avoid regulatory violations and to provide the care their patients have come to expect. Recent developments include the emergence of accountable care organizations, which are expected to replace traditional fee-for-service payment models. This has resulted in health systems acquiring a variety of healthcare entities from physician practices to hospitals as they seek to increase their ability to provide adequate healthcare at all phases of the care process as efficiently as possible. The continued rollout of PPACA will also lead to a larger amount of the population seeking healthcare, which has led health systems to acquire other health systems as they seek to prepare for the increase in demand for their services.
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Given the high fixed costs associated with running a health system, a failure to increase its patient base as a result of the aforementioned increase in demand may result in a health system finding itself at a disadvantageous position compared to its competitors.
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