Macroeconomic headwinds drive mergers and acquisitions activity
Hospitals and health systems are motivated to combine forces as their individual growth has stalled due to macroeconomic headwinds. The main factors driving activity in the healthcare sector involve a combination of the following, but are not limited to:
- An aim to improve market relevance by offering comprehensive and specialized services that patients need
- A focus on value-based population health management with the aim of improving health outcomes for a specific population while controlling costs
- The desire for revenue and geographic diversification and economies of scale
- The need to address Medicaid expansion and certificate-of-need changes in certain states
Viewpoints on various mergers
Horizontal mergers
When a health system acquires a hospital or when two physician practices with overlapping services in the same geographic area merge, there are benefits and drawbacks.
Benefits:
- Newly merged entities may operate more efficiently by sharing clinical and administrative resources and best practices, which would otherwise not be shared when operating in silos
- The increased negotiating power for volume discounts in inpatient and outpatient supplies and equipment can led to more lower costs for the health systems’ bottom line, and potentially patients
Drawbacks:
- The merging systems may close services such as intensive care, labor and delivery, psychiatric care and cardiac surgery due to overlapping of services to reduce costs, thus requiring patients to travel outside their communities. This may pose additional challenges for patients who are disabled, without transportation, or non-English speaking
- Less competition in the market may result in fewer incentives to improve quality of care, posing a risk to patients and payers
Studies of markets that have undergone horizontal consolidation have found that mergers do not improve quality of care and may be worse in highly concentrated markets than in markets with more competition. One study found that risk-adjusted one year mortality for heart attacks in Medicare patients was 4.4% higher in more highly concentrated hospital markets than in less concentrated markets.3
Implications for pharmaceutical manufacturers:
- Manufacturers must adapt and emulate their customers’ newly established contracting processes as customers streamline their supply chain for bulk purchasing agreements and contracts for improved efficiency on logistics and distribution of products
- Specialty account managers may benefit from relationship building and call planning since after consolidation, their customer base will likely be consolidated allowing them to spend more time with customers who now oversee a greater portion of hospital services
Vertical mergers
As the most dominant trend, this type of merger occurs with entities that offer different services along the same supply chain, such as when a hospital or health plan acquires physician practices.
Between 2019 and 2022, hospitals acquired 4,800 additional physician practices, and 58,000 more physicians became hospital employees.4 According to new data from the consulting firm Avalere in a study sponsored by the Physicians Advocacy Institute, nearly 80% of physicians in the US are employed by hospitals, health systems and corporate entities.5
Benefits:
- The integration of services improves care coordination as different levels of care are combined, from primary care and specialty services to hospital services. This optimizes patient outcomes, increases patient satisfaction and minimizes medical errors
- Allows for potentially greater participation in complex, value-based payment programs
Drawbacks:
- Could limit patient choice in care if referrals are kept within the system
- May lead to price increases if the merging parties gain too much market power due to diluted competition
Implications for pharmaceutical manufacturers:
- Vertical mergers are advantageous for manufacturers with a large portfolio of products or a robust pipeline to expand market presence and establish relationships with Pharmacy and Therapeutics (P&T) committee stakeholders to gain formulary status
- The result is the ability to reach more prescribers and treat more patients, especially as the number of specialty drugs in oncology, immunology and rare diseases continues
Cross-market mergers
Cross-market mergers involve consolidation of health systems operating in different geographic markets, with an emphasis on intellectual capital, such as expertise and innovative strategies, as a key driver of value over traditional capital expansion.7
Examples of recent cross-market mergers include the Intermountain Health merger with SCL Health, the Advocate Aurora Health merger with Atrium Health, the recent UnityPoint and Presbyterian partnership announcement and the acquisition of Geisinger by Kaiser Permanente through a new 501(c)(3) organization called Risant Health.
The blueprint by Kaiser Permanente’s subsidiary reflects a “model in which intellectual capital is as – if not more – important than traditional capital”7– Kaufman Hall
Example of cross-market partnerships8
Seeking value through growth and efficiency
