trends in healthcare mergers and acquisitions · powerful physician practice footprint in multiple...

CONFIDENTIAL – ©2018 Kaufman, Hall & Associates, LLC. All rights reserved. 1CONFIDENTIAL – ©2018 Kaufman, Hall & Associates, LLC. All rights reserved.

Trends in Healthcare Mergers and Acquisitions

Louisiana Hospital Association

Winter Leadership Symposium

Anu Singh, Managing Director

January 29, 2019

CONFIDENTIAL – ©2018 Kaufman, Hall & Associates, LLC. All rights reserved.T R E N D S I N H E A LT H C A R E M E R G E R S A N D A C Q U I S I T I O N S 2

Today’s Agenda

• Transformation, In Action

• M&A, Market Observations

• Bringing It Back to Strategy

• Looking to the Future

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Transformation, In Action


Legacy Healthcare Is Under Immense and Multiple Pressures

Insurers/Risk Managers

Will change the high and often inconsistent costs of legacy care models

Clinicians/ Caregivers

Are likely to resist payment changes until new models are proven

Patients/ Users

Losing tolerance for lack of accessible transparency about cost and quality

Disruptive Entrants

Show intense cross-vertical interest in key segments of care delivery

GovernmentAgencies

Continue their regulatory scrutiny as transformation marches ahead


Industry Transformation Empirics: Historical Reference

“Every major reform brings about new, sometimes unforeseen, problems.

No one foresaw the industry's spectacular growth, with the number of air

passengers increasing from 207.5 million in 1974 to 721.1 million last year…

Still, fares have come down. In 1974 the cheapest round-trip New York-to-Los

Angeles flight (in inflation-adjusted dollars) that regulators would allow:

$1,442. Today one can fly that same route for $268.”

Source: Breyer, S.: "Airline Deregulation, Revisited." Bloomberg Businessweek, Jan. 20, 2011.

—Supreme Court Justice Stephen Breyer

AIRLINE INDUSTRY

https://www.bloomberg.com/news/articles/2011-01-20/airline-deregulation-revisitedbusinessweek-business-news-stock-market-and-financial-advice


Industry Transformation Today: Appendectomy Costs in CA

“The price of an appendectomy ranged from as little as $1,529 to as much as

$182,955 depending on where it was performed, according to results

published in the Archives of Internal Medicine. The price of an appendectomy

looked to vary more by individual institution rather than geographic region.

‘While Fresno County had the smallest range of charges, the lowest and

highest charges still differed by a remarkable $46,204,’ the study found.”

Source: Kliff, S.: "How much does an appendectomy cost? Somewhere between $1,529 and $186,955.” The Washington Post, April 24, 2012.

HEALTHCARE

http://archinte.ama-assn.org/cgi/content/full/archinternmed.2012.1173

https://www.washingtonpost.com/blogs/wonkblog/post/how-much-does-an-appendectomy-cost-somewhere-between-1529-and-186955/2012/04/24/gIQAMeKMeT_blog.html?utm_term=.9e259a281c35


Industry Transformations Epitomize the “Fork in the Road”

ManagedOpportunities

• Service/product aggregation and disaggregation

• Consolidation of local/retail banking providers

• Consumer initiatives and “frictionless” transactions

• Legacy cost structure andinfrastructure

• Disintermediation of travel agency and brokerage

• Transparency of price and availability

MissedOpportunities

Note: Copyrights of images belong to their respective owners.


Key Takeaways from Other Industry Transformations

The lack of

purchaser/consumer

flexibility has been

at the core of

many industry

transformations

Cost

Timing/Availability

Location/Site Preference

“Friction” of Transaction

Quality and Patient Satisfaction Rating


The Healthcare Transformation Roadmap Will Be Arduous

Accept a new business model that rewards efficiency and value

Establish market essential sites, service lines, and continuums of care

Develop aptitude and foresight to thrive in new

payment models Commit to a financial “altitude” to modernize and drive R&D initiatives

Create an aware, empowered, and engaged

human capital teamBe open to collaborative modelswith many forms of partnerships

Garner support of stakeholders and fiduciaries to reconstruct the business model


M&A, Market Observations


Consolidation Is Accelerating

Sources: Kaufman Hall Transactions Data, S&P Median Credit Rating Reports, Moody's Median Credit Rating Reports, Moody's Credit Rating Changes Reports.

Hospital and Health System M&A Transactions, 2000-2017

84 85

61

38

5853 57 58 60

50

74

8691

98 102112

102

115

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Auctions Yield

Chaos for Bonds

King v. Burwell

The number of transactions

nearly doubled between

2007-2017


Transaction Target Size Is Increasing

Average Target Revenue per Transaction ($ in millions)

$50

$100

$150

$200

$250

$300

$350

$400

$450

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Average Target Revenue

13.1% CAGR

Source: Kaufman Hall data as of Sept. 30, 2018.


Leading Organizations Partnering at Unprecedented Levels

Transactions and Associated Revenue Per Year, 2013-2017

Year Transacted Revenue ($ billions) Number of Transactions

2017 $63,186 115

2016 $31,288 102

2015 $32,028 112

2014 $23,098 102

2013 $31,328 98

Sources: Kaufman Hall Transactions Data, S&P Median Credit Rating Reports, Moody’s Median Credit Rating Reports, Moody’s Credit Rating Changes Reports.

In 2017, 14 deals involved a seller with a credit rating of A- and better, compared to nine deals in 2016 and one in 2013.

7 of the 10 largest national health systems have been a party to an announced, completed, or in-process major acquisition or partnership (target of $1B+ of net revenue) in the last five years.

$


Participation Is Rising Among the Highest-Rated Borrowers

2 23

4

1 1

7

13

9

14

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Number of Sellers with Target Credit Ratings A- or Above

Note: Copyrights of images belong to their respective owners.Sources: Kaufman Hall Transactions Data, S&P Median Credit Rating Reports, Moody's Median Credit Rating Reports, Moody's Credit Rating Changes Reports.


Mega Deals Are Expanding National and Regional Presence

Note: Copyrights of images belong to their respective owners.Sources: Kaufman Hall Transactions Data, S&P Median Credit Rating Reports, Moody's Median Credit Rating Reports, Moody's Credit Rating Changes Reports.

Many mega deals either expanded each partner’s statewide to regional coverage, or brought nationwide systems together for an enhanced national reach

National PartnershipsPartnerships that expanded each system’s

operations across multiple states

Regional PartnershipsPartnerships that extended operations, creating

systems with regional presence


For-Profits Are Repositioning and Exiting Markets

10 transactions involving23 hospitals





Summary M&A Market Observations

• Transactions are moving to a more strategic rationale and away from a heavy financial focus

• Larger and higher-rated organizations are scaling up at a pace and level that exceeds the steady activity involving smaller, more vulnerable providers

• Today’s partnerships are blurring traditional boundaries of healthcare business lines

• Transactions are increasingly occurring across state lines, creating super-regional systems


Bringing It Back to Strategy


Economies of scale and synergies still matter, but accessing and capitalizing on intangible asset investments and reducing susceptibility to commoditization have brought “an entirely new echelon of leading-edge partnerships.”


The Traditional Provider Business Model Is Under Attack

INCREMENTAL CHANGE IS NOT ENOUGH

19%

42%

2008 2017

National Estimate


Millennial cohort now larger than Boomers… they think and act differently

Commercially insured in HDHPs trending up

Changing Culture and ExpectationsShifting Costs to Consumers

Changing Demographics Changing Consumer Technology


The Distinction Between Major Industrial Changes

Aggregation Transformation

Strategic FocusLeveraging economies of scale for increasing marginal profits

Use of innovation to materially change industry dynamics

Revenue Strategy

“Buy low, sell high” approach to acquiring revenue

Pursuit of high “quality of revenue” strategic pursuits

Expense StrategyIntense focus on fixed cost to maximize operating leverage

Total cost evaluation, attacking all sources of waste/excess

Capital StrategyMore likely to be driven by capacity and throughput

Frequently aimed at new channels, markets, or services

Market PostureMarket share, reliant on sheer size and barriers to entry

Market expansion, driven by alignment and collaboration


Industry Forces Are Reshaping the Basis of Competition

True population health management likely will be beyond

the reach of most organizations that opt

to ignore collaborations and

partnerships

New entrants will likely focus on either

higher margin services or more consumer-driven elements, ceding the rest to legacy

providers

The provider space will further disintegrate into

more distinct segments of care

delivery

Consolidation is a given: new forms of

alignment with unexpected

participants and with novel

structures will become the norm

Industry transformation will present the biggest threat to leadership teams that ignore the fundamental market shift,

and provide opportunities to those that embrace it.


Business Models Must Evolve as Transformation Is Pursued

Holding Company ModelOperating Company Model

• Emphasizes asset acquisition for brand extension

• Siloed and business-unit/facility specific orientation, metrics and structure

• New entities maintain status largely operating as they did pre-merger

• Emphasizes growth and advancement to build efficiencies and reduce costs

• Organization-wide focus on key competitive factors

• Centralized governance structure to ensure economies of scale and scope


Attributes once highly valued in healthcare, such as stability, judiciousness, and incrementalism—are becoming increasingly obsolete.

Today, effective leadership teams must be agile, creative, and foreseeing.


Looking to the Future


Future Trends

• More mega mergers and other large deals involving well-capitalized and high-performing providers

• More for-profit/not-for-profit alliances as providers seek broader and more complementary portfolios

• Large players rationalizing portfolios during post-merger integration, creating additional buying opportunities

• More regional and local deals with bigger size and scale as systems strive to expand access and fill care continuum gaps


New and Powerful Competitors Will Fuel Transformation

Note: Copyrights of images belong to their respective owners.Source: Byers, J.: “Optum a Step Ahead in Vertical Integration Frenzy.” Healthcare Dive, April 12, 2018. Japsen, B.: “Anchored by Optum’s Reach, UnitedHealth’s Profits Jump.” Forbes, July 17, 2018.

Emerging Industry Leader and Market

Disruptor

Powerful physician practice footprint in multiple markets with the scale to re-engineer the clinical model in both primary and specialty lines

“In the second quarter of 2018, OptumHealth increased the number of people it serves by 7 percent to 92 million. Revenue per person grew 12 percent over last year, as OptumCare grows and diversifies its businesses.”

Andrew WittyCEO of Optum

“For example, the DaVita acquisition, which is still pending, allows OptumCare to operate in 35 of 75 local care delivery markets the company has targeted for development.”

Andrew HayekOptumHealth CEO


New and Powerful Competitors Will Fuel Transformation

Integrated Retail and Risk-Bearing Platform

Integrated retail-level health company with a risk-bearing entity that has scale and infrastructure to manage chronic disease states in a consumer-engaged platform

“This transaction creates opportunity to rethink and reinvent

U.S. healthcare…[it] will create an innovative, new healthcare

platform that will be easier to use, less expensive for

consumers, and integrated broadly within the marketplace to

deliver superior, coordinated care.”

CVS Health Earnings Report

May 18, 2018


Even More Potential Competitors Are Plotting Their Entry

Actively evaluating a collaboration that would combine 5,000 retail stores, a leading online retail platform (140 million weekly transactions) and 14 million health plan members, nationally

Has in-sourced employee health/wellness clinics for its workforce and continues to develop wearable technology with an unprecedented patient database

Has acquired pharmacy licenses and/or operations in 14 states and is a founding partner with JPMorgan Chase and Berkshire Hathaway to develop new healthcare solutions for its workforce


The FTC’s Influence on the Industry Is Noteworthy

• The FTC has historically:

─ Viewed provider consolidation through the lens of pricing of historically observed inpatient volumes

─ Expressed its desire to limit concentration of area providers within fairly tight geographic parameters

• The rationale is that this would reduce competition and give hospitals inappropriate pricing power

• Limited market definitions and single measurement criteria are leading to blocked mergers that pale in comparison to the scale of corporations in other industries


What It Takes to Be a Successful Health System in the Future

• Financial resources to invest in new capabilities, particularly for digital health and population health management

• Market presence across a sufficiently broad geography

• Capital and resources for innovation, and research and development

• Internal talent/ability to attract external talent, especially in the digital space

• Ability to attract innovative partners and a strategy to maximize value of those partnerships

• Financial wherewithal to allow time and flexibility to develop the necessary capabilities and test new strategies

Scale plays a major role in achieving these strategic objectives.


"NONPROFIT IS A TAX STATUS, NOT A BUSINESS MODEL."

-DORRI MCWHORTER

Source: Bertagnoli, L.: “Managing a 140-Year-Old Nonprofit Like It’s a Startup.” Crain’s Chicago Business, Oct. 5, 2018.


About the Speaker

Anu Singh, a Managing Director of Kaufman Hall, provides financial advisory services to healthcare organizations and companies nationwide. Mr. Singh leads the evaluation, structuring, negotiation, and execution of mergers, acquisitions, partnerships, joint ventures, and other forms of transactions. He also leads projects involving the assessment of strategic options, growth strategies and business unit/segment viability. His clients include national and large multi-regional health systems, academic medical centers, community hospitals, large physician practices and groups, health insurers, non-acute care providers, and capital providers to healthcare entities. Mr. Singh has advised on or evaluated more than 100 healthcare transaction-related engagements.

Prior to joining Kaufman Hall, Mr. Singh was a Director at Huron Consulting Group, within its Corporate Advisory Services practice. His previous experience includes the execution of turnaround and restructuring plans, and advising on mergers, acquisitions, and other transactions. Mr. Singh also has raised capital for a variety of clients, ranging from underperforming or distressed companies to well-capitalized, investment-grade companies across multiple industries. He has extensive overseas work experience, particularly on behalf of aid agencies, Central Banks, and other parties involved in major financial markets.

Mr. Singh has presented at various industry and professional events and seminars, including those sponsored by The Governance Institute, Healthcare Financial Management Association, Voluntary Hospital Association, Becker’s Hospital Review, National Federation of Municipal Analysts, and the Turnaround Management Association. He also has authored articles and been quoted in a number of industry publications.

Mr. Singh has an M.B.A. from Northwestern University’s Kellogg School of Management and a B.S. in Finance from the University of Illinois at Urbana-Champaign. He holds CPA, CFA, CTP, CIRA, and CDBV certifications.

Anu SinghManaging DirectorKaufman, Hall & Associates, LLC

[email protected]

mailto:[email protected]


Qualifications, Assumptions and Limiting Conditions (v.12.08.06):

This Report is not intended for general circulation or publication, nor is it to be used, reproduced, quoted or distributed f or any purpose other than those that may be set forth herein without the prior written consent of Kaufman, Hall & Associates, LLC. (“Kaufman Hall”).

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