After a dip in deal activity in 2013, a newly released report from Bass, Berry & Sims PLC and Mergermarket predicts increased consolidation and an uptick in activity for 2014 … particularly for hospitals, physicians, and HIT companies.
Based on a series of interviews with healthcare and life sciences professionals and investors, the survey analyzes the anticipated M&A trends and the factors behind them. Published June 30, “Healthcare & Life Sciences M&A Outlook” found economies of scale and increased capital needs to be two of the major drivers cited for consolidation plans between hospitals and providers.
“We expect to see consolidation in healthcare across the board, driven by the increased need for infrastructure to promote quality and efficiency and to capture the necessary data to comply with regulatory requirements,” said Danielle M. Sloane, a member of the healthcare group in the Nashville office of Bass, Berry & Sims.
She continued, “Another driver of M&A in the physician practice sector is compliance. These days, healthcare companies have to be sophisticated to make sure they are operating in compliance with federal and state rules … there are so many of them.”
Sloane, a healthcare regulatory attorney, added it’s very difficult for one person in a small organization to wear the many different hats and acquire the array of skills required to effectively manage the complex administrative and regulatory environment. Add to that the decrease in reimbursement, and Sloane said it isn’t surprising that small physician practices want to align with a hospital or larger organization.
“As fee-for-service reimbursement is reduced over time and replaced with performance measures, profitability will depend upon coordination to improve quality and promote efficiency,” she said, adding that coordination calls for scale and a great deal of administrative management. Joining forces with hospitals or other large practices has become increasingly attractive to physicians who want to focus on patients rather than paperwork.
Overall, 86 percent of the survey respondents expect M&A activity to increase in the healthcare and life science industry. Three specific drivers were cited most often:
Increased demand for facility and equipment improvement (46 percent),
Need for IT support/capabilities (42 percent), and
Rising compliance costs (42 percent).
These bullish expectations come after a year in which deal activity took a downward turn. In 2013, healthcare saw 385 deals worth $97 billion as compared to 2012 when there were 459 deals worth $124 billion, according to Mergermarket data. The report authors opined the anticipated increases come amid a stronger economy and more clarity around the implementation of ACA.
Among survey respondents, 20 percent said physician groups would be the top area of consolidation. Key areas where that consolidation is expected to happen include physicians moving to hospitals (32 percent), insurance companies (18 percent), practice management companies, (16 percent), other physician practices (14 percent), integrated delivery systems (14 percent) or going under contract with insurance companies or hospitals (6 percent). Also, the respondents picked cardiology and dermatology as the two specialties likely to see the most activity in terms of consolidation.
While acquisition activity clearly is anticipated to rise, Sloane pointed out it is only one way to align physicians and hospitals. A variety of structured options including joint ventures, accountable care organizations (ACOs), co-management and gainsharing arrangements could also be utilized to help achieve clinical integration and administrative collaboration. Many options, Sloane added, are going to be extremely data driven with each participant required to meet certain quality and efficiency benchmarks.
“ACOs can be a viable alternative to acquisitions,” she pointed out, noting it’s a way to bring physicians and hospitals into alignment without having to make an outright purchase. Bundled payments offer a similar option.
Co-management is another alignment strategy that has gained popularity over the last few years. “Co-management is essentially where a hospital contracts with a physician group practice to manage a service line,” she said. Sloane added the physicians go beyond clinical or medical director duties and are also responsible for managing quality and efficiency metrics.
She said such an arrangement generally allows for a base salary with bonus money allocated for reaching a certain percentage threshold on various metrics like a reduction in infection rates or starting procedures on time. “When you design them (co-management contracts), you have to be careful not to inadvertently incentivize either overutilization on the one hand or an inappropriate reduction in care on the other hand. It’s a very delicate balance,” she noted.
Similarly, Sloane continued, “Gainsharing arrangements engage physicians to adopt specified clinical behaviors to help control costs.” Typically, the hospital would agree to share with physicians any reduction in the hospital’s cost for patient care that could be attributed in part to the physician’s efforts.
An example might be that physicians are rewarded for using a brand of device that could be purchased in bulk, thus saving money. However, Sloane stressed the physician usually still has the ability to use a different brand based on medical need or patient preference. She added the Office of the Inspector General has been vocal regarding gainsharing in recent years. “The OIG has issued numerous advisory opinions that can be used to help physicians and providers develop appropriate gainsharing arrangements,” she pointed out.
No matter what route physicians and hospitals take to join forces, Sloane said it is becoming increasingly apparent that aligning resources will be necessary to meet the clinical, quality and regulatory demands being placed on the healthcare industry.
To review the complete M&A report, go online to bassberry.com and click on “Firm News” at the top of the homepage.
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