2018 M&A in Review
New Healthcare Combinations and Competition
Strategic Insights: New Healthcare Combinations and Competition
As new combinations and competitors appear in the healthcare market, hospitals and health systems should:
  • Double down on their consumer strategy, as competition increases to control healthcare’s “front door.”
  • Seek opportunities to deepen growth across the spectrum of healthcare services through combinations or partnerships with other healthcare organizations.
  • Innovate to diversify revenues by leveraging clinical excellence, operational expertise, brand, and other resources.
New competitors are bringing massive scale and capital resources to the healthcare market, with annual revenues up to almost 10 times those of the largest not-for-profit health systems (see Figure 4). A trend that rose to prominence in 2017—when CVS Health announced its plan to acquire Aetna, Humana acquired home health long-term care provider Kindred Healthcare, and Optum acquired DaVita Medical Group—has continued in 2018. New in 2018 were clear signs that the tech giants plan to make significant moves into healthcare. Early in the year, the yet-unnamed healthcare joint venture between Amazon, Berkshire Hathaway, and JPMorgan Chase was announced, followed by Amazon’s acquisition of PillPack, a full-service pharmacy that sorts and delivers medications directly to consumers nationwide. Apple released an upgrade to its Apple Watch, which included an FDA-approved electrocardiogram monitor app, and announced plans to develop a primary care clinic model that would initially serve Apple employees. Alphabet hired former Geisinger Health System CEO David Feinberg to lead Google’s various healthcare initiatives, a noteworthy sign that the company plans a more focused approach to the healthcare market.
In a rapidly changing field of competition, these efforts illustrate the bets health systems are placing on healthcare’s future.
  • In recent years, health systems have expanded into specialty pharmaceuticals,6 and in 2018, an alliance of health systems announced the formation of a not-for-profit company, since named Civica Rx, to manufacture essential generic medications.7
  • Other health systems—especially those with academic medical centers—are investing in healthcare start-ups, and can often do so at a better price than venture capital firms because they can offer their own facilities for clinical trial sites, and also bring the strength of their brand to the partnership.
  • Still others are leveraging their reputations and clinical expertise through innovative expansions of service, such as the virtual care collaboration between NewYork-Presbyterian (NYP) and Walgreens, which includes the ability to access an NYP expert for a second opinion through the Walgreens’ Find Care Now digital marketplace, launched in July 2018.8
The main target of many of these new or newly combined competitors is the “front door” of healthcare: the very services—particularly primary care—that have traditionally fed demand for higher-acuity inpatient services at health systems.  If these new market entrants can gain control of healthcare’s front door, without the expense and burden of hospital facilities and inpatient care, they will also be able to influence patient referral patterns, and hospitals will increasingly assume the role of cost centers. Health plans have been active participants in several of these new combinations, and bring to the table expertise in managing risk, relationships with millions of consumers, and substantial capital reserves.   Not-for-profit hospitals and health systems may still have an advantage in working with physician groups, particularly if the group leaders or board members are uneasy about the for-profit status of a potential acquirer. At the same time, all hospitals and health systems should be focused on a consumer strategy that makes them essential and relevant to consumers across the broadest possible spectrum of their healthcare needs. This may involve both acquisitions and partnerships with organizations that have developed strong competencies in such areas as lab tests, imaging, and urgent care, where consumers are seeking convenience, accessibility, and affordability. For example, PeaceHealth’s acquisition of ZOOM+Care’s on-demand digital and retail health platform in December 2018 was described by PeaceHealth’s CEO as an acceleration of the health system’s “vision of ensuring greater healthcare accessibility and affordability…while increasing [its] ability to meet the on-demand needs of today’s consumer.”5
At a time when many health systems are focused on their core business, ProMedica’s acquisition of HCR ManorCare stood out. The merger is a move away from “front door” services that build health system referral networks to post-discharge services, where health systems have been more likely to partner than to acquire. Within the shared geography of northwest Ohio (ProMedica and HCR ManorCare are both headquartered in Toledo), the merger provides ProMedica the opportunity to deepen growth into the continuum of care for an aging demographic. Less certain are ProMedica’s plans for other markets where HCR ManorCare has a presence. It is too soon to predict whether the ProMedica/HCR ManorCare deal is an exception or the start of a new trend. But health systems are clearly interested in moves that will help them diversify their revenue, get in on the ground floor of new delivery models, or control the cost and volume of needed supplies. For example:
6 - Crosby, J.: “Fairview Health Services Cements Stake in Pharmacy Venture.” Star Tribune, Dec. 9, 2013. http://www.startribune.com/fairview-health-services-cements-stake-in-pharmacy-venture/235137271/
5 - PeaceHealth: “PeaceHealth to Acquire ZOOM+Care® to Expand On-demand Primary and Specialty Care Across the Pacific Northwest.” Press release, Dec. 18, 2018. https://www.peacehealth.org/PeaceHealth-to-acquire-ZOOM-Care
7 - Mukherjee, S.: “A Superstar Team of Hospitals Is Sick of High Drug Prices—and Launching a Nonprofit Drug Company to Fight Them.” Fortune, Sept. 6, 2018. http://fortune.com/2018/09/06/civica-rx-nonprofit-drug-company/
8 - Bryant, M.: “Walgreens Rolls Out Digital Marketplace with 17 Well-known Providers.” Healthcare Dive, July 27, 2018. https://www.healthcaredive.com/news/walgreens-rolls-out-digital-marketplace-with-17-well-known-providers/528748/
©2018 Kaufman, Hall & Associates, LLC
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