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John Hesselmann As we take stock of health care mergers and acquisitions activity in 2020 – marked by both mega consolidations and deal breakups – it leads to the question: how much of a disruption will the pandemic prove to be for health care M&A? Will it create a sustained headwind
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John Hesselmann[/caption]
As we take stock of health care mergers and acquisitions activity in 2020 – marked by both mega consolidations and deal breakups – it leads to the question: how much of a disruption will the pandemic prove to be for health care M&A? Will it create a sustained headwind changing the motivations for consolidations? Or a short albeit intense tempest that may cause payers and providers to take cover before resuming business as usual when the winds calm?
Consolidation will continue to be strong in health care. [caption id="attachment_361549" align="alignleft" width="171"]
Cory Spinale[/caption]
M&A activity in virtual health care services has been soaring. In 2020, Teladoc Health Inc. acquired Livongo Health Inc. for $18.5 billion, merging two of the largest publicly traded virtual care companies. Thirty Madison Inc. raised $47 million from partners such as Johnson & Johnson. Humana Inc. invested $100 million into Get Heal Inc. and telehealth startup Ro raised $200 million. Investors are eyeing telehealth as one possible solution to a growing need to manage chronic conditions, which currently comprise more than 75% of all health care costs.
The coronavirus is also accelerating other motivations for M&A. Hospitals facing economic pressures, particularly smaller, independent hospitals that may have already been searching for a lifeline before the pandemic, may be even more inclined to seek partners.
Experts also tell us they expect much more investment and acquisitions in alternative types of care – beyond brick and mortar – as efforts grow to invest in new digital technology and point-of-care solutions. And as telemedicine use soars, particularly for vulnerable populations, deals can unleash advancements in areas such as video visits, digital and mobile care platforms, at-home services and advanced home care models.
Despite leaders’ best intentions, in recent months, many major consolidations began to stall. This included two megadeals involving Beaumont Health, which ended partnership discussions with both Advocate Aurora Health and Summa Health last year. Four hospitals located on Chicago’s South Side – Advocate Trinity Hospital, Mercy Hospital and Medical Center, South Shore Hospital and St. Bernard Hospital – also called off their planned $1.1 billion merger. COVID-19 may have only exacerbated other underlying challenges.
Here are some of the critical issues impacting health care mergers and acquisitions in 2020.
n Compatible cultures. Common issues tend to create an impasse in M&A proceedings. These include divergence in corporate mission, focus and governance, faith-based considerations, approaches to allocation of capital spending, centralized governance and physician influence. To avoid these challenges, leadership needs to spend time talking about what it means to come together and explore the vision, values and mission of the combined organization very carefully. This also means candidly acknowledging what might be real barriers to success.
n Shifting risk tolerance. Governing bodies have become less tolerant of risk in the current economic environment. The pandemic has created uncertainties and concerns over increased operating costs, decreased patient volume, liquidity stressors, lower reimbursement and reopening risks. Also, macroeconomic forces are combining to increase the uninsured and Medicaid populations. Decision-makers need to recalculate acceptable risk tolerance levels based on their current financial picture, taking careful consideration of declining balance sheet reserves, investment returns, rating agency viewpoints and other execution risks.
n Ongoing stakeholder scrutiny. Senior executives and boards must also adjust to constant scrutiny and higher expectations for transparency from investors. Pre-closing and post-closing, stakeholders are more likely today to second-guess whether the deal’s fundamental premises are being met and to refine or renegotiate deal premises.
For this reason, health care leaders are finding themselves more consistently involved in stakeholder education, re-articulating deal goals, objectives and benefits.
Despite existing barriers, senior executives are optimistic that consolidation – when done right – can deliver substantial benefits to patients, payers and providers.
One thing remains clear: health care leaders who can adjust to reduced risk tolerance, increased investor scrutiny, and a greater focus on alignment, mission and governance are most likely to succeed in today’s health care M&A environment. n
John Hesselmann is national head of health care, education and not-for-profit at Bank of America Corp. Cory Spinale is Rhode Island relationship manager of health care, education and not-for-profit at Bank of America.
