Healthcare M&A: Mastering the 3D chessboard

INSIGHT DRIVEN HEALTH Healthcare M&A: Mastering the 3D chessboard Think like a portfolio manager or leave money on the table Record levels of mergers and acquisitions (M&A) are fundamentally reshaping the US healthcare landscape. But if healthcare providers don’t oversee these transactions with an investment portfolio manager mindset, Accenture estimates they could leave at least 10 percent of anticipated costs saving on the table. Healthcare M&A in the US reached $241B by the strategic growth opportunities holistically— quickly often means that horizontal deals May 2015, the highest year-to-date volume all three dimensions simultaneously—as are closed quickly, without rigorous planning ever recorded. Healthcare providers are making investment portfolio managers would. Doing so to achieve benefits in both the near- and these acquisitions to gain economies of scale; successfully means getting the most out of M&A long-term. As a result, substantial value is shift from volume-based to value-based care; transactions. Failure to do so means leaving lost: Accenture estimates that in traditional address local market characteristics to remain money on the table. horizontal M&A by healthcare providers, at competitive; better appeal to consumer wants least 10 percent of the anticipated cost savings and needs; and expand their digital health and From horizontal to are left on the table. ehealth capabilities. vertical and digital While this new tidal wave of M&A expands the set of strategic options available to Horizontal M&A represents the traditional ‘land healthcare providers, it also creates management grab’ of hospitals buying other hospitals to complexity comparable to a game of three- create an ever-expanding footprint. However, dimensional chess: In the current environment, horizontal acquisitions have generally failed providers must view opportunities and threats to generate the desired synergies, and some from both horizontal and vertical perspectives, have actually resulted in diminished operating as well as a rapidly emerging digital health performance of the combined entities. The dimension. The game can only be won by viewing desire to realize the perceived scale benefits

Figure 1: A s traditional hospital acquisitions shrink, non-acute and digital acquisitions are on the rise 100% Other 2% Other 3% Digital 1% Digital 1% Digital 8% 90% Payer 0% Payer 1% Payer 2% 80% 70% Non-acute 60% Provider 64% Non-acute Provider 74% 50% Non-acute Provider 84% 40% 30% 20% Hospital 32% 10% Hospital 21% 0% Hospital 6% 2006-2010A2011-2014A 2015-2018P Hospital Non-acute Provider Payer Digital Other Sources: Accenture Analysis and S&P Capital IQ On the other hand, vertical M&A—when a Given the promise of digital health to reinvent The shift toward vertical and digital M&A in hospital acquires a payer or a non-acute healthcare, providers are also looking for healthcare will continue to gain momentum, care provider (e.g., retail clinic or physician digital M&A and investment opportunities, as market forces cause providers to seek practice)—has significantly increased. Vertical which are flourishing given the growing diversification and differentiation (Figure 2). M&A is driven by changes in payment models funding being made available to digital health Accenture predicts that acquisitions of non- and consumer expectations, and is evidenced start-ups. Acquisition targets are typically acute providers will reach 84 percent of the by the large share of patient volumes small or midsize companies providing health- total provider acquisition volume by 2018 while increasingly shifting to non-acute settings. related products or services in ehealth, purchases of payers will double. Digital health According to Accenture analysis, the share of telemedicine, population health management, acquisitions will expand by a multiple of 8 – non-acute acquisitions as a portion of total health analytics, remote monitoring, wearable from 1 percent of overall acquisition volume provider acquisition volume increased from 64 technology and other areas. But, digital in 2014 to 8 percent by 2018. Meanwhile, the percent in 2006-2010 to 74 percent in 2011- business acquisitions are likely to transform share of traditional horizontal acquisitions is 2014, while horizontal acquisitions decreased and disrupt the business model altogether. So expected to shrink from 21 percent in 2014 to from 32 percent to 21 percent in the same while making digital investments is essential to a 6 percent by 2018 (Figure 1). timeframes (Figure 1). provider long-term, it is daunting nonetheless. Figure 2: T he top 2 reasons to pursue vertical and digital deals Diversification: Providers can mitigate business risk by creating a broader investment portfolio that brings in revenue that is not necessarily tied to traditional hospital-related reimbursement limits. Differentiation: Providers can establish new categories of services to increase their competitive advantage.

Think like a portfolio deals as one-off opportunities to create a new management program can increase ROI and manager to make the most revenue stream or add market share. The best enable companies to achieve up to 25 percent of acquisition strategies prepared executives will systematically and more revenue from new products when rigorously manage M&A opportunities as a compared with less successful competitors. In this era of healthcare M&A, provider portfolio, and evaluate how a potential deal “Best in class” organizations typically improve will influence the whole (Figure 3). According project ROI by as much as 28 percent.6 executives must avoid the trap of viewing to the Aberdeen Group, an effective portfolio Figure 3: 5 s teps provider executives need to take to become effective managers of a diverse healthcare portfolio 5. Go Where • After comprehensive due diligence, define You Want approach, operating model and capital requirements • Strive for value creation from investments to Grow through merger integration 4. Define • Multidimensional-vertical, horizontal, payer, digital • Survey and evaluate acute, non-acute, payer and digital the Playing landscapes, in regional markets and nationally, to identify Fields opportunities. roactive target screening and streamlined consistent evaluation is key 3. • ivest under performing assets to generate additional cash ST Work on • Assess aility to maintain strong profitaility in core assets Your Core • ommit dedicated resources for strategic groth initiative • ave organizational frameork in place to effectuate groth process efficiently 2. • ro‚ect longer-term, realistic scenarios that ill likely impact your system Think Long... ƒe.g., scan „…† year horizon for my services, markets, patientmemer segments, usiness mi‡ˆ and Short • evelop scenario-ased plans, emphasizing commonalities across scenarios and the initiatives needed to help the core usiness adapt to the future requirements 1. • isaggregate and assess the current portfolio of operations and usinesses Know • ‰stalish strategic o‚ectives and focus areas for groth Thyself • Analyze your current positioning, strengths, eaknesses to determine your value proposition to potential targets in various sectors Source: Accenture Ensuring that a given transaction is a good fit operational commitments, a deal must also There are, of course, no guarantees of success, with a healthcare provider’s strategy requires meet long-term strategic goals in a shifting and individual acquisitions may still go wrong. executives to step back and view it in light health landscape. Every level of analysis and However, a portfolio approach will improve the of other potential targets on the market and decision making should be rigorous – using all chances that the broader business survives and current business lines within a health system. available data, stress testing multiple scenarios grows and a transaction generates the value Given the significance of these financial and and developing clear plans of implementation. that was intended.

Methodology About Accenture Insight About Accenture Accenture analyzed healthcare provider Driven Health Accenture is a global management consulting, acquisition data from S&P Capital IQ Insight driven health is the foundation of more technology services and outsourcing company, from 2006-2014. Data from more than effective, efficient and affordable healthcare. with approximately 319,000 people serving 1,500 acquisitions were analyzed and That’s why the world’s leading healthcare clients in more than 120 countries. Combining categorized by type of provider organization providers and health plans choose Accenture unparalleled experience, comprehensive acquired (i.e., hospital, non-acute provider, for a wide range of insight driven health capabilities across all industries and business payer, digital company or other). Accenture services that help them use knowledge in new functions, and extensive research on the performed historical and trend analysis to ways—from the back office to the doctor’s world’s most successful companies, Accenture determine 2015-2018 forecast. office. Our committed professionals combine collaborates with clients to help them become real-world experience, business and clinical high-performance businesses and governments. For more information: insights and innovative technologies The company generated net revenues of to deliver the power of insight driven health. US$30.0 billion for the fiscal year ended Aug. Authors: For more information, visit: 31, 2014. Its home page is www.accenture.com Kristin Ficery www.accenture.com/insightdrivenhealth [email protected] Michael Main [email protected] Key Contributors: Austin Corbett [email protected] Avi Goldgraber [email protected] Copyright © 2015 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.