Healthcare continues trend toward consolidation as more M&A deals mark the end of 2017
As we kick off 2018, we rest in the wake of the announcement of the largest M&A deal to date in the healthcare industry between CVS and Aetna. While stakeholders speculate about implications, another deal was announced between healthcare payer UnitedHealth (UNH) and provider group DaVita (DVA). UNH’s Optum announced an agreement to buy a division of DVA, DaVita Medical Group (DMG) – not the dialysis management business for which DVA is well known – for approximately $4.9 billion in cash. If the deal passes through regulatory oversight, Optum will have removed an attractive acquisition target for competitors looking to acquire provider groups.
Along the same line, within 2 weeks of the Optum-DVA deal, Humana indicated plans to acquire Kindred Healthcare. These M&A data points reinforce the trend toward healthcare payer and provider convergence that Chilmark Research highlights as the theme of our annual conference. The race is on for market share of vertically integrated health systems.
With the DMG acquisition, Optum’s healthcare delivery division, OptumCare, gains yet another provider group (see Table 1). The acquisition will bring with it roughly 1.7 million patients served annually across a range of specialties and forms of care delivery.
DaVita’s Divestiture & Appeal to Acquirers
DaVita is one of eight healthcare providers in the Fortune 500 for fiscal year 2016-2017 (see Table 2).
DaVita had been acquiring provider groups aggressively. It is reasonable to presume that DaVita continued to acquire provider groups to be more attractive for DMG acquisition. It is unclear whether this divestiture serves as an example of providers challenged by the prospect of risk management, which is in the DNA of neither a payer nor a provider, or another strategic business decision.
While DaVita’s dialysis management business continued to thrive, DMG struggled. In third quarter SEC filings, the company highlighted divisional losses attributed mostly to a change from shared risk to global risk contracts, increased utilization, growth, and increased labor costs.
DMG has 300 primary and specialty care clinics, 35 urgent care centers and six surgical care centers in California, Florida, Colorado, New Mexico, Nevada and Washington. DMG only represents about 25% of DVA net revenues, but there are a finite number of acquisition targets for Optum and its competitors to pursue with the same consolidated magnitude, breadth, and geographic distribution of DMG.
As with the CVS-Aetna deal, the promise of the Optum-DMG deal has to do with the vertically integrated business and care operation. By aligning business interests of organizations across the risk spectrum and the care continuum, population health management, optimization of risk based contracts and cost management all promise to be more effective.
Optum’s Opportunity to Capitalize
As with the CVS-Aetna deal, the promise of the Optum-DMG deal is the vertically integrated business and care operation. By aligning business interests of organizations across the risk spectrum and the care continuum, PHM and the optimization of risk-based contracts and cost management all promise to be more effective.
Integrating and driving efficiency across provider organizations acquired by Optum is not a simple task. The organizations listed in Table 1 use a litany of technology solutions from various vendors including Cerner, Allscripts, NextGen, Meditech, Conduent, Inovalon, Healthfusion, IBM, Medelytics, McKesson, and Softcare. As Optum acquires provider groups, it must decide how prescriptive and assimilative to will be. This includes process and protocols, as well as other aspects of system interoperability.
Components of OptumInsight, including analytics, short-form health surveys, consulting and decision support (Impact Intelligence) may all offer a means of improving efficiencies at the DMG subsidiaries that had been performing poorly for DaVita. It is not clear, however, how Optum specifically will be able to convert these provider groups into more profitable organizations.
Decentralization and Consolidation
Over the past decade care delivery has trended toward a decentralized model, migrating from acute to ambulatory care. Surgical centers, alternatives to traditional primary care, and urgent care clinics arose to provide alternatives to a traditional hospital-centric care model. This has challenged stand-alone hospitals and yielded a further fragmented care system.
With ubiquitous EHR systems, the challenges of interoperability began – but as the industry has made steps toward better integration, the hurdles toward providing efficiencies have become more business driven. Consolidation is an inevitable remedy – and it appears to be upon us.
Consolidation of payers and providers will be a battle for patients under management and their ability to create greater efficiencies as consolidated organizations. Administrative efficiencies, risk reduction and lower costs of care management are feasible at scale, but coordinating care across a diverse set of care environments can be challenging and systems integration remains difficult. By owning more layers of care, the payers can reduce integration friction. Care coordination in network can be improved and decentralized care environments more effectively leveraged for their individual contributions to cost reduction and improvements to care quality.
We will be watching to see if UNH and Optum can turn this acquisition into a win by leveraging their data, the skill of their services, the quality of their technology, and the ability capitalize on the reduction of organizational barriers.
In this acquisitive environment, the power appears to lie with the payers and other large health brands such as CVS, as most providers have less capital and haven’t been moving as fast. It is worth evaluating, though, whether partnership or acquisition is the more suitable strategy in this time of flux. We will explore this topic in a Domain Monitor for CAS clients in the upcoming weeks.
As 2018 begins, what is the next big deal on the horizon? How will organizations like Partners HealthCare or Kaiser Permanente respond to acceleration of M&A around them? Will the potential mergers of Dignity and CHI or Providence-St. Josephs and Ascension give provider organizations enough depth and breadth to counter payer M&A moves? We will certainly ask ourselves these questions as these mega-deals continue to unfold in an increasingly convergent provider-payer market.