Optum’s Deal With DaVita: Vertically Integrated Healthcare Continues to Grow

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.

Table 1: Optum’s Recent Provider Organization Acquisitions

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).

Table 2: Healthcare Providers in the Fortune 500, 2016-2017

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.

Stay up to the minute.

Did You Know?

Consolidation in HIE Market to Continue

Yesterday, Chilmark Research participated in a webinar hosted by the eHealth Initiative. The topic of discussion was consolidation in the HIE market and drawing upon our research for the recently published HIE Market Report, we gave the following presentation.

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While we do predict that the HIE market will continue to consolidate, the big question is how much are larger companies willing to spend to pick-up one of the Tier Two HIE vendors. There are still several good companies out there that are ripe for the picking but after the large valuations we saw for both Axolotl and Medicity in the second half 2010, are these Tier Two companies expecting the same rich rewards. If so, this may dampen the appetite for acquisitions and we’ll see stronger partnerships being formed instead.

Acquisitions Creating White Hot Market for Healthcare IT

Since the beginning of 2010 there has been a series of acquisitions in healthcare IT (HIT) market, which recently culminated in one of the largest, IBM’s acquisition of Initiate.  Triggering this activity is the massive amount of federal spending on HIT, (stimulus funding via ARRA which depending on how you count it, adds up to some $40B) that will be spent over the next several years to finally get the healthcare sector up to some semblance of the 21st century in its use of IT.  But one of the key issues with ARRA is that this money needs to be spent within a given time frame, thus requiring software vendors to quickly build out their solution portfolio, partner with others or simply acquire another firm.

And it is not just traditional HIT vendors doing the acquiring (AdvancedMD, Emdeon, Healthcare Mgmt Systems, MediConnect, etc.).  As the table below shows, many of these acquisitions are being driven by those who wish to get into this market (Thoma Bravo, Wound Mgmt Technologies, etc.) and capitalize upon future investments that will be made by those in the healthcare sector.

We are only at the beginning of the sea change in the HIT market and one can expect far more acquisitions over the next 12-18 months as stronger players expand their portfolios and new companies enter the HIT market.  If you are currently assessing an HIT solution for your organization, be sure to assess a vendor’s product road map and how they will meet your future needs (government mandates – e.g., meaningful use, interoperability, etc.) for if their answers are not absolutely clear, compelling and logical, you’ll better off looking elsewhere.

HIT Market White Hot

Doing some quick analysis of the healthcare IT market and have uncovered some 17 HIT software acquisitions since beginning of year.

Is this but a lead up to the big industry confab, HIMSS that begins in a few short weeks?

Certainly, the market is in desperate need of consolidation. Recent actions are likely but a small example of a trend that will accelerate over the next 12-18 months.