The more things change, the more they stay the same. An apropos statement regarding healthcare mergers and acquisitions in 2016.
We expect there to be at least one new blockbuster merger or acquisition announced this year that garners the attention of state and federal regulators. Other trends we predict will continue in 2016 are the rise of affiliation agreements in the health systems sector and increased consolidation activity in the health plan sector.
We expect a blockbuster M&A deal among large players in the health system sector. Prominent health systems and integrated delivery networks have amassed greater power through consolidation. A proposed merger or acquisition will likely mirror the scope and clout of the merger planned between Providence Health & Services and St. Joseph Health.
The impact on multistate service areas will attract national media attention. At the same time, expect intense scrutiny from state and federal regulatory agencies. The Federal Trade Commission will use its considerable power to monitor potential deals if there is concern they pose a threat to consumer choice. While this is nothing new, the FTC has ramped up its scrutiny of consolidation deals, particularly among health systems. Several prominent health system mergers have been forced to disband because of the FTC.
Alternative consolidation methods—partnerships, affiliations, alliances, and joint ventures—will be more popular among health systems in 2016. We expect such deals will account for approximately 50 percent of health system consolidations this year, up from approximately 40 percent of consolidation deals tracked in 2015. These deals all stop shy of full ownership changes but still have a substantial impact on a market’s competitive landscape.
Small hospital systems that wish to remain independent will partner with larger health systems and IDNs, benefitting from participation in ACOs and sharing in best practices. Statewide alliances will also become more prevalent as part of the increase in affiliation agreements. For instance, 10 health systems in Kentucky formed a statewide alliance in January 2016, and we expect similar announcements this year. The large provider consortiums make attractive provider networks for health plans but may also directly contract with large employers, as seen in Seattle.
Acquisitions among national payers will spawn a new crop of agreements in 2016. Small, regional health plans have been acquisition targets for larger health plans. Now mid-tier and large payers in a market or state will become acquisition targets. For example, California-based Kaiser Permanente plans to acquire Group Health Cooperative, based in Washington, expanding Kaiser’s footprint.
Large health plans will follow Kaiser and acquire regional carriers that boast strong name recognition in their respective markets. As a result, regional carriers will see an influx of capital, leading to improved IT infrastructure, and will also engage in new value-based agreements with local providers. Mid-sized insurers in a market or state will also merge, combining forces in an effort to remain a strong local player. The combined entity will increase its clout and ability to partner with IDNs for ACOs, and may diversify its health plan product line.
Acquisitions in the health plan sector will not solely occur between payers. Expect IDNs and health systems to target health plans as a means of diversifying their portfolios. For example, Fairview Health Services in Minneapolis exercised its option to buy struggling PreferredOne health plan in January 2016.
The healthcare industry will continue to consolidate in 2016, and major shifts in consolidation trends from previous years are not expected, though slight variations will occur. However, there are always surprise announcements that defy trends and send M&A activity in a new direction.
Sarah Wilson is an analyst at DRG and a Healthcare Mergers & Acquisitions expert. Follower her on Twitter at @SarahWilsonDRG