Supply Chain Enablement: Healthcare M&A Activity in Full Gallop

It is undeniable that the SCOTUS ruling that left the Affordable Care Act (ACA) largely in tact –and removed a huge bit of uncertainty—has led to a significant increase in healthcare deal-making activity. Everyone’s “ears are on,” especially within the nonprofits. Even the largest systems are exploring new acquisitions and alliances, as there seems to be a widely held recognition that there is safety in numbers –safety from reimbursement cuts and the new payment models.

And for providers located in states where the government plans to opt-out of the Medicaid expansion, the pressure to find scale is even greater. The math is simple. These hospitals will be forced to consolidate if there is no increase in the number of insured residents. Of course, supply chain professionals are front and center. GPOs can help expedite the creation of partnerships among members, but there is no substitute for the economies of scale that can be driven when like-minded systems (from a SCM perspective) decide to join forces.

But consolidation strategies are not limited to “turn around” scenarios. While it’s true that the nonprofits are now in a terrific position to acquire distressed properties, the investor-owned providers are aggressively on the look-out for high performers who can improve their cash flows and sustain their stock prices.

We’ve previously posted stories in these pages talking about how the development of accountable care (ACOs) models (including bundled payment schemes) is a natural driver of vertical integration. So watch for providers and payors alike to seek ways to circle the wagons and establish more defensible market positions by acquiring skilled nursing and other home-health focused businesses.

Some of the deals are straightforward: For example, Genesis HealthCare LLC, which operates long-term care, senior living and rehabilitation facilities, recently announced its plan to acquire skilled nursing provider Sun Healthcare Group Inc. This deal joins two forces with similar service lines. It’s about scale. And while there’s nothing new about health systems acquiring physician practices for similar purposes, other deals are not so clear-cut: DaVita, Inc., one of the nation’s largest providers of dialysis services, announced its plans to merge with HealthCare Partners, the country’s largest operator of medical groups and physician networks.

Although PE firms still shy away from the nonprofits –not wanting the hassles of big Boards of Directors and the other complications—when they do bite the bullet we see the acquired nonprofit become a for profit system. So the fact that Ascension has been on an acquisition role and that it is backed by Oak Hill Capital Partners (a PE firm) is definitely noteworthy. No, I don’t envision a change in Ascension’s nonprofit status, but it does speak to the quality and transparent style of Ascension’s management –that a major PE firm would look past its own traditional aversions.

The healthcare marketplace is, in fact, undergoing highly significant transformations. Yes, when the reimbursement carrot gets moved, we expect to see the corresponding realignment, but what’s currently going on out there is far more significant. You know that supply chain management practice in healthcare is coming of age when you recognize how freely and effectively disparate entities are able to tie the knot, combine for scale and vertically integrate for competitive advantage.

—Tom Finn

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