M&A is Driving Innovation and Consolidation That Will Help Advance the Evolution of Healthcare Delivery
May 16, 2018
Fifteen years ago, David Kindig, MD, PhD and Greg Stoddart, PhD introduced their hypothesis of population health in the American Journal of Public Health. They defined population health as, “The health outcomes of a group of individuals, including the distribution of such outcomes within the group.” In what became one of the industry’s most discussed articles in years, Kindig and Stoddart explained population health represents a shift from the traditional patient centric model of delivering care, to a new model focused on improving the health of an entire population rather than an individual.
Kindig and Stoddart explained population health effectively levels the medical playing field by accounting for the social, environmental, cultural, and physical variables that different populations are born into, which can affect their overall health and wellbeing. Many healthcare experts have subsequently lauded population health for its potential to improve health outcomes in the U.S., while reducing the cost of care.
In March of 2018, The American Journal of Managed Care published a report by David J. Dzielak, PhD, the former executive director of the Mississippi Division of Medicaid, that addresses the promise of a fledgling pilot program rooted in population health. Dzielak acknowledged the efforts in Mississippi are only just the beginning, saying, “These preliminary results, which are exciting, need to be verified and repeated not only in other settings but also with other health conditions and disease states such as hypertension, heart failure, asthma, and metabolic syndrome.”
What Hasn’t Changed
Population health has the potential to significantly improve both the efficacy and efficiency of our nation’s healthcare system. From a patient’s perspective, the holistic preventative side of population health is about eating well, exercising, getting enough rest and washing your hands all coupled with regular monitoring from a primary care clinician. These combined factors will go a long way to reducing and delaying the need for an expensive healthcare response. From the provider and payers’ perspective the traditional delivery care models, in conjunction with the traditional insurance company models, have repeatedly demonstrated their deep-rooted and significant limitations, in addition to being unsustainable economically (for either the public or private sectors).
However, despite its game-changing potential, the hypothesis of population health remains largely unproven, particularly on a large scale. That will continue to be the case until economic risk is broadly shared. As soon as enough economic risk is shared, population health will begin to steer healthcare providers away from spending excessive resources on inadequate outcomes. While traditional insurance companies allow many providers to be part of their networks, they typically fail to hold them accountable to outcomes and quality and cost metrics – a practice that would be non-existent under population health.
There have been anecdotal successes with population health, including some that, not unlike the aforementioned pilot program in Mississippi, might clarify how the model can be successfully applied to entire populations. But, despite these successes, population health is not ready to replace the traditional models – yet.
What Has Changed
The industry is witnessing changes in the delivery of healthcare that are arguably both the necessary precursors to achieving the concept of population health and the required innovations that are a way to steal from the consolidators, whose ground was once sacred. The consolidation in the industry is a survival tactic, not a solution. The changes that will likely have the greatest impact on the industry are:
An alignment in economic and healthcare incentives –With more and more healthcare providers assuming the financial risk for patient care, the largest, most influential parties are beginning to see patient care from a shared perspective. This joint approach is creating an interdependent delivery model where the desire for cost-effective care becomes an added incentive to the need to provide high-quality care.
An emphasis on patient engagement – As patients continue to fuel consolidation and change in healthcare, there continues to be an inexorable correlation between the quality and cost of a patient’s care and the extent to which they are actively engaged in their health and wellbeing. Therefore, payers and providers alike will continue to develop, deploy and test high-touch and high-tech patient engagement tools, from concierge-like care coordinators to user-friendly mobile apps.
An increase in self-insurance – Rather than paying an insurance company to manage a population risk and pay medical, dental, and vision claims, organizations are independently taking these risks with the help of a third-party insurance carrier providing stop-loss coverage. The highly praised joint healthcare initiative announced by Amazon, Berkshire Hathaway, and JPMorgan Chase is an example of this trend, and demonstrates the benefits and influence of the population health model.
Where to Expect Increased M&A Activity
The majority of recent M&A activity in the healthcare industry has involved large, complex organizations, from CVS’s proposed acquisition of Aetna to the pending merger of health system behemoths Catholic Health Initiatives and Dignity Health. This activity—which will no doubt continue, if not escalate—reflects the emergence of large, diverse health constellations whose clout will enable them to have a greater impact on an industry undergoing sweeping transformation. But are these deals creating the economic and quality of care results the experts have forecasted?
The effects of these deals will eventually influence standalone healthcare businesses—physician groups, nursing homes, and ambulatory care practices that once could successfully go it alone. The future is clear if population health actually produces the results it should and can, however this will require businesses to belong to a risk sharing integrated continuum of care to remain viable and successful. As a result, these businesses have three potential options to ensure their access to insured patients and long-term success:
- Joint Venture – A business agreement between two or more businesses, typically including clinical personnel, patients, equipment, and even real estate. The goal of these joint ventures is to leverage a combined set of competencies with adequate capital funding to become part of a larger piece of the shared risk. The most common joint ventures will involve adjacent specialties such as: a physical therapy practice and an orthopedic physicians group, or two identical clinical services with complementary geographic reach and patient populations.
- Alliance – Because it is not as permanent as a joint venture, an alliance affords organizations with added flexibility in honing the complement of healthcare services that best meets their needs—and those of their patients—often with a greater diversity of partners. An independent surgical center might partner with a hospital system and its surgeons, but also partner with an independent orthopedic or ophthalmology practice.
- Acquisition – The outright purchase of a standalone business, including the ready access to its patients, by one of an array of potential suitors. A physician group may be acquired by a private equity firm with the knowhow and capital to fuel the growth and efficiency of the business—or a healthcare system could buy a renal care center to expand the nephrology services offered to those in its primary service area.
How M&A is Helping to Drive Population Health
It all comes full circle, back to population health. What Kindig and Stoddart advocated—and what the industry plainly needs—is to adopt a holistic, shared risk approach to healthcare, and to wring out its many inefficiencies. While admittedly oversimplified, especially for such a vast and complex industry, this is the basic formula for improving health outcomes at reduced costs.
As we’ve previously examined, M&A in general, and private equity in particular, are driving the transformation of healthcare. Understandably, the large-scale deals have been the focus of much of the industry’s attention, because they will bring about the greatest potential change. But, the standalone physician and ambulatory care practices are nevertheless essential to improving quality health outcomes at reduced costs. Not only do they constitute roughly 40 percent of total healthcare spending in the U.S., they are, historically, vastly more cost-effective than inpatient care.