THE STEADY MARCH OF STRATEGIC PARTNERSHIPS

Transcription

1 APRIL 2017 HEALTHLEADERS MEDIA INTELLIGENCE REPORT THE STEADY MARCH OF STRATEGIC PARTNERSHIPS An Independent HealthLeaders Media Report Supported by: An Independent HealthLeaders Media Report Powered by:

2 PERSPECTIVE Recipe for Successful Health System M&A: Ensure Focus on Execution of Transaction Does Not Undermine Key Long-Term Strategic Imperatives Brent McDonald Head of Healthcare Strategic Advisory Services, Managing Director Bank of America Merrill Lynch The evolving U.S. healthcare landscape, perhaps more now than ever before, requires that health system executives possess varied and deep skill sets. Not only must executives navigate the changing political and macroeconomic landscape, including the repeal-and-replace uncertainty, but in execution of their well-intentioned strategic transactions, health system leaders must remain focused on the original strategic imperatives and objectives to help ensure long-term, sustainable success. Of 140 surveyed participants, 61% believe their organization s merger, acquisition or partnership activity will increase within the next three years. Commonly, a decision is made to move forward on an appropriate strategic transaction and then senior leadership assigns a multidisciplinary deal team to consummate such. The majority (74%) of surveyed participants cite both financial/operational and clinical/care delivery equally as the primary objective when deciding to transact. Prior to commencement, successful healthcare organizations will have gone through a lengthy strategic planning process, developed a list of strategic imperatives and had such approved by their board of trustees. Some of these strategic imperatives may include: the Triple Aim, relevance/attractiveness with employers and payers, alignment of incentives, ability to manage the resulting organization as a system versus a loose federation, and the stickiness and sustainability of the resulting system. A breakdown in the deal consummation process that results in the strategic imperatives not maintaining primacy but being subordinated or ignored may result in a nice press release or closing ceremony but when measured by the test of time, the transaction may not deliver expected and necessary sustaining strategic benefits. This is exacerbated in complex M&A transactions and strategic partnerships. Such complex transactions cannot be managed in a manner similar to important but more routine operational or capital initiatives (e.g., construction of a new bed tower or implementation of a staff reduction initiative) facing healthcare organizations. Senior leadership must help ensure that the strategic benefits of a transaction do not become deemphasized due to deal fatigue, completion of task bias, arbitrary deadlines, and other pressures that work against the deal team obtaining optimal outcomes. PAGE 2

3 Healthcare leaders must help ensure that the strategic imperatives are effective guardrails of the deal team s efforts and not lost in the difficult and dynamic transaction negotiation and consummation process. A successful approach focuses less on arbitrary timelines or goals and embraces an accountability process that monitors the deal progress and documentation to help ensure a true north heading. Effective leaders must remain laser-focused on the strategic imperatives and not allow completion and execution of the deal to subordinate the foundation of the original strategic mandate. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and Members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. PAGE 3

4 TABLE OF CONTENTS PERSPECTIVE FOREWORD... 5 ANALYSIS... 7 SURVEY RESULTS FIGURE 1: Financial Objectives...14 FIGURE 2: Care Delivery Objectives FIGURE 3: Primary Objective FIGURE 4: Description of MAP Activity FIGURE 5: Description of Contractual Relationship...18 FIGURE 6: Entity Involved in MAP Activity FIGURE 7: MAP Activity for the Next Months...20 FIGURE 8: Impact of Trump Administration FIGURE 9: Type of Organization Interested in Pursuing...22 FIGURE 10: Level of MAP Activity...23 FIGURE 11: Value of Mergers and Acquisitions in the Next Three Years...24 FIGURE 12: Cumulative Total Dollar Value...25 FIGURE 13: Financial Reasons for Abandonment...26 FIGURE 14: Operational Reasons for Abandonment FIGURE 15: Payer Involvement...28 METHODOLOGY RESPONDENT PROFILE PAGE 4

5 FOREWORD Healthcare M&A Activity Continues Despite Uncertainty Based on the 2017 HealthLeaders Media Mergers, Acquisitions, and Partnerships survey results, 2017 should be an active year for merger and acquisition activity. More than 87% of survey respondents report that for the next months they are completing deals underway or exploring potential new deals for a variety of strategic reasons, and 89% of respondents say that within the next three years, they will pursue mergers and acquisitions that will go up in dollar value or remain even. Kevin Griffin Senior Vice President, Financial Planning & Analysis Novant Health, Inc. Charlotte, North Carolina Lead Advisor for this Intelligence Report Interestingly, while the vast majority of health systems (74%), hospitals (73%), and physician groups (76%) cited both financial and clinical improvements as the primary objectives of overall M&A planning and activity, when digging deeper into the data, clinical improvement and the transition to value-based care seem to be leading the clinical consolidation charge. The three top care delivery objectives cited by respondents for M&A planning and activity were improving position for population health management (69%), improving clinical integration (66%), and improving position for care delivery efficiencies (64%). Financial objectives are also driving increased size and scale for M&A planning and activity, with respondents citing the need to increase market share (67%), to expand geographic coverage (58%), and to improve financial stability (58%). While size alone can and, typically does, lead to better financial performance, the top financial responses also closely align with the top provider care delivery objectives. For example, when providers expand geographic coverage for financial objectives, they are also helping their clinical care delivery objectives such as population health and improving position for care delivery efficiencies. This alignment will lead to financial and operational success. The diversity of M&A activity was also a notable outcome of the survey, in which an acquisition of one organization by another (37%) and contractual relationships, but not M&A (33%) came in as top-rated responses by survey takers. Respondents seem almost equally willing to entertain M&A light models as an alternative, likely with a goal of increasing scale without committing significant balance sheet resources or overcoming governance limitations or complications. For example, Novant Health created a joint operating company in our PAGE 5

6 Northern Virginia market with the University of Virginia Health System, which allowed us to capture clinical and operational improvements, while at the same time, preserving significant governance input for both sides and allowing additional entities to participate at a future date. While still in the early stages of this joint operation, we expect that looser affiliations and nontraditional structures will continue to augment our traditional M&A growth. Last, the majority of respondents say there are no changes to their M&A plans (54%) due to Trump administration policy expectations; however, 19% of respondents are putting M&A activities on hold until they know more about what impact the Trump administration and the risk of PPACA repeal will have. Despite some uncertainty, healthcare systems, hospitals, and physician groups remain heavily focused on evaluating and executing merger and acquisition transactions. It would appear that no matter the future of healthcare, the current thinking is that bigger will be better, and size and scale will be critical to the delivery of healthcare and serving the communities in which we operate. PAGE 6

7 ANALYSIS Merger, Acquisition, and Partnership Activity Continues to Build The steady march of merger, acquisition, and partnership (MAP) activity shows few signs of abatement, and the long list of factors contributing to healthcare industry consolidation healthcare reform, the move to value-based care, and provider needs for greater scale and geographic coverage, to name just a few continue to reshape the industry landscape. Jonathan Bees HealthLeaders Media Senior Research Analyst However, unlike with last year s HealthLeaders Media MAP survey, we can no longer say that there are no mitigating factors with the potential to slow MAP activity. With a new administration in Washington promising to make significant changes to the healthcare industry, notably to repeal and replace the Patient Protection and Affordable Care Act, substantial change appears to be in the wind, and has the potential to bring a pause in MAP activity as providers await greater clarity from the administration. According to the 2017 HealthLeaders Media Mergers, Acquisitions, and Partnerships Survey, for example, more than half (54%) of respondents say there are no changes to their organization s MAP plans because of the incoming Trump administration (Figure 8). Another 19% say they are putting some things on hold until they know more, and 9% are revising and updating some plans. No respondents (0%) say that their organization is making extensive changes to its plans. I don t think there s enough clarity out of the administration on the healthcare front to be able to pivot yet, and it s been such a short period of time that I m not surprised to see people waiting to know more before reacting, says Kevin Griffin, MBA, senior vice president of financial planning and analysis at Novant Health, a nonprofit integrated healthcare network with 2,655-licensed beds, 14 medical centers, and approximately 1,500 physicians in more than 500 locations, based in Winston-Salem, North Carolina, and the lead advisor for this Intelligence Report. Case for continued MAP growth. While 19% of respondents in our survey say they are putting some things on hold until they know more about the Trump administration s plans, several other survey data points reflect little if any diminishment in MAP appetite. For example, 87% of respondents say that their organization s MAP plans for the next months involve either exploring potential deals or completing deals underway, or both (Figure 7). The breakdown: 40% of respondents say that their organization will be both PAGE 7

8 exploring potential deals and completing deals underway, 34% say they will be exploring potential deals, and 13% say they will be completing deals underway. Only 13% of respondents say they have no MAP plans, which is down 12 percentage points from 25% in last year s survey. These results indicate a continued positive trend for MAP activity. Further, 61% of respondents expect their organizations MAP activity to increase within the next three years, and 32% expect this to remain the same (Figure 10). Only 6% expect MAP activity to decrease, indicating that the overall trend will likely continue for some time. These results are nearly identical to last year s survey results, which were increase (63%), remain the same (33%), and decrease (3%). A close examination of the data reveals that a greater share of physician organizations (67%) than health systems (61%) and hospitals (56%) expect MAP activity to increase, and a greater share of hospitals (41%) than health systems (30%) and physician organizations (27%) expect this activity to remain the same. In addition, based on net patient revenue, a greater share of large organizations (72%) than small (55%) and medium organizations (54%) expect MAP activity to increase, and a greater share of medium (42%) and small organizations (37%) than large organizations (19%) expect this activity to remain the same. Interestingly, there are some regional differences in expectations for MAP activity. For example, a greater share of respondents who say they expect MAP activity to increase are from the West (82%) than from the South (57%), Midwest (53%), and Northeast (53%), and a greater share of respondents who say they expect this activity to remain the same are from the Midwest (47%) than from the Northeast (37%), South (35%), and West (12%). Note that a greater share of respondents who say they expect WHAT HEALTHCARE LEADERS ARE SAYING Here are selected comments from leaders regarding whether the current level of provider merger, acquisition, and/or partnership activity is good or bad for the healthcare industry, and why they think so. I think it is bad for the industry. Healthcare is local, and no matter how much acquiring organizations try to keep it local, decisions are made, in many cases, that remove some levels of local care. CEO at a small hospital Good. Healthcare is moving from a cottage industry to vertical and horizontal integration. Both types lead to better understanding of inefficiencies in the industry, resulting in improved processes. Chief medical officer at a small hospital It s not good or bad. It s a natural reaction to the high cost of doing the business of healthcare delivery. Scale addresses uncertainty and risk. Chief information officer at a large physician organization Good, as long as the focus remains on increasing access to care, improving population health, and containing costs. Chief of staff at a medium physician organization Bad, due to the loss of physician autonomy and control. Good, due to improvement in standards, quality, and electronic infrastructure. Executive director, partner, board member at a medium physician organization It is a mixed bag. Some systems have merged just to get bigger, with the plan to reduce overhead. Studies show that overhead is not reduced as a result of being bigger. Some systems just want to be able to say mine is bigger than yours. Not a good strategy. All mergers should be strategy-driven and must involve compatible cultures. Unfortunately, most mergers are just not well thought out. Chief financial officer at a medium health system Bad for the industry. Reduces competition, but doesn t seem to place providers in a better negotiation posture with payers. Too much loss of local control. Chief information officer at a medium health system PAGE 8

9 this activity to decrease are from the Northeast (10%) and South (9%) than from the West (6%) and Midwest (0%). Increases in MAP dollar value. Another indicator of MAP activity is the cumulative total dollar value of the mergers and acquisitions respondents say their organizations will be exploring over the next three years (Figure 12). While this year s results are relatively comparable to last year s survey, there appears to be a slight shift toward lower cumulative total dollar value. The shift becomes apparent when you aggregate some of the results, with the less than $50 million range being eight percentage points higher (61% versus 53%) than last year, and the $50 million and more range being eight percentage points lower (39% versus 47%). However, while cumulative total dollar spend may be declining slightly, the survey results also indicate that the majority of respondents (55%) expect that the size of the merger and acquisition deals their organizations will pursue within the next three years to increase (Figure 11). Approximately onethird (34%) expect the dollar value to remain even, and only 12% expect the dollar value to decrease. Looking into the data further, a greater share of physician organizations (68%) than hospitals (48%) and health systems (48%) expect the dollar value of the mergers and acquisitions their organization will be pursuing to increase, and a greater share of hospitals (44%) than health systems (35%) and physician organizations (25%) expect the dollar value to remain even. In addition, a greater share of health systems (17%) than hospitals (8%) and physician organizations (7%) expect the dollar value to decrease. Based on net patient revenue, a greater share of small organizations (61%) than large (48%) and medium organizations (46%) expect the dollar value of the mergers and acquisitions their organization will be pursuing to increase, and a greater share of medium (46%) and small (34%) organizations than large organizations (22%) I don t think there s enough clarity out of the [Trump] administration on the healthcare front to be able to pivot yet, and it s been such a short period of time that I m not surprised to see people waiting to know more before reacting. expect this to remain even. In addition, a greater share of large organizations (30%) than medium (8%) and small organizations (5%) expect the dollar value to decrease. MAP organizational preferences. Survey responses indicate that the top three entities involved in respondents most recent MAP activity are health systems (27%), physician practices (27%), and hospitals (20%), which represents 74% of the total MAP activity (Figure 6). Interestingly, responses indicate that providers favor MAP activity with a provider from the same or a similar setting. For example, a greater share of health systems (35%) than hospitals (26%) and physician organizations (10%) say that their most recent MAP activity is with another health system, and a greater share of physician organizations (48%) than health systems (25%) and hospitals (16%) mention activity with physician practices. Further, a greater share of hospitals (37%) than health systems (17%) and physician organizations (7%) cite activity with another hospital, and a greater share of physician organizations (21%) than health systems (5%) and hospitals (3%) mention activity with another physician organization. These responses appear to indicate that providers have a preference for increasing scale along similar lines of business, and that increasing infrastructure diversity throughout the care continuum is currently a secondary strategy. PAGE 9

10 Looking forward to the next year, more than half of respondents (59%) say that their organization has a high interest in pursuing a physician practice through a MAP (Figure 9). The response for this type of entity is followed by a second tier of tightly clustered responses, including physician organization (30%), health system (27%), and hospital (26%). The strong response for physician practices is likely because primary care physicians are a key component of the continuum of care, and will play an increasingly important role in population health management and clinical integration efforts in the years to come. A number of entities had large increases in response rate for being pursued within the next year (Figure 9) compared with the results for the entity involved in the most recent MAP activity (Figure 6). The largest increase in response is for physician practices (up 32 percentage points to 59%), followed by physician organization (up 23 percentage points to 30%), ambulatory surgery center (up 19 percentage points to 20%), and retail clinic/urgent care clinic (up 17 percentage points to 20%). A broad spectrum of the remaining care continuum entities also had large increases, an indication that expanding population health infrastructure is of growing importance to providers. Note that as with Figure 6, there is a correlation between organizational setting and the type of entity respondents say their organization has a high interest in pursuing through a MAP within the next year, with organizations generally pursuing like or similar entities. For example, a greater share of respondents from physician organizations (81%) than hospitals (59%) and health systems (50%) indicate that they have high interest in pursuing a physician practice, and a greater share of physician organizations (48%) than health systems (26%) and hospitals (23%) indicate that they have high interest in pursuing another physician organization. Further, a greater share of respondents from health systems Independent groups are starting to band together to build scale against the health systems in order to be able to compete with them. (33%) than hospitals (26%) and physician organizations (16%) say their organization has a high interest in pursuing a health system through a MAP within the next year. Griffin suggests that, besides population health management and clinical integration efforts, there is another factor behind the high levels of physician organization interest in pursuing physician practices and other physician organizations. My hypothesis is that physician practices that wanted to be affiliated with health systems have largely happened by 2015 or 2016 in major markets, and I think the physician groups that are left are ones that generally don t want to be part of health systems. They value their independence, but my guess is they may not have the scale to compete against other physician groups or against the employed physician groups in the health systems. So these independent groups are starting to band together to build scale against the health systems in order to be able to compete with them. I think the low-hanging fruit for the healthcare systems has probably been harvested by now, and so the folks that are left and potentially able to do deals are probably fiercely independent. I would guess these are largely specialty groups as opposed to the primary care folks. Objectives of MAP activity. Respondents indicate that the range of objectives driving their organizations MAP planning or activity is exceptionally broad in nature. For PAGE 10

11 example, nearly three-quarters of respondents (74%) report that the primary objective of their organizations overall MAP planning or activity is both financial/operational and clinical/care delivery equally (Figure 3). Sixteen percent say that the primary objective is financial/operational, and only 8% say that it is clinical/care delivery. Obviously, they re both critically important, says Griffin. But I m not surprised to see financial/operational a little bit more important right now, because it s always staring you in the face every day. Everyone is aware of the transition to value-based care and population health, but they re not living in that world every day yet, at least to the same extent that they re dealing with the fee-for-service, financial/ operational, blocking-and-tackling world. Looking at financial objectives specifically, respondents say that increasing market share within their geography (67%) is the top financial objective of their organizations overall MAP planning or activity. However, there is a large group of responses in the second tier, suggesting that no single objective is responsible for driving MAP activity (Figure 1). This second group includes expanding geographic coverage (58%), improving financial stability (58%), improving position for payer negotiations (54%), and expanding position in care continuum (53%). It probably comes as no surprise that a greater share of health systems (75%) than hospitals (62%) and physician organizations (59%) say that increasing market share within their geography is the top financial objective of their organizations overall MAP planning or activity. Note that, while this is the top activity for health systems and hospitals, improving financial stability (74%) is the top activity for physician organizations. Further, a greater share of health systems (70%) than physician organizations (53%) and hospitals (49%) I think the low-hanging fruit for the healthcare systems has probably been harvested by now, and so the folks that are left and potentially able to do deals are probably fiercely independent. mention expanding geographic coverage as being among the financial objectives of their organizations overall MAP planning or activity. While this is the second-ranked activity for health systems, the second-ranked activity for physician organizations (68%) and hospitals (58%) is improving their position for payer negotiations. According to respondents, the top three care delivery objectives of their organizations overall MAP activity (Figure 2) are improving position for population health management (69%), improving clinical integration (66%), and improving position for care delivery efficiencies (64%). Griffin says that Novant Health is currently fine-tuning its strategy to focus on tactics other than just market share acquisition and building scale. We re moving to things such as expanding geographic coverage. This would probably be our No. 1 goal in getting into other markets while we do want to take market share in our markets, M&A is not necessarily going to drive that. But getting into expanded geographic coverage for diversification purposes, for population health purposes, that s going to be really important for us. Notably, a greater share of health systems (75%) than physician organizations (68%) and hospitals (64%) mention improving their position for population health management as among the care delivery objectives of their organizations PAGE 11

12 overall MAP activity. Further, based on net patient revenue, a greater share of medium organizations (76%) than large (71%) and small organizations (64%) mention improving their position for population health management. Last, a greater share of nonprofit organizations (75%) than forprofit organizations (57%) cite this as well. MAP activity type. Respondents were asked to describe the nature of their most recent MAP activity (Figure 4). The top responses are an acquisition of one organization by another (37%), a contractual relationship, but not M&A (33%), and a merger of two organizations into one (10%). Only 14% of respondents say that their organization has had no activity. Note that non-m&a partnerships are expected to grow over the next few years because it is typically less expensive than traditional M&A and doesn t require an exchange of assets or a change of local governance. I do think health systems and hospitals understand that they need to do something but don t want to give up control and financial flexibility at this time, says Griffin. For example, we have a shared services division that provides management services and other services for about eight or nine hospitals around the Southeast, and I think those folks know they need some help but aren t yet ready to raise their hand and lose local control. And I think many health systems and hospitals have started going down that road a little bit by creating soft relationships maybe to position themselves for what they may need to do but aren t ready to pull the trigger on yet. Interestingly, M&A activity based on the acquisition of one organization by another is correlated with organizational size. For example, based on net patient revenue, a greater share of large organizations (50%) than small (36%) and medium organizations (31%) mention this kind of activity. Organizational size is also correlated with a merger of two organizations into one, with a greater share of Everyone is aware of the transition to value-based care and population health, but they re not living in that world every day yet. large organizations (18%) than small (7%) and medium organizations (7%) citing this activity. This is likely because larger organizations have the necessary financial resources to support such transactions. Among respondents who mention a contractual relationship, but not M&A (Figure 4), the top responses for contractual relationship types (Figure 5) are affiliation, collaboration, or alliance (47%); joint operating agreement (21%); and professional service agreement (17%). Other joint venture (8%) and joint venture with change of ownership (6%) complete the list of responses. Note that affiliation, collaboration, or alliance likely receives a high response because this type of agreement is simpler, more flexible, and requires less commitment than a joint operating agreement or joint venture with change of ownership. Why MAP deals fall apart. When providers enter into MAP negotiations, there are no guarantees that a formal agreement will be concluded. In fact, there are a number of ways that a potential deal can be derailed. For example, approximately one-quarter (23%) of respondents say that concern about assumption of liabilities is the top financial reason that a MAP involving their organization was abandoned before or during the due diligence phase (Figure 13). Note that the full extent of a target organization s financial liabilities may not be apparent PAGE 12

13 until the due diligence phase is completed, which may explain why this important aspect plays a major role as a deal-breaker. Rounding out the top financial responses for abandoning a deal were concern about price (20%) and regulatory issues (18%). It is worth mentioning that 18% of respondents report that their organization did not abandon the negotiations. Interestingly, a greater share of physician organizations (31%) than health systems (23%) and hospitals (18%) mention concern about assumption of liabilities, and a greater share of physician organizations (28%) than health systems (23%) and hospitals (11%) cite concern about price. This perhaps indicates that physician organizations have less flexibility when it comes to the financial considerations of MAP activity. Respondents say that the top operational reasons that a MAP involving their organization was abandoned before or during the due diligence phase (Figure 14) was concern about governance (30%), incompatible cultures (27%), mistrust between parties (23%), and concern about the operational transition plan (21%). Only 9% of respondents say that their organization did not abandon negotiations. Importance of an aligned culture. While there are many financial and operational challenges to overcome during any MAP negotiation, perhaps the most important aspect during the due diligence phase is determining whether alignment exists between the cultures of the respective organizations. Without alignment, a MAP will be destined for failure. Griffin outlines some of the key considerations. One, is the management team compatible and do they think about delivering care, which, in our case, we call delivering the remarkable patient experience. Do they believe in that every day? And second, is everyone aligned in what we re trying to do? That, at the end of the day, we re a not-for-profit mission-driven organization just like they are. Jonathan Bees is senior research analyst for HealthLeaders Media. He may be contacted at jbees@healthleadersmedia.com. Digging into the data reveals that a greater share of physician organizations (58%) than health systems (25%) and hospitals (17%) mention shared governance, and a greater share of hospitals (37%) than physician organizations (29%) and health systems (22%) cite incompatible cultures. Further, a greater share of physician organizations (38%) than hospitals (17%) and health systems (16%) mention concern about the operational transition plan. PAGE 13

14 SURVEY RESULTS FIGURE 1: Financial Objectives Q Which of the following are among the financial objectives of your overall merger, acquisition, and/or partnership planning or activity? Increase market share within our geography Expand geographic coverage Improve financial stability Improve position for payer negotiations Expand position in care continuum Improve operational cost efficiencies Improve access to operational expertise Improve access to capital Improve access to financial management Other 9% 8% 30% 28% 58% 58% 54% 53% 48% 67% Base = 159 Multi-Response While respondents indicate that increasing market share within their geography (67%) is the top financial objective of their organizations overall merger, acquisition, and/or partnership (MAP) planning or activity, there is a large cluster of responses in the second tier, suggesting that no single objective is responsible for driving MAP activity. This second group includes expanding geographic coverage (58%), improving financial stability (58%), improving position for payer negotiations (54%), and expanding position in the care continuum (53%). PAGE 14

15 SURVEY RESULTS FIGURE 2: Care Delivery Objectives Q Which of the following are among the care delivery objectives of your overall merger, acquisition, and/or partnership activity? Improve population health management Improve clinical integration Improve position for care delivery efficiencies Expand into new care delivery areas Improve or enhance clinical talent Gain care delivery cost efficiencies through scale Expand position in care continuum Divest to sharpen strategic mission Other 3% 16% 49% 48% 47% 41% 66% 64% 69% Base = 159 Multi-Response The top three responses for care delivery objectives of respondents overall merger, acquisition, and/or partnership (MAP) activity are improving position for population health management (69%), improving clinical integration (66%), and improving position for care delivery efficiencies (64%). A greater share of health systems (75%) than physician organizations (68%) and hospitals (64%) mention improving their position for population health management as among the care delivery objectives of their organizations overall MAP activity. Further, based on net patient revenue, a greater share of medium organizations (76%) than large (71%) and small organizations (64%) mention improving their position for population health management. Last, a greater share of nonprofit organizations (75%) than for-profit organizations (57%) cite this as well. PAGE 15

16 SURVEY RESULTS FIGURE 3: Primary Objective Q What is the primary objective of your overall merger, acquisition, and/or partnership planning or activity? 74% 16% 8% 2% Both financial/operational and clinical/care delivery equally Financial/operational Clinical/care delivery Other Base = 159 Nearly three-quarters of respondents (74%) report that the primary objective of their organizations overall merger, acquisition, and/or partnership planning or activity is both financial/operational and clinical/care delivery equally. Sixteen percent say that the primary objective is financial/operational and only 8% say that it is clinical/care delivery. A greater share of physician organizations (21%) and hospitals (20%) than health systems (11%) mention financial/operational, and a greater share of health systems (12%) than hospitals (4%) and physician organizations (3%) cite clinical/care delivery. PAGE 16

17 SURVEY RESULTS FIGURE 4: Description of MAP Activity Q Please describe the nature of your most recent merger, acquisition, and/or partnership activity. 37% 33% 14% 10% 6% An acquisition of one organization by another A contractual relationship, but not M&A A merger of two organizations into one Other No activity Base = 159 An acquisition of one organization by another (37%) and a contractual relationship, but not M&A (33%) lead the list of responses of most recent merger, acquisition, and/or partnership activity, followed by a merger of two organizations into one (10%). Only 14% of respondents say that their organization has had no activity. Note that non-m&a partnerships are expected to grow over the next few years because it is typically less expensive than traditional M&A and doesn t require an exchange of assets or a change of local governance. M&A activity based on the acquisition of one organization by another is correlated with organizational size. For example, based on net patient revenue, a greater share of large organizations (50%) than small (36%) and medium organizations (31%) mention this kind of activity. Organizational size is also correlated with a merger of two organizations into one, with a greater share of large organizations (18%) than small (7%) and medium organizations (7%) citing this activity. This is likely because larger organizations have the necessary financial resources to support such transactions. PAGE 17

18 SURVEY RESULTS FIGURE 5: Description of Contractual Relationship Q Which of the following best describes that contractual relationship? Of those who are involved in a contractual relationship. Affiliation, collaboration, or alliance 47% Joint operating agreement 21% Professional service agreement 17% Joint venture with change of ownership 6% Other joint venture 8% Other 2% Base = 53 Among respondents who mention a contractual relationship, but not M&A in Figure 4, the top responses for contractual relationship types are affiliation, collaboration, or alliance (47%), joint operating agreement (21%), and professional service agreement (17%). Other joint venture (8%) and joint venture with change of ownership (6%) complete the list of responses. Note that affiliation, collaboration, or alliance likely receives a high response because this type of agreement is simpler, more flexible, and requires less commitment than a joint operating agreement or joint venture with change of ownership. PAGE 18

19 SURVEY RESULTS FIGURE 6: Entity Involved in MAP Activity Q What kind of entity was involved in your most recent merger, acquisition, and/or partnership activity? Of those who are involved in a merger, acquisition, or other form of activity. Health system (e.g., IDN/IDS) Physician practice(s) Hospital Physician organization (e.g., IPA, PHO, clinic) Retail clinic/urgent care clinic Long-term care, SNF Ancillary (e.g., diagnostic, therapeutic, custodial) Ambulatory surgery center Health plan, insurer Ancillary, allied (e.g., home health, rehab, lab) Other healthcare organization Other nonhealthcare organization 3% 2% 2% 1% 1% 1% 2% 7% 7% 20% 27% 27% Base = 137 The entities involved in survey respondents most recent merger, acquisition, and/or partnership (MAP) activity typically include health systems (27%), physician practices (27%), and hospitals (20%), which represents 74% of the total activity. Interestingly, responses indicate that providers favor MAP activity with a provider from the same or a similar setting. For example, a greater share of health systems (35%) than hospitals (26%) and physician organizations (10%) say that their most recent MAP activity is with another health system, and a greater share of physician organizations (48%) than health systems (25%) and hospitals (16%) mention activity with physician practices. Further, a greater share of hospitals (37%) than health systems (17%) and physician organizations (7%) cite activity with another hospital, and a greater share of physician organizations (21%) than health systems (5%) and hospitals (3%) mention activity with another physician organization. These responses appear to indicate that providers have a preference for increasing scale along similar lines of business, and that increasing infrastructure diversity throughout the care continuum is currently a secondary strategy. PAGE 19

20 SURVEY RESULTS FIGURE 7: MAP Activity for the Next Months Q Please describe your organization s merger, acquisition, and/or partnership plans for the next months. Eighty-seven percent of respondents say that their organization s merger, acquisition, and/or partnership (MAP) plans for the next months involve either exploring potential deals or completing deals underway, or both. The breakdown: 40% of respondents say that their organization will be both exploring potential deals and completing deals underway, 34% say they will be exploring potential deals, and 13% say they will be completing deals underway. Only 13% of respondents say they have no MAP plans, which is down 12 percentage points from 25% in last year s survey. These results indicate a continued positive trend for MAP activity. A greater share of physician organizations (47%) than health systems (41%) and hospitals (36%) mentions it is both exploring potential deals and completing deals underway, and based on net patient revenue, a greater share of respondents from large organizations (53%) than small (40%) and medium organizations (31%) mention this. PAGE 20

21 SURVEY RESULTS FIGURE 8: Impact of Trump Administration Q What impact is the incoming Trump administration having on your organization s merger, acquisition, and/or partnership plans? 54% 19% 18% 9% 0% No changes to our plans Putting some things on hold until we know more Revising and updating some plans Extensive changes to our plans Don't know Base = 159 More than half (54%) of respondents say there are no changes to their organization s merger, acquisition, and/or partnership (MAP) plans because of the incoming Trump administration. Another 19% say they are putting some things on hold until they know more, and 9% are revising and updating some plans. No respondents (0%) say that their organization is making extensive changes to its plans. A greater share of respondents from physician organizations (71%) than hospitals (56%) and health systems (47%) say there are no changes to their organization s MAP plans because of the incoming Trump administration. Further, based on net patient revenue, a greater share of small organizations (60%) than medium (57%) and large organizations (50%) also say this. Based on net patient revenue, a greater share of respondents from large organizations (29%) than small (19%) and medium (11%) say their organizations are putting some things on hold until they know more. PAGE 21

22 SURVEY RESULTS FIGURE 9: Type of Organization Interested in Pursuing Q Which of the following entities would you say your organization has a high interest in pursuing through a merger, acquisition, or partnership within the next year? Of those pursuing a merger, acquisition, or partnership. Physician practice(s) Physician organization (e.g., IPA, PHO, clinic) Health system (e.g., IDN/IDS) Hospital Ambulatory surgery center Retail clinic/urgent care clinic Ancillary (e.g., diagnostic, therapeutic, custodial) Health plan, insurer Long-term care, SNF Ancillary, allied (e.g., home health, rehab, lab) Other healthcare organization Other nonhealthcare organization 3% 1% 30% 27% 26% 20% 20% 17% 14% 14% 12% 59% Base = 138 Multi-Response The majority of respondents (59%) say that their organization has a high interest in pursuing a physician practice through a merger, acquisition, or partnership (MAP) within the next year. The response for this type of entity is followed by a second tier of tightly clustered responses, including physician organization (30%), health system (27%), and hospital (26%). The strong response for physician practices is likely because primary care physicians are a key component of the continuum of care, and will play an increasingly important role in population health management and clinical integration efforts in the years to come. A number of entities had large increases in response rate for being pursued within the next year (Figure 9) compared with the results for the entity involved in the most recent MAP activity (Figure 6). For example, the largest increase in response is for physician practices (up 32 percentage points to 59%), followed by physician organization (up 23 percentage points to 30%), ambulatory surgery center (up 19 percentage points to 20%), and retail clinic/urgent care clinic (up 17 percentage points to 20%). A broad spectrum of the remaining care continuum entities also had large increases, an indication that expanding population health infrastructure is of growing importance to providers. Note that as with Figure 6, there is a correlation between organizational setting and the type of entity respondents say their organization has a high interest in pursuing through a MAP within the next year, with organizations generally pursuing like or similar entities. For example, a greater share of respondents from physician organizations (81%) than hospitals (59%) and health systems (50%) indicate that they have high interest in pursuing a physician practice, and a greater share of physician organizations (48%) than health systems (26%) and hospitals (23%) indicate that they have high interest in pursuing another physician organization. Further, a greater share of respondents from health systems (33%) than hospitals (26%) and physician organizations (16%) say their organization has a high interest in pursuing a health system through a MAP within the next year. One exception to the correlation is hospitals. A greater share of health systems (35%) than hospitals (28%) and physician organizations (6%) indicate that they have high interest in pursuing a hospital. PAGE 22

23 SURVEY RESULTS FIGURE 10: Level of MAP Activity Q Within the next three years, do you expect your organization s merger, acquisition, and/or partnership activity to increase, decrease, or remain the same? Of those aware of their organization s merger and acquisition activity. Increase 61% Remain the same 32% Decrease 6% Base = 140 The majority of respondents (61%) expect their organizations merger, acquisition, and/or partnership (MAP) activity to increase within the next three years, and 32% expect this to remain the same. Only 6% expect activity to decrease, indicating that the overall trend will likely continue for some time. These results are nearly identical to last year s survey results, which were increase (63%), remain the same (33%), and decrease (3%). A greater share of physician organizations (67%) than health systems (61%) and hospitals (56%) expect MAP activity to increase, and a greater share of hospitals (41%) than health systems (30%) and physician organizations (27%) expect this activity to remain the same. Based on net patient revenue, a greater share of large organizations (72%) than small (55%) and medium organizations (54%) expect MAP activity to increase, and a greater share of medium (42%) and small organizations (37%) than large (19%) expect this activity to remain the same. A greater share of respondents who say they expect MAP activity to increase are from the West (82%) than the South (57%), Midwest (53%), and Northeast (53%), and a greater share of respondents who say they expect this activity to remain the same are from the Midwest (47%) than the Northeast (37%), South (35%), and West (12%). Note that a greater share of respondents who say they expect this activity to decrease are from the Northeast (10%) and South (9%) than the West (6%) and Midwest (0%). PAGE 23

24 SURVEY RESULTS FIGURE 11: Value of Mergers and Acquisitions in the Next Three Years Q Within the next three years, do you expect the mergers and acquisitions your organization will be pursuing to go up in dollar value, remain even, or go down? Of those aware of the value of their organization s mergers and acquisitions. Down 12% Up 55% Even 34% Base = 104 More than half of respondents (55%) expect the dollar value of the mergers and acquisitions their organization will be pursuing to increase within the next three years, and 34% expect this to remain even. Only 12% expect the dollar value to decrease. A greater share of physician organizations (68%) than hospitals (48%) and health systems (48%) expect the dollar value of the mergers and acquisitions their organization will be pursuing to increase, and a greater share of hospitals (44%) than health systems (35%) and physician organizations (25%) expect the dollar value to remain even. Further, a greater share of health systems (17%) than hospitals (8%) and physician organizations (7%) expect the dollar value to decrease. Based on net patient revenue, a greater share of small organizations (61%) than large (48%) and medium (46%) expect the dollar value of the mergers and acquisitions their organization will be pursuing to increase, and a greater share of medium (46%) and small organizations (34%) than large (22%) expect this to remain even. In addition, a greater share of large organizations (30%) than medium (8%) and small (5%) expect the dollar value to decrease. PAGE 24

25 SURVEY RESULTS FIGURE 12: Cumulative Total Dollar Value Q Please estimate the cumulative total dollar value of the mergers and acquisitions your organization will be exploring over the next three years. Of those who expect to explore and are aware of their organization s merger and acquisition activity. Less than $5 million 18% $5 million $9.9 million 16% $10 million $49.9 million 27% $50 million $99.9 million 15% $100 million $499.9 million 19% $500 million or more 5% Base = 113 Survey results for cumulative total dollar value of the mergers and acquisitions respondent organizations will be exploring over the next three years are relatively comparable to last year s survey. However, there appears to be a slight shift toward lower cumulative total dollar value. For example, if you aggregate some of the results, the less than $50 million range is eight percentage points higher (61% versus 53%) than last year, and the $50 million and more range is eight percentage points lower (39% versus 47%). PAGE 25

26 SURVEY RESULTS FIGURE 13: Financial Reasons for Abandonment Q Thinking back to the last time a merger, acquisition, or partnership involving your organization was abandoned before or during the due diligence phase, which of the following were among the financial reasons that the deal did not proceed? Of those who recently pursued a merger, acquisition, or partnership. Concern about assumption of liabilities Concern about price Did not abandon negotiations Regulatory issues Costs to support the transaction itself too high Other party's decision, for reasons I don't know Concern about risk/revenue sharing Could not agree on capital expense commitments Uncertainty about the economy Unable to arrange financing Other Don't know 2% 5% 7% 9% 14% 14% 12% 11% 20% 18% 18% 23% Base = 137 Multi-Response Nearly one-quarter (23%) of respondents say that concern about assumption of liabilities was the top financial reason that a merger, acquisition, or partnership (MAP) involving their organization was abandoned before or during the due diligence phase. Note that the full extent of a target organization s financial liabilities may not be apparent until the due diligence phase is completed, which may explain why this important aspect plays a major role as a deal-breaker. Rounding out the top responses for abandoning a deal were concern about price (20%) and regulatory issues (18%). Note that 18% of respondents report that their organization did not abandon the negotiations. Interestingly, a greater share of physician organizations (31%) than health systems (23%) and hospitals (18%) mention concern about assumption of liabilities, and a greater share of physician organizations (28%) than health systems (23%) and hospitals (11%) cite concern about price. This perhaps indicates that physician organizations have less flexibility when it comes to the financial considerations of MAP activity. PAGE 26

27 SURVEY RESULTS FIGURE 14: Operational Reasons for Abandonment Q Thinking back to the last time a merger, acquisition, or partnership involving your organization was abandoned before or during due diligence, which of the following were among the operational reasons that the deal did not proceed? Of those who recently pursued a merger, acquisition, or partnership and abandoned negotiations for financial reasons. Concern about governance Incompatible cultures Mistrust between parties Concern about operational transition plan Other party's decision, for reasons I don't know Did not abandon negotiations Lack of community support Concern about fate of organization's mission Other Don't know 10% 9% 8% 6% 5% 13% 21% 23% 27% 30% Base = 112 Multi-Response Respondents say that concern about governance (30%), incompatible cultures (27%), mistrust between parties (23%), and concern about the operational transition plan (21%) are the top operational reasons that a merger, acquisition, or partnership involving their organization was abandoned before or during the due diligence phase. Only 9% of respondents say that their organization did not abandon negotiations. A greater share of physician organizations (58%) than health systems (25%) and hospitals (17%) mention shared governance, and a greater share of hospitals (37%) than physician organizations (29%) and health systems (22%) cite incompatible cultures. Further, a greater share of physician organizations (38%) than hospitals (17%) and health systems (16%) mention concern about the operational transition plan. PAGE 27

28 SURVEY RESULTS FIGURE 15: Payer Involvement Q Which of the following describes how payers fit into your organization s merger, acquisition, and/or partnership activity? Traditional reimbursement relationships 57% Formal programs (e.g., ACOs, bundled payments) 43% Formal relations with employers Joint ventures with payers 21% 25% Ownership of a payer business unit Don't know 11% 14% Base = 159 Multi-Response According to respondents, traditional reimbursement relationships (57%) and formal programs (e.g., ACOs, bundled payments) (43%) are the top ways that payers fit into respondents merger, acquisition, and/or partnership strategy. The results are similar to last year s survey, although the response rates were one point higher and eight points lower, respectively. Note that several payer strategies are correlated with financial resources. For example, based on net patient revenue, a greater share of large organizations (38%) than medium (26%) and small (19%) mention formal relations with employers, and a greater share of large organizations (35%) than medium (22%) and small (12%) cite joint ventures with payers. Further, a greater share of large organizations (35%) than medium (15%) and small (5%) mention ownership of a payer business unit. This is likely because large organizations have the financial resources and organizational scale to make this type of merger and acquisition activity viable. PAGE 28

29 METHODOLOGY The 2017 Mergers, Acquisitions, and Partnerships Survey was conducted by the HealthLeaders Media Intelligence Unit, powered by the HealthLeaders Media Council. It is part of a series of monthly thought leadership studies. In January 2017, an online survey was sent to the HealthLeaders Media Council and select members of the HealthLeaders Media audience at healthcare provider organizations. A total of 159 completed surveys are included in the analysis. Base size varies between 53 and 159 according to respondents knowledge of the question. The margin of error for a base of 159 is +/-7.8% at the 95% confidence interval. Totals do not always add to 100% due to rounding. UPCOMING INTELLIGENCE REPORT TOPICS MAY Value-Based Readiness JUNE Cost and Revenue Strategies JULY/AUGUST Patient Experience Click for information on joining. Copyright 2017 HealthLeaders Media, a division of BLR, 100 Winners Circle, Suite 300, Brentwood, TN Opinions expressed are not necessarily those of HealthLeaders Media. Mention of products and services does not constitute endorsement. Advice given is general, and readers should consult professional counsel for specific legal, ethical, or clinical questions. ABOUT THE HEALTHLEADERS MEDIA INTELLIGENCE UNIT The HealthLeaders Media Intelligence Unit, a division of HealthLeaders Media, is the premier source for executive healthcare business research. It provides analysis and forecasts through digital platforms, print publications, custom reports, white papers, conferences, roundtables, peer networking opportunities, and presentations for senior management. Intelligence Report Senior Research Analyst JONATHAN BEES jbees@healthleadersmedia.com President STEVE GREENBERG sgreenberg@decisionhealth.com Publisher CHRIS DRISCOLL cdriscoll@healthleadersmedia.com Editorial Director BOB WERTZ bwertz@healthleadersmedia.com Marketing Specialist, Intelligence Unit AMANDA WAGNER awagner@healthleadersmedia.com Managing Editor ERIKA BRYAN ebryan@healthleadersmedia.com Assistant Managing Editor MARY STEVENS mstevens@healthleadersmedia.com Senior Client Services Manager CATHLEEN LAVELLE clavelle@healthleadersmedia.com Intelligence Report Contributing Editor CHRISTOPHER CHENEY ccheney@healthleadersmedia.com Intelligence Report Design and Layout KEN NEWMAN Intelligence Report Cover Art DOUG PONTE dponte@healthleadersmedia.com PAGE 29

30 RESPONDENT PROFILE TITLE Respondents represent titles from health systems; hospitals; physician organizations; ancillaries, allied providers; and long-term care/snfs. Base = % TYPE OF ORGANIZATION Base = 159 Health system (IDN/IDS) 46% Hospital 28% Physician org (MSO, IPA, PHO, clinic) 21% Ancillary, allied provider (home health, lab, rehab postacute, etc.) 3% Long-term care/snf 2% NUMBER OF BEDS Base = 45 (Hospitals) (small) 44% 14% 9% 3% 3% 1% (medium) 36% 500+ (large) 20% Senior leaders Operations leaders Clinical leaders SENIOR LEADERS CEO, Administrator, Chief Operations Officer, Chief Medical Officer, Chief Financial Officer, Executive Dir., Partner, Board Member, Principal Owner, President, Chief of Staff, Chief Information Officer, Chief Nursing Officer, Chief Medical Information Officer CLINICAL LEADERS Chief of Cardiology, Chief of Neurology, Chief of Oncology, Chief of Orthopedics, Chief of Radiology, Dir. of Ambulatory Services, Dir. of Clinical Services, Dir. of Emergency Services, Dir. of Inpatient Services, Dir. of Intensive Care Services, Dir. of Nursing, Dir. of Rehabilitation Services, Service Line Director, Dir. of Surgical/ Perioperative Services, Medical Director, VP Clinical Informatics, VP Clinical Quality, VP Clinical Services, VP Medical Affairs (Physician Mgmt/MD), VP Nursing Information leaders Marketing leaders Financial leaders OPERATIONS LEADERS Chief Compliance Officer, Chief Purchasing Officer, Asst. Administrator, Chief Counsel, Dir. of Patient Safety, Dir. of Purchasing, Dir. of Quality, Dir. of Safety, VP/Dir. Compliance, VP/Dir. Human Resources, VP/Dir. Operations/Administration, Other VP FINANCIAL LEADERS VP/Dir. Finance, HIM Director, Director of Case Management, Director of Patient Financial Services, Director of RAC, Director of Reimbursement, Director of Revenue Cycle MARKETING LEADERS VP/Dir. Marketing/Sales, VP/Dir. Media Relations INFORMATION LEADERS Chief Technology Officer, VP/Dir. Technology/MIS/IT NUMBER OF SITES Base = 73 (Health systems) 1 5 (small) 18% 6 20 (medium) 37% 21+ (large) 45% NUMBER OF PHYSICIANS Base = 34 (Physician orgs) 1 9 (small) 21% (medium) 29% 50+ (large) 50% REGION 25% 21% 31% 23% WEST: Washington, Oregon, California, Alaska, Hawaii, Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming MIDWEST: North Dakota, South Dakota, Nebraska, Kansas, Missouri, Iowa, Minnesota, Illinois, Indiana, Michigan, Ohio, Wisconsin SOUTH: Texas, Oklahoma, Arkansas, Louisiana, Mississippi, Alabama, Tennessee, Kentucky, Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, D.C., Maryland, Delaware NORTHEAST: Pennsylvania, New York, New Jersey, Connecticut, Vermont, Rhode Island, Massachusetts, New Hampshire, Maine PAGE 30

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