- Large and mid-size healthcare organizations should implement more proactive healthcare mergers and acquisitions strategies to avoid common acquisition mistakes, such as undefined growth strategies and deal overpayments, asserted Deloitte in a recent report.
Deloitte researchers found that healthcare organizations tend to make more acquisition mistakes during high-volume healthcare mergers and acquisitions periods, such as 2015 and 2016, but avoiding a reactive approach can ensure that deals add value to their organization.
“Winning and creating value in this environment may require something more: a set of detailed action steps to help companies proactively identify and transact strategic deals rather than reactively pursue disparate, ad hoc opportunities,” the report stated.
Healthcare mergers and acquisition rates have significantly increased in the past year. Healthcare companies spent roughly $3.8 trillion on mergers and acquisitions by the end of 2015, representing the highest amount ever, according to recent data from Bloomberg.
Many healthcare organizations also intend to continue the merger and acquisition trend into 2016. Deloitte reported in 2015 that 63 percent of chief financial officers at healthcare organizations expected to pursue these deals in 2016.
While healthcare mergers and acquisitions rates increase, Deloitte stated that organizations are more likely to misstep when making deals. The most common mistakes include having an undefined growth strategy and overpaying for acquisitions.
Healthcare organizations should develop a growth strategy that clearly addresses the role that mergers and acquisitions will play in their organization’s growth plan, researchers advised. Without a defined growth plan, organizations may end up reacting to deals rather than pursuing value-adding acquisitions.
“Some companies unwittingly outsource their growth strategy to investment bankers,” stated the report. “As a result, they end up reacting to available deals those intermediaries present instead of proactively identifying viable candidates that support their strategic goals.”
Healthcare organizations also tend to overpay for acquisitions as deal volume increases, researchers added. Asset purchase prices typically rise as the wave of high deal volume continues, causing bid premiums to increase from 10 to 18 percent in the first phase of the wave to 50 percent and beyond in the third phase, according to cited academics Peter Clark and Roger Mills.
“This final phase is where many ill-advised and costly deals are struck, often leaving a legacy of broken promises and lost value,” Deloitte researchers wrote.
The report also noted that healthcare organizations may also face limited growth options in times of high healthcare mergers and acquisitions rates. Some organizations and their stakeholders may be concerned that the economy is not driving corporate growth, leading them to rush into mergers and acquisitions deals to spur organization growth.
To overcome healthcare mergers and acquisitions challenges, researchers suggested that organizations become “advantaged acquirers” by increasing self-assessments, identifying priority pathways, focusing on competitive signaling, implementing strategic screening, and developing disciplined integration plans.
Healthcare organizations can start on the path to becoming an advantaged acquirer by performing self-assessments that identify the organizations strengths, weaknesses, and growth opportunities, the report stated. The evaluations can help executives to develop a healthcare merger and acquisitions strategy that plays to the organization’s strengths while trying to fill in care or market gaps.
“These opportunities include choosing the most attractive customer segments and geographies, serving customers in ways competitors cannot replicate, and understanding the capabilities and market access required to achieve those goals,” wrote researchers.
Another key to improving acquisition deals is to pinpoint mergers and acquisitions priorities that respond to “identified priority pathways at the business-unit (BU) level that address new products or solutions they will bring to market at prices that will add value for customers.”
Developing priority pathways could help organizations to focus on high-value deals, rather than the preferred deals that business executives are championing.
Researchers added that advantaged acquirers tend to monitor their competition’s healthcare mergers and acquisitions behaviors. Healthcare organizations should be aware of their competitor’s deals in terms of geographies, capabilities, size, product or service offerings, and targeted customer populations.
“Call it competitor signaling, where past behavior will often foreshadow which acquisition targets may be next on their priority lists,” wrote researchers. “Armed with that information, an advantaged acquirer can often determine if a deal it is considering does or does not make sense, or whether to begin preparing for a battle on a priority deal.”
Organizations should also implement strategic screening of acquisition deals, the report stated. Filters, such as size, geography, customer populations, technology capabilities, and talent, allow executives to prioritize deals according to value.
Strategic screening will also help organization to establish disciplined integration plans for new providers, continued the report. Researchers advised healthcare organizations to ensure that new providers can fit into the larger system with minimal cultural issues.
“It can be extremely difficult to analyze synergy potential or conduct a detailed valuation without evaluating such integration risks and determining if the right resources and talent are available to integrate the acquisition effectively,” the report stated.
Improving healthcare merger and acquisition strategies may also be beneficial as value-based care and MACRA implementation spurs more acquisitions. Deloitte reported in July that about 58 percent of healthcare organizations would consider joining a larger healthcare system to reduce financial risk under the Quality Payment Program and other alternative payment models.
Approximately 80 percent also said that MACRA would drive providers to merge with larger healthcare organizations and networks to shoulder financial pressures. The surveyed organizations agreed that about a one-third or two-thirds of remaining independent physicians are likely to consolidate in the next three years.
Another study in the September issue of Health Affairs showed that more providers moved to larger practices in 2015 in order to gain more access to value-based care and risk-based reimbursement resources.
Researchers reported that the number of providers in practices of nine or fewer physicians decreased from 40.1 percent in 2013 to 35.3 percent in 2015, while the proportion of providers in group practices of 100 or more physicians increased from 29.6 percent to 35.1 percent in the same period.