Trends #7 – Vertical / Horizontal Integration

(By Bryan Smith and Seth Edwards)

In a recent blog post, we pointed to 2023 as a tumultuous year for healthcare, presenting new opportunities and threats to the status quo. Physicians, health systems and payors seeking strategic and operational gains has led to significant integration activity. ?

Each year, various organizations highlight trends in healthcare merger and acquisitions (M&A), and for 2023, these include:

• Higher rates of financially distressed hospitals going to market
• The purchasing of physician practices appears to be slowing
• Cross-market mergers continuing (at least until the FTC gets involved)

Higher Rates of Financially Distressed Hospitals Going to Market

Hospital horizontal integration is often fueled by the desire to achieve economies of scale, rationalize services, or accessing higher reimbursement rates. Sometimes, the decision to sell is made to simply keep the doors open, which was a large M&A driver in 2023. One report states, “…the highest percentage of announced transactions involving a financially distressed partner in recent history. At 28%, this figure almost doubled percentages seen in the three prior years….” Kaufman-Hall 1.24

The Purchasing of Physician Practices Appears to be Slowing

Identifying the number of annual physician practice transactions is challenging, but one analysis identified 16 percent fewer deals in 2023 than 2022. Among those organizations that are purchasing practices, Optum added roughly 20,000 more employed and affiliated providers to grow to 90,000 in total, roughly 10 percent of all the physicians in the United States. Stat News 11.23

Potential contributors to a transactions slowdown include increases in interest rates driving up internal hurdle rates, changes in CMS reimbursement rates that potentially make some specialties less attractive, greater scrutiny from the FTC (especially around roll-up deals) and, perhaps, an increasing lack of practices to purchase.

Incentives often drive trends. To that end, Premier believes that with the full implementation of the Cost Components of the Merit-based Incentive Payment System in the Quality Payment Program (the value-based purchasing program for clinicians in traditional Medicare), it may drive more physicians to explore value-based care or ultimately selling the practice to a larger group who can help with reporting.

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Cross-Market Mergers Continuing (At Least Until the FTC Gets Involved)

When hospital mergers occur within a local geography, the Federal Trade Commission (FTC) often reviews these types of deals for antitrust considerations.

Loosely defined, cross-market mergers occur between health systems that are in seemingly different markets and do not threaten to impact the competitive nature in either market. This is a common event with researchers saying that as much as “…55?percent of the 1,500 hospitals targeted for a merger or acquisition between 2010 and 2019 were located in a different commuting zone than the acquirer.” Health Affairs 11.22

These cross-market mergers include some of the largest deals in 2023, including the Kaiser Permanente / Geisinger tie up early in the year, and the Advocate-Aurora / Atrium merger at the end of the year. Deals of this type are especially important to health systems that already have a large presence in their core market. And because of the lack of threat in triggering antitrust concerns, the FTC has enacted less scrutiny on these arrangements.

That trend may be changing. In recent years, multiple groups have expressed concerns that cross-market M&As could have anti-competitive effects when the same insurance companies or employers are drawing beneficiaries or employees from both markets, or that there may be implications for hospital employee wages, among other concerns. Some well-informed industry groups disagree with those concerns, but the FTC has indicated interest in taking a closer look at these types of arrangements. HealthCareDive 7.23 That could certainly have a chilling effect on those types of mergers.

Additional Trends

• Continued activity from Academic Medical Centers buying community hospitals to relieve capacity constraints. Kaufman-Hall 1.24
• Larger health systems, and especially for-profits, continue to reconfigure their assets. It is telling when the number of for-profit purchases of not-for-profit facilities (5) is less than half the size of not-for-profits buying previously for-profit hospitals (13). This does not include items such as Steward’s closing of a hospital in San Antonio. In an upcoming blog, we will discuss the involvement of for-profit and private equity funding in healthcare. ?
• Premier is seeing both consolidation and expansion in the ACO market as the players continue to mature. While hospital consolidation and interest from for-profit ventures are driving consolidation, recent MSSP rule changes and a growing understanding of how specialists’ impact ACOs are encouraging the development of multiple ACOs with high performers taking risk and others in a “learning” posture.

2023 was a tumultuous year for healthcare, and the increasing M&A activity is indicative of that. By this time next year, we’ll know if the same trends have held true for 2024.