On March 18, 2016, the Georgia Association of Healthcare Executives sponsored a closed-door session for C-Level Executives throughout the state to hear perspectives from two insiders: Harold Kirtz, Senior Litigator for the Federal Trade Commission, and Mr. Will Melson, President of the Broadwell Group. The discussion went long, but here’s one half of the story from a dealmaker’s perspective.
Q: What is the actual “state” of Mergers & Acquisitions?
A: While none of us have unlimited funds, healthcare professionals struggle with the idea there’s a lot of things I “could” do, but what “should” I do? When it comes to mergers & acquisitions, you’re probably presented with a lot of opportunities to consider – should we join? Should we buy? Should we merge? Should we integrate?
I think we’re in the middle of it. And when you’re in the middle of all this change, it’s sometimes a little hard to figure out. Should we go with a population health management? Should we do something with a payer plan? We see a lot of health systems that will dabble in something that looks like a plan.
You would have thought that in 2010, M&A was on a huge tear. And even up to 2014, you’re thinking there’s no way it can be any bigger. Last year was a 66% increase of M&A activity in Healthcare. Even nationwide – Wall Street Journal reported there were over $2 Trillion of mergers.
Q: Is regulation causing Payers to consolidate?
A: If you’ve worked with Payers, you know they’re looking for ways to get better, or at least get bigger to create more leverage. Payers, believe it or not, have an incentive just like hospitals. Sometimes it may feel like regulation causes small groups not to exist, but the medical loss ratio is basically forcing insurance companies to be more efficient. There’s a certain percentage of the dollars they collect that is supposed to go to actual healthcare. It’s really the transactional cost of healthcare that we need to fix. The largest healthcare ThinkTank in the U.S. has estimated about 27% for transaction costs in healthcare as opposed to 3% for VISA.
Q: What is driving M&A Activity?
A: There are seven reasons for an acquisition or merger:
- Strategic
- Economies of Scale
- Patient Access
- Acquire Capabilities/Services
- Acquire Talent
- Leverage – Share Existing Capabilities
- Geographic Access
Strategic – maybe that’s the umbrella bucket; the point being that your strategy should come before you go out and start doing acquisitions. As Vince Lombardi said, “Luck is preparedness waiting for opportunity.” If you can combine those two, then you win the championship, so to speak. But it’s the preparedness you have to be ready for. Otherwise these opportunities come along, and it’s got to be a fast deal… and nobody likes to have to make a fast decision.
We see a lot of economies of scale going on here in Georgia. And the three forces that are happening, I think are: 1) governmental action, in a lot of ways are incentivizing or forcing some consolidation; 2) enormous costs of technology (for example, EHRs and EMRs, like Epic). I don’t know why we tolerate the enormous cost of technology in healthcare. We work with clients who write an $80M+ check to Epic. And that’s just for your licenses. You’ve still got to implement.
But you’ve got this cost of technology…and you’re looking to spread that out. And the third thing that’s unique and brand new to this industry is 3) consumers are getting engaged. They don’t want to go to one place and fill out all the forms and go to the next place and have to start all over…they’re looking for (what we call) clinically integrated networks. So you’ve got those three things that are coming together, at the same time – that perfect storm. And so those make up a lot of these reasons for mergers today.
What’s not on this list is “eliminate the competition.” Harold and I agree on this principle. But not everyone I work for would agree on that. There was a study done about four years ago on the best ROI for M&A, and one of the worst ROI’s is to just take out the competition. It’s a very expensive way to deploy your capital. So, that’s not on the list.
Q: So where do you make the money?
A: Here are five choices:
- Due diligence
- Price negotiation
- Post-merger integration
- Run it better than the seller
- Disposition
You make money in all five areas. Some executives think only of one or two. The largest bucket that is also the most “impact-able” is post-merger integration. You can make a lot of money or lose your ROI depending on how that’s done. That’s why we put extra emphasis in post-merger integration. The thing I’ve found that is different now than maybe 20 years ago is that “due diligence” is a two-way street. If any of you have been in on deals recently, it’s sometimes like the buyer is the seller and the seller becomes the buyer. And you can’t ignore that.
Here in Georgia, there are certainly some really good systems that make their money, maybe, in the price negotiations. There are others that make their money on the “sell” side – what would a person wanting to buy be looking for?
There are fiduciary responsibilities – the Duty of Inquiry (for a Board) requires you to ask the questions that you should ask. Now you can hire third-party advisors, and you’re allowed to take their findings and rely on those findings, but there are quite a number of duties.
Q: Why would a Merger & Acquisition Fail?
A: There are a lot of reasons why. For example, picking up an acquisition for size – that’s probably one of the worst things you can do… Buy – just to get bigger. Because what you can end up doing is taking on an acquisition that’s going to be a drain on your capital, your cash flow, your operations and your ability to run it.
It could change a good bit of your culture. Culture eats strategy every day. Meaning, culture is stronger than any strategy – you could have the best strategy but still have to deal with culture. For example, we represented the Catholic Health Partners who bought the first Jewish Hospital in the country. So you can imagine the cultural issues with that. Not just the Catholic hospital, but (I think) the system’s CEO was a Protestant, running a Catholic system, and his #2 was Muslim. But if you just recognize that culture eats strategy, that will make you address it. We didn’t have a single doctor leave the system and net revenues were within 3% of twelve months prior. ER visits were up, which meant the public had a vote of confidence. Surgeries were up 23%, which meant the doctors liked what they received. So it is possible.
Another thing I think has changed enormously is “transparency”. Today, I find that the best deals are transparent and upfront – if you tell me upfront that there’s an issue, we can just about solve a deal with anything, but if you wait until we’re close to closing, then it’s going to be a lot bigger problem, and it could ruin the deal.
Q: So what’s next?
A: I have a strong bias that the natural state of things will follow, just like other industries.
- Super Regional Systems
- National Brands
- No-Borders Care
- Consumer Engagement
- Quality Segmentation vs. Sameness
- UBER-ization of Healthcare
- Trials & Tribulation – Innovation
- Predictor Model – The Path & Winners
There are some limiting factors in healthcare that will slow us down, but I think you’re going to start seeing some Super Regional Systems, defined as a system between 5-25 size. Regional, meaning size, not a single hospital serving a geographical region.
UBER-ization of healthcare – this is a very controversial topic. But it’s really the same principles as telemedicine plus more. Bryant Cornett was recently telling me that Fulton County has a Blue Cross-Blue Shield tele-health booth. You go in, you get your blood pressure, fill out some forms, and it pops out some pharmaceuticals…it just dispenses. So that’s an example what we mean by UBER-ization of healthcare – the use of telemedicine and finding capacity for ways to do things cheaper.
The good news is – all these trials and tribulations will lead to innovation. And there actually are models. We’ve got a pretty good predictor model of what’s going to be successful and what won’t be, and some of the key factors.
I think the other EXTREMELY controversial topic is quality segmentation versus sameness. We “want” everyone to have access to the best healthcare there is. At the same time, you also realize not everyone shops at Walmart. But not everyone shops at Neiman Marcus. So, is that where we end up in healthcare – that you can choose what you want? Or do we end up with sameness? We hate the word “sameness,” but “equality,” we love.
Q: What are some of the things that will slow us down?
A: As Harold said, CONs (Certificate of Need) will slow things down because it will allow a non-competitive player to stay put, and you can’t do anything about it. Rural markets hate CONs. Here in metro Atlanta, CONs don’t really impede competition… you still have to compete, right? There are enough choices that a CON might certainly slow you down, but you’ve got a threshold there. If you need to put an imaging center somewhere, you pretty much can.
The second thing I think happens is that CEOs and Executives, maybe, feel a little bit like, ’Let’s REALLY think this out before we move or before we change the way we do something.’ Apple tries something, and they say, ‘Oops, sorry. We messed up Apple Maps. Can we please try it again?’ We just assume that’s okay. Car companies add a car, and if we don’t buy it, we don’t care. In healthcare, it’s not really acceptable to go out and try something, then pull back. So that’s going to slow us down, but it’s not going to suspend the inevitable.
Q: What are your predictions?
A: I think cheap debt financing is going to be around for quite some time. When you have times of great change like this, money-people want to get in on it, especially regarding technology. But that just brings cash in. Especially if you’re a for-profit system, it just gives you more access to do more things.
In-patient (numbers) are going down. Outpatient is going up. So M&A today isn’t necessarily just hospitals getting together, or groups of hospitals getting together – it really is (for) the delivery of care. Within the next 10 years, we project outpatient volumes will soar 21%.
One acquisition that was predicted – Verizon buying Tenet is unlikely. I don’t think that’s going to happen.
About Will Melson
Will Melson is the President & Owner of the Broadwell Group. With more than 25 years of real-life, in-the-trenches business experience, he drives revenues to peak levels. He shapes high-performing teams that partner with his clients to promote a shared vision, set strategic direction and manage the rate of change. Will is known for his exceptional ability in business and relatable demeanor that connects with his clients at an intimate, intense and individual level.
Prior to co-founding BGI in 2001, Will was a global VP at iXL and notably one of the youngest Principals at PriceWaterhouseCoopers Consulting. He has served as interim CEO for six organizations, as well as COO for others. He and his team are a highly sought-after, post-merger integration team who often lead the entire process, including evaluating deals in due-diligence. A member of the American College of Healthcare Executives and Health Information and Management Systems Society, he also serves on several boards and has successfully chaired four non-profits. He has co-authored several books, including “Making IT Pay,” a book on ecommerce for PriceWaterhouseCoopers, and a “Healthcare Executives Guide to ACO’s” and has been quoted in Modern Healthcare, had three Harvard Business School business cases written on his team’s work, and is seen in other publications.
Will was recently a key speaker at the AHLA (American Health Lawyers Association) annual M&A conference and often speaks at Georgia Tech and Duke University to shape a new generation of leaders. His successes include M&A transactions well over $7B in deal value; growing a client from $300M to $5B via acquisitions; leading turn-around efforts that increased revenue by 300%, reduced costs by 45% and increased gross margins by 62%; and leading a 42-team effort in an industry-setting, post-merger integration of a large hospital, including supply chain, 164 IT applications, HR, finance, data conversion, and training of more than 1600 client staff. For additional information or context for this article, contact Will Melson directly at wmelson@broadwellgroup.com
Beki Golden