The healthcare and health IT landscape saw some seismic shifts in 2018 due to vertical mergers and large-scale acquisitions among different players as well as the entrance of new disruptors. What are the implications for healthcare industry stakeholders in the long term, and what do the M&A deals of 2018 spell for the year ahead?
In a recent interview, Ben Rooks, founder and principal of ST Advisors, a strategic and financial advisory firm focused on healthcare IT, and Michelle Mattson-Hamilton, associate principal, ST Advisors, reviewed M&A activity in 2018 and the impact of consolidation and integrations on the entire healthcare arena.
The healthcare industry also watched as Amazon continued its push into healthcare with the acquisition of online pharmacy PillPack as well as teaming up with Berkshire Hathaway and JPMorgan Chase to form a healthcare company. Tech behemoth Apple also launched its Health Records platform this year. What’s more, in November came media reports that Walgreens Boots Alliance and health insurer Humana are in preliminary discussions to take equity stakes in each other and are discussing the possibility of expanding a clinic partnership, according to reports from CNBC.
“2018 was an interesting year, with some really interesting transactions,” Mattson-Hamilton says. “As far as characterizing the year overall, I saw technology companies moving into healthcare and then reactions to that, and then the big mega-mergers with the payers and the pharmacy benefit managers (PBMs), and how that will change the industry, as well as the large provider mergers and acquisitions; everything flows from that.”
Without argument, the biggest deals in the healthcare space this past year, and potentially the most transformative, were among payers and PBMs—notably, CVS Health completing its $69 billion acquisition of health insurer Aetna in November, and Cigna Corporation, the fifth largest health insurer in the U.S., finalizing its $67 billion acquisition of PBM Express Scripts in December.
Currently, the PBM market is highly concentrated with approximately 70 percent of all prescriptions handled by just three PBMs – CVS Caremark, United Health Group-owned OptumRx and Express Scripts. The CVS-Aetna merger combines CVS’ pharmacies with Aetna’s insurance business, while CVS also has one of the largest pharmacy benefit managers through CVS Caremark.
“It will be interesting to see what CVS-Aetna does. I can’t imagine Aetna saying to clients, now you can only shop at CVS. It’s brilliant, shifting from retail to mail order to benefit design,” Rooks says.
With the ongoing transition to value-based care, health insurers are looking to have a broader role in the healthcare environment, Mattson-Hamilton says. “They are looking at pharmacy technology and care provision,” she says, particularly noting health insurer Humana’s post-acute care acquisitions as the company partnered with two private equity firms to acquire Kindred Healthcare for $4.1 billion and invested in hospice provider Curo Health Service for $1.4 billion. “So, you have the CVS-Aetna deal, and Cigna-Express Scripts, and that aligns nicely with what UnitedHealth has built around their Optum portfolio. All three organizations now have pharmacies, including captive specialty pharmacies, and can leverage those in a unique way, once they are done with the integrations.”
Through its Optum health services segment, UnitedHealth continued to buy up provider organizations in 2018 as it increasingly moves into the direct delivery of medical care. The insurer is still in the process of closing its nearly $5 billion acquisition of DaVita Medical Group, which operates 300 clinics in half dozen states. When that deal was announced back in December 2017, Optum already had more than 200 MedExpress urgent care and walk-in centers and about 30,000 clinicians.
This past June, Optum and Summit Partners acquired staffing firm Sound Inpatient Physician Holdings for $2.2 billion, and in late November came news that Seattle-based healthcare provider Polyclinic was being acquired by UnitedHealth for an undisclosed sum.
The insurance giant also added several pharmacies in 2018, including Avella Specialty Pharmacy in October and Genoa Healthcare, which runs 425 pharmacies, in September. These companies will be wrapped into UnitedHealth’s pharmacy benefit group OptumRx, according to media reports.
Hospitals and health systems continue to consolidate as several large mergers were announced in late 2017 and in 2018. This past September, Bon Secours Health System and Mercy Health of Ohio announced they had completed their merger, creating one of the largest Catholic health systems. llinois’ Advocate Health Care and Wisconsin’s Aurora Health Care announced plans to merge in December 2017, and the planned merger of Catholic Health Initiatives and Dignity Health will create a combined organization with 139 hospitals with operations in 28 states. In the fall, Philadelphia-based Einstein Healthcare Network and Jefferson Health signed a definitive agreement to merge as well.
While healthcare provider organizations contend that provider consolidation benefits consumers through lower prices, time will tell whether this plays out. An analysis conducted by The New York Times and published in November found that mergers have led to higher costs for patients. “The mergers have essentially banished competition and raised prices for hospital admissions in most cases, according to an examination of 25 metropolitan areas with the highest rate of consolidation from 2010 through 2013, a peak period for mergers,” according to the article.
“All these mergers are happening, both vertical and horizontal, as providers are dealing with more powerful payers. One might be able to argue that, in some cases in localized areas, because of the provider mergers, the power has shifted toward the providers, or that this might be evening it out in some cases,” Mattson-Hamilton says, noting that larger organizations amass more buying power.
Rooks also notes that ongoing provider consolidation presents a challenge for health IT vendors.
“With more hospital consolidation, there are fewer people to sell technology to. We’re seeing that this is the beginning of the end of the hangover,” he says, elaborating that, until recently, healthcare IT leaders were exclusively focused on EHR (electronic health record) implementations. “People are now picking their heads up and looking at what’s next. They are starting to look for more solutions. So, we’re seeing a lot of horizontal consolidation on the vendor side, tacking on acquisitions to capture more customer wallet share.”
Health IT Vendor Acquisitions
Following strong activity in 2018, Rooks anticipates 2019 will be a robust year for health IT vendor M&A activity. “Looking at the trends that are driving M&A, private equity has a lot of dry powder to spend,” he says.
One of the bigger headlines this year in the vendor market was the acquisition of athenahealth, the Watertown, Mass.-based EHR and practice management vendor, by private equity firm Veritas Capital and hedge fund Elliott Management. The $5.7 billion deal, which was completed in November, concluded a six-month acquisition process and a tumultuous period for athenahealth and its leadership, as company co-founder and CEO Jonathan Bush stepped down back earlier this year. Rooks shared his opinion on that development in this June podcast.
Following the closing of the deal, Veritas, a government and technology focused investor, and Evergreen expect to combine athenahealth with Virence Health, the GE Healthcare value-based care assets that Veritas acquired for $1 billion earlier this year. Rooks notes that the acquisition represents a good deal for shareholders, but also adds, “Twelve to 24 months from now, Athena customers nor remaining employers will feel better off from this.”
A recent survey from Reaction Data found that healthcare organization leaders are expressing some initial skepticism about the combination of athenahealth with Virence Health Technologies. Current customers of the two vendors say they are in “wait and see” mode following the merger of the two companies, however, the majority of non-customers say they do not plan to purchase health IT technology from the combined company, according to the survey.
Other big health IT deals this past year include Veritas-backed Verscend Technologies buying Cotiviti, a provider of payment accuracy and analytics driven solutions, for $4.82 billion; pharmaceutical giant Roche’s $1.9 billion acquisition of Flatiron Health, which has both an oncology EHR and data analytics platform; Inovalon buying Ability Network for $1.2 billion; and Global Payments, a payment processing company, acquiring AdvancedMD, a provider of cloud-based solutions for small and medium-sized physician offices, for $700 million.
The nearly $2 billion price tag of the Roche-Flatiron deal raised a lot of interest, and Rooks notes that the value of Flatiron is in the clinical research-grade quality real word data generated by its network. “Primarily [Roche] needs access to its data; they need that data to be able to improve and increase their time to market for new cancer treatments,” he says.
In another interesting development, retail brand Best Buy also expanded into healthcare with a $800 million acquisition of GreatCall, a company that offers health and medical alert services to older consumers. While the acquisition may not seem like a natural fit, Mattson-Hamilton notes, ““This a great acquisition for them as they are trying to move more into the healthcare space.”
And there was Amazon’s grab for online pharmacy company PillPack. Beyond this big move, Rooks and Mattson-Hamilton both note that Amazon has made smaller moves into healthcare, including patenting technology that enables its Alexa voice assistant to detect abnormal physical or emotional conditions.
What’s more, about a year ago, Amazon quietly launched a line of over-the-counter health products, possibly challenging pharmacy retail chains. CNBC reported that Amazon launched the Basic Care line in August 2017, and the OTC health products are produced by private label manufacturer Perrigo. AWS also recently announced that its Amazon Translate, Amazon Comprehend and Amazon Transcribe artificial intelligence services are now HIPAA compliant.
“It’s pretty impressive in a short amount of time, and we’ll have to wait to see how much traction they are going to get,” Rooks notes. “I wouldn’t bet against Jeff Bezos.”
