The Urge to Merge in Healthcare: This Time, Will It Be Different?

By Patrick Pilch and Scott Gottlieb

There’s a flurry of deal activity in the healthcare space – hospitals merging, physician groups consolidating into multi-specialty groups, insurers and hospitals acquiring physician groups; the list goes on. From 2012 to 2013, 189 hospital mergers occurred, up from about 50 to 60 annually from 2005 through 2007, according to Irving Levin Associates. And the trend is building. The last time we saw this level of M&A activity was in the 1990s, but many of those deals broke apart shortly after they were consummated.

Are we in for another bad ending this time around? The short answer: no.

In an article we wrote for Morning Consult and our BDO Knows Healthcare newsletter, we point out a number of factors that are driving better outcomes this time around. One of the key differentiators: data.

In the 1990s, acquirers didn’t have the tools (or data) to properly measure the risk that they were taking on. Practice management companies were supposed to add this layer of sophistication. But that actuarial expertise was never adequately adopted and hospitals didn’t have ready access to the actuarial tools that were required. Physician productivity also fell after these acquisitions, in part because reimbursement schemes didn’t take into account changing practice patterns once doctors turned from being proprietors to being personnel.

Data on patient risk is now far more accessible, making it easier for providers to price capitated contracts. The tools for crunching these data sets are also readily available. And the actuarial skills required to conduct these analytics are more widely distributed across industry constituents and no longer the sole province of insurers.

Many argue that the industry has learned from its past mistakes. Today’s M&A deals require more sober thought around how providers intend to measure and understand the risk they’re taking on through these new arrangements, and how they plan to price it. Consolidating hospitals and provider groups must make the investments necessary to engage in these crucial analyses.

What do you think? This time around, will the M&A boom in healthcare succeed?