provider m&a: the evolving landscape
TRANSCRIPT
1 | McKinsey & Company CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
Provider M&A: the evolving landscape
November 9, 2016
Rupal B. Malani, M.D., M.S.
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
2
Dynamics acrosshealthcare sub-
sectors
Dynamics withinhealthcare sub-
sectors
Dynamics from outside healthcare
Several forces have led to shifts in the healthcare market
SOURCE: Levin; NAIC 2013-14; Interstudy managed market surveyor, January 2015, assumes Centene/Health Netmerger, Aetna/Cigna merger, and Anthem/Cigna merger; McKinsey analysis; MPAC data
Major trends:
▪ Significant payor, provider, and PBM consolidation
▪ Increased pressure on growth and profitability
Medicare Advantage MLR
increased ~0.4% p.a. 2010-14
3 payors cover 44% of US
lives; 22 PBMdeals since
2010
▪ PE and REITs buying post-acute assets and other microtargetedprofitable healthcare players
Over $63 Btotal price of providers sold to non-provider
investors2010-2015
▪ Payors rapidly building capabi-lities outside of managed care
▪ Provider systems acquiringstrategic non-acute assets
▪ Disruptive players likeDaVita expanding scope
22 DaVita deals
disclosed since 2004
Non-acutetarget in
~20% of all hospital-led
deals
>30 deals 2010-15 with
payors acquiring non-
payors
3
Health systems are using M&A to gain scale and achieve efficiencies
SOURCE: AHA hospitals report 2013; Medicare cost report 2013
1 Weighted average share of inpatient admits across MSAs where system provides care; high = weighted avg share > 30%; moderate = weighted avgshare 15-30%; low = weighted avg share 2-15%. Excluding three very large MSAs: New York City, Chicago, and Los Angeles
10.3
8.4
Low per-MSAshare (N = 39)
High per-MSAshare (N = 11)
7.4
6.3
Low per-MSAshare (N = 39)
High per-MSAshare (N = 11)
Average share in top 50 MSAs1
Non-AMC providers operating expenses per case mix index-adjusted admission, $ thousands
AMC providers operating expenses per case mix index-adjusted admission, $ thousands
4
40 3948
4034
51
70 84
6877 70
911
29
Q2’1615
74
2005
43
06 08
34
1
40
2
50
40
07
3 2
13
62
78
86
1
09 11 14
41
79
1210
69
Strategic deals (acquirer is hospital/health system) PE deals
Hospital M&A has accelerated significantly in recent years
NOTE: Only deals involving the acquisition of a hospital or health system target are included. The acquirer was either a hospital/health system or private-equity investor (the private-equity investments were either buy-outs or add-on investments). The counts do not include joint ventures, partnerships, or deals involving specialty hospitals (e.g., behavioral, rehabilitation, or inpatient cancer facilities)
SOURCE: McKinsey analysis of Levin data
Hospital M&A activity, number of deals
5
PE investment in the provider space – 1995 to 2015
PE investment has been increasingly spread across the care continuum
87
07 08
87
61
148
11
110
09
124 128
10 1312
114
14 15
123
04 05 06
57
85
22
48
21
01
1824
12
0399 022000
9
1995 98
13
96 97
108
69
Q2’16
Practitioners5 Health plans
Hospital
OP and diagnostic facilities3Health IT1
Business/ medical support4Post-acute2
NOTE: Majority transactions are buy-out’s and add on’s but also includes growth capital, recaps, public to private etc. Does not include PE investments in pharma, medical devices, DME/HME etc.; 2015 transactions until November
1 Comprised of SaaS, EMR, enterprise software, digital health, automated workflow solutions etc; 2 Comprised of LTAC, SNF, Assisted Living and Home Health; 3 Comprises of ASC, Diagnostics/Imaging, Urgent Care, Oncology, Hospice, Behavioral and Dialysis; 4 Comprised of Physician practice management, MSOs, RCM/receivables, outsourced support services, IT consulting management, cost containment solutions and other non-clinical support services; 5 Comprised of physician practices, physician staffing and other clinical staffing
SOURCE: PreQuin; McKinsey analysis
6
Non-M&A transactions1 by type, 2010 – 2016 YTD
2032 26
48 45
9
11 15 98
16
59
2013
4132
2014
6
2012 2015
60
20162010
9
72
2011
525
114
JV PartnershipsNumber
1 Transactions include deals made on a continuum of ownership models (other than full merger oracquisition); in these models, assets could be partially owned and/or managed by one of theparties involved in the deal
SOURCE: Press search, team analysis
In addition, providers are exploring alternatives deal structures
▪ Non-M&A transactions, driven mainly by partnerships, grew over 10x from 2010 to 2016
▪ Partnerships are often struck to enhance care coordination within a region, retain and attract physicians or establish value based contracts (e.g., ACOs)
7
Size of deals, total number of facilities and acquired revenues
USD Billions
Aggregate revenues of M&A targets
Number
Total number of hospitals acquired
110
303.5x
2004 - 2009 2010 - 2015
750
350
2004-2009
+115%
2010 - 2015
145
90 +65%
2010 - 20152004 - 2009
Aggregate M&A hospital deal value has tripled
NOTE: Does not include specialty hospitals; does not include Private Equity transactions; revenue numbers are nominal (medical services CPI grew by 3% CAGR from 337 in 2005 to 476 in September 2015)
SOURCE: Levin; McKinsey analysis
USD Millions
Average revenue/hospital acquired
8
Systems with revenues over $1 billion are expanding geographically and gaining market share
CAGR, % 2007-14 CAGR, % 2007-14 CAGR, % 2007-14
2
2
3
1
-6
-3
1 Systems with zero or negative reported revenue are excluded, as well as systems with zero acute beds reported. Top market share is determined by the number of admissions.
2 The number of systems in each size category is held constant at 2014 levels to accurately show change in market share within each category3 Analysis does not include independent hospitals
Systems with $1-$5B revenues3
Systems with over $5B revenues1,3
Systems with <$1B revenues3
Number of MSAs2
Growth in top market share
# of MSAswhere #1 or #2
9
Aggregate target revenues, %2
2004 - 2010
19%
2010 - 2015
36%40%
32%
28%
45%
<$1B$1B - $5BOver $5B
Mid-size systems are increasingly becoming both acquirers and targets of M&A
2010 - 2015
16%
25%
18%
2004 - 2009
82%
59%
0%
<$1B$1B - $5BOver $5B
$39B $120B
1 Acquirers are quantified by the number of deals instead of aggregate target revenues because the latter skews the analysis in favor of larger systems (on average, they make larger acquisitions)
2 Targets are quantified by their revenues to maintain consistency with all other exhibits and analyses in this article. Targets include health systems as well as independent hospitals 3 Q2’2016 data has been annualized
248 465
Number of deals by buyer size, %1
10
11%
Religious
AMC
Other
2010 - 20151
48%
28%
2004 - 2009
24%
71%
18%
$30B $110B
AMC and faith-based systems have recently become more acquisitive with AMCs using M&A to gain in-market scale
SOURCE: Levin; McKinsey analysis
Acquisitions by system type
Aggregate target revenue, $ Billions
13Over 100 miles
50 - 100 miles 12
Under 50 miles 61 71
14
15
AMC M&A deals 2010 – 2015(N = 86)
% of total deals
11
Providers can unlock a range of value levers through scale …
Patientaccess
Capacityrationalization
Scale economies
Network strength Skilleconomies
▪ Consolidating sub-scale clinical units
▪ Consolidating ancillary functions
▪ Leveraging brand and other privileged assets
▪ Offering a broad, accessible network
Capitalefficiency
▪ Combined capital base
▪ Enhancing capital market attractiveness
▪ Enhanced value proposition to partners
▪ Combining special assets
▪ Assuming morerisk
▪ Purchasing and supply management
▪ Back office / support functions
▪ Management / overhead ▪ Clinical operations
effectiveness▪ Performance mgmt.▪ Utilization mgmt.▪ Best practice
sharingScale and skill economies key to capturing value within service lines
Scale can give broader geographic reach, supporting strategic objectives
Defensive positioning
▪ Prevent competitor from acquiring strategic assets
▪ Avoid disruption to stakeholder relationships
Opportunism
▪ Capture under-valued assets
▪ Leverage proprie-tary knowledge of market
Value potential from competitive differentiation
12
…However systems risk net value destruction in poorly executed scale strategies
Cost of coordination, safeguarding, complexity, etc.
Performance of stand-alone entities
▪ Agency issues (ambiguity over accountability, risk)
▪ Unanticipated culture challenges
Structural leverage
▪ Diversify risk and pursue broader partnerships
Scale / scopeeconomies
▪ Value through increased efficiency
Skill economies
▪ Share capabilities and build deeper specialization
Certain value destruction:Costs inherent in organizing as a multi-site provider network
Conventional wisdom:“Corporate center creates value through financial discipline and scale”
Key to value creation: Skill economies
Economies of scale / scope are enough to drive value in some deals
Value destruction, common for providers and in M&A more generally
Value creation, possible through strong strategy and distinctive execution
Impact of partnerships and M&A on value
13
More organizational complexities
Two factors may challenge M&A as a path to achieving scale
Fewer traditional synergies
▪ Traditional synergies such as back-office administration do not help realize value and only deliver marginal returns
▪ Value-creation opportunities lay in areas more difficult to capture, especially those more clinical in nature
▪ Challenges are acute when the integration involves a health system rather than a single hospital
▪ Acquirer needs to manage a range of multifaceted organizations and employ more complicated value-capture levers
As health systems grow larger and reach scale, there are two main challenges
14
Despite increase in deal activity, the provider landscaperemains fragmented
SOURCE: HealthLeaders Interstudy, Modern Healthcare, AHA 2013
If the threeannounced payordeals go through, the top five payors’ share of the commercial market will likely increase from …
In comparison, from 2010 to 2014, the top 20 health systems’ share of overall healthcare spending rose only from… 2014
61%54%
28%26%
In 75% of the top 25 MSAs, the provider landscape is still more fragmented than the payor market
15
Looking forward, pressures on growth and profitability may create an environment ripe for opportunistic acquisitions
SOURCE: SK&A Physician datafile 2008, 2010, 2013; Merritt Hawkins 2009 Review of Physician and CRNA Recruiting Incentives; McKinsey PRISM model; McKinsey Health Reform Team analysis
Regulatory
▪ Continued regulatory uncertainty with ACA
▪ Growing impact from DSH decrease and Medicare growth rate declines, growing from ~1.5 to ~4.2% EBIDA impact, 2015 to 2019
▪ Downward pressure on reimbursement from payorconsolidation, growth of narrow networks
▪ Changes to care models, including payment innovation and shift to value-based care (e.g., episodes of care, PCMH, risk sharing, etc.) requiring new skills
Payors
▪ Shift away from IP care: Each of next 3-4 years we expect 1% annual decline in IP discharges, 2-3% annual increase in OP visits
Patients
▪ Magnified competition among non-hospital providers, including those previously cooperative
▪ Disruptive players targeting profitable services; top 2 dialysis providers share increased from 70 to 85% from 2012-15
▪ MD employment by hospitals grew from 17% in 2008 to 24% in 2013
Providers
Key forces