On a regular basis, lists are being published tallying the various mergers and acquisitions across the healthcare (HC) and medtech sectors. Across the globe, hospitals, medtech firms, pharmaceuticals and insurance providers alike, are merging, acquiring, consolidating and evolving into bigger -and typically more diversified- organizations. Everywhere you look, the healthcare market is consolidating and businesses are looking at ways to decrease overheads, to drive efficiency, and to enhance their portfolios and their competitive edge. This article will explore these dynamics across various key markets within healthcare, highlight the drivers and outcomes, and explore the concerns that have been raised in regards to widespread HC M&A.
Introduction to M&A in healthcare sectors
What is happening?
Hospital networks are consolidating and absorbing other previously independent facilities; medtech companies are purchasing other medtech manufacturers; pharmaceutical enterprises are purchasing smaller promising players; insurance providers are expanding vertically and horizontally; and traditionally non-healthcare related firms are pursuing complimentary products from within the healthcare field.
What is driving these changes and what does the future hold?
In 2015, healthcare players across the line and across the globe -from pharmaceuticals to insurance providers- totaled over €700 bn worth of mergers and acquisitions. In regards to medtech companies, close to 50% of these mergers were accomplished in the USA alone, followed by 10% in the UK, 6% in Germany and Sweden, and 4% in France.
Around a third of transactions involve substantial sums of €15-€50 m.
Within the medical device and supply sector, 30% of M&A pertained to general equipment and supplies, 12% to patient monitoring equipment and therapies, and 12% to disposable products.
For 2018, estimates project that medtech M&A will total around €380 bn. Around 2/3 of these transactions will be domestic, and the remainder represent cross-border transactions. Looking specifically at M&A within the USA, ¼ of their transactions are expected to be across-borders, whereas in Europe, close to 2/3 are forecasted to be across-border in the year to come.
Drivers of healthcare and medtech M&A
The most evident reason that these vast volumes of M&A are occurring are:
- Gaining bigger market shares; access to local markets
- Enhancing product portfolios
- Enhancing experience and skills within a provider network
- Absorbing and eliminating competition
- Reducing overhead costs; economies of scale
- Increasing procurement/pricing leverage
- Creating a new solution through acquiring other components that can be integrated/added-value to one’s product, or by building partnerships with complementary product manufacturers
- Globalization and supply chain improvements
Regulatory frameworks and economic conditions – One could argue that the aforementioned drivers are enterprise-generated, and primarily geared to increase revenues. Simultaneously, there are also regulatory developments and pressures that are significantly propelling the consolidation of the market. In the USA, for example, the introduction of Obamacare blew new life into the insurance market; vast volumes of fresh applicants for insurance coverage (many of which have government subsidies) swarmed the previously underused insurance market. Insurance providers accordingly, have since been seeking M&A deals both horizontally as well as vertically to improve cost-containment by owning the care providers within their own networks, to remove competition, and obtain greater market shares.
Regulatory compliance is also a formidable driver. Considering that the operational costs of running quality control programs, staying on top of changing regulatory environments, and conforming to all security and safety regulations, is time and resource consuming. This drives up costs significantly for smaller market players. Respectively, it makes it interesting for less profitable firms to be absorbed by larger players that have compliance management installed throughout the firm.
2015 and 2016, in the USA particularly, also mark two years of favourable interest rates, making capital investments more attractive.
Satisfying consumer demands – Regarding insurance providers, these are strongly driven by the demands of the insurance seekers. Consumers are becoming more informed, more demanding, and more selective in their provider searches. Insurers are often merging vertically, to streamline and improve the control of expenses incurred along the patients’ trajectory. They acquisition horizontally to extend their regional coverage and enhance their network, obtaining larger market shares.
In regards to hospitals, their patients want access to affordable and quality healthcare. Care providers able to offer access to primary through to tertiary care in a streamlined fashion will appeal to HC consumers (and insurers). This drives the absorption of retail (primary care) clinics, outpatient, diagnostics and tertiary facilities by larger hospital networks.
Negotiating power – Another significant driver, specifically for hospitals and insurance providers, is to seek enhanced negotiating leverage by increasing their demand. On one hand, we observe hospitals consolidating and growing in capacity and size, and on the other side we see medtech companies merging and increasing their portfolios; leverage is dynamic on either ends of the market.
New facilities and R&D – Regarding large pharmaceuticals, M&A are typically a way of gaining new R&D facilities and picking up innovative technologies that emerged from smaller highly specialized start-ups. It also saves big pharma from creating their own production facilities, if they can acquire existing laboratories from an established entity.
Concerns regarding healthcare M&A
With ever increasing demands upon healthcare delivery and affordability, it was in fact long overdue to have an extensive and strategical restructuring of the market. Most of the current models fail to secure healthcare availability for all. In an ideal world, we would like to think that healthcare and medtech providers seek to ameliorate this situation, whilst remaining both profitable and competitive.
M&A aims to boost efficiency and cost-containment, but in order to avoid unfair competition and a dystopian monopolistic future, it must be monitored and regulated.
Inherently, it is tricky to run a socially minded activity for profit. What are the right balances between efficiency, necessity and amenity, stimuli and penalties, economic liberties and regulations, etc., whilst still providing accessible and qualitative healthcare and ensuring that market players remain motivated and continue reinvestments into R&D to improve healthcare?
As in most cases, there are two sides to every coin, and there have been concerns raised in response to the rapid and widespread consolidation of the medtech and healthcare markets. Some disadvantages, flaws and misconceptions related to M&A in healthcare, are the following:
Economies of scale:
When looking at HC insurance firms, on average around 10% of expenditure is spent on administrative costs. Studies have shown that –in comparison to other industries – M&A in healthcare insurance does not achieve the same extent of benefits in larger scale insurance firms, and that their administrative costs are not lowered significantly.
Concentration of providers:
A study performed in the USA dating 2015, made a price comparison of 15 common medical interventions. The results revealed that areas with the highest concentration of physicians had prices up to 26% more expensive than regions with the lowest concentration. This shows that high volumes of providers and provider accessibility do not correlate to lower prices for healthcare provisions.
Regarding the aforementioned objective of reducing administrative costs, this is often achieved if one reduces staffing costs, i.e. eliminating jobs and or reducing wages after M&A. Being able to do this as an enterprise, without losing output, appears beneficial; however, in terms of company-spirit and social sustainability, an M&A can have negative impacts on a country’s macroeconomics. Its effects will trickle down to reduce the confidence of remaining workers, and to the detriment of the nation’s social benefits system, creating households with a redundant-made/fired member, with less money to spend.
- In the USA, regulators fear that insurer consolidations and mergers will diminish competition and reduce vital inscription options for senior patients under Medicaid.
- Worldwide, regulators and analysts fear large scale multinational-multimillion enterprise mergers (as well as smaller specialism-specific medtech mergers), as this reduces the competitive drive to push for quality:price performance, reduces innovation, and makes it harder for smaller businesses to penetrate the market.
Gaining negotiating power:
- Insurers hope to gain leverage in negotiations with medical providers and hospitals.
- Firstly, analysts project that this desired leverage will be much lower than expected. Even in situations where insurers are able to obtain lower reimbursement agreements with providers, this benefit will typically not trickle down to the advantage of the insured members.
- Secondly, hospitals are also merging and respectively trumping the leverage of the insurers. Larger hospital networks are able to ask higher compensation from the insurance companies; this cost is passed on to the insurance members through higher premiums. In other words, hospital mergers can drive up healthcare costs, to the detriment of the patient.
Transparency and corporate accounting scandals:
Incidences of inadequate corporate-financial transparency in major US medtech manufacturers in 2016, highlighted the risks involved in purchasing other companies. Several deals were withdrawn close to the final contracts were signed, often leaving one of the parties with a penalty fee for precluding the deal.
Opportunities and KSF
To maximize the benefits of a merger and or acquisition, the following should be carefully considered:
- Perform extensive due diligence in regards to financial and non-financial factors.
- Seek M&A that match the medical trends/demands of your stakeholder group; e.g. outpatient care and minimally invasive techniques are rapidly growing. It can easily be assumed that business activities expanding one’s outpatient capacity and MIS-techniques/devices will be popular and profitable.
- Concentrate on adding value to your products, services, and organization.
- Verify that strategical objectives are aligned with the expected outcomes of the M&A.
- Apply monitoring mechanisms and establish a clearly defined indicator list to observe, adjust and improve post-M&A developments/performance in your organization. Prevent inefficiencies, overlapping, or deterioration of protocols and/or employees’ moral.
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About Laura Weynants
Performs primary and secondary market research to create Country Deep Dive Reports at TforG. Interviews KOLs and medical sector professionals to build on TforG’s healthcare market expertise and competence networks. Complementing five years of sustainability policy and CSR communication, she now focuses on grasping key medical market trends, structures and opportunities in medical sectors worldwide. Coming from an international background of living in Germany, Spain, USA, UK and Belgium, she has gained a keen insight in international organizations and language skills to perform first hand investigations. She graduated from Sussex University Brighton, UK with a BA English Literature and Sociology and achieved a Master Degree in Sustainability and Corporate Social Responsibility in EOI Business School in Madrid, Spain.