The healthcare industry, specifically the insurance sector, is undergoing perhaps the largest transformation of any industry in decades. Merger and acquisition activity, for example, Aetna’s acquisition of Humana and Anthem’s acquisition of Cigna, are examples of the predicted consequences of the confluence of a number of mega trends happening within healthcare on a global scale. Economics, regulatory changes, digitization, demographics and consumer expectations are forcing companies to rethink their strategy and consolidation will be one of the options.
Three Things to Watch For
► This is Only the Beginning
In a world of increased competition, declining revenues and rising costs, many healthcare organizations will fail, but opportunities will exist for those that remain. “Scale to play” will be a critical component of success in the future, apparent in the current M&A activity. While healthcare insurers have taken on massive cost reduction efforts in the past 10 years, they are still unable to get their overall cost structure in line to be truly competitive. Legacy systems, inefficient processes, expensive outsourcing contracts and consumer expectations are proving to be too much to manage for many small to medium size companies. Companies will be reevaluating their strategies and the idea of merging will become more appealing, so do not be surprised to hear more big name companies being acquired in the coming months.
► Value will be Difficult to Realize
The post-merger failure stories are too numerous to cite, but the Geisinger Health System and Hershey Medical Center is a recent example of two healthcare entities that tried to merge but failed to recognize the challenges of cultural differences. True synergies are rarely realized due to culture, lack of execution, complex and incompatible IT systems and overall complacency of individuals on both sides of the deal. These issues are real, underestimated and have no quick (or inexpensive) solutions. In addition, mega deals designed as “land grabs” for market share and revenue may work for a while, but unless all of the challenges are effectively addressed the company can never achieve the cost structure designed when the deal was conceived. In order to realize value, it’s important to 1) be realistic and 2) remember that flawless execution is critical.
► Room will be Made for New, Nimble, Innovative Companies to Evolve
Part of the challenge with mega deals is that they actually stifle innovation, consumer experience and the ability to truly change services within the industry. Traditional companies rarely have an effective innovation engine and struggle to move projects from proof of concept, to pilot into production. As M&A integration initiatives compete for resources, true innovation takes a back seat. This slowdown creates opportunities for nimble, well-funded startups to provide solutions into the market, capitalizing on opportunities that the traditional companies are unable to solve either through products or services.
What to Do
► Evaluate (and scrutinize) Existing Cost Structures
Many healthcare organizations today do not have cost structures that are sustainable. Duplicate processes, large siloed business units, multiple (and overlapping) vendor contracts are destroying value. Providers are stuck with stranded assets (brick and beds) that used to be part of the revenue model in a fee-for-service world. As stay times and reimbursement shrink, providers are struggling to be competitive. Insurers (both profit and not-for-profit) have large, legacy, inefficient organizational structures that have resulted in lack of metrics/incentives and limited integration of acquisitions. In the future, these companies will have to go to the next level of scrutiny of overall operating costs. Processes, procurement strategy, technology updates and organizational structures will all need to be tuned for efficiency and incentives will need to be aligned to key performance metrics. Companies that focus on efficiency and cost metrics will have an advantage.
► Focus on Execution
While a good strategy is vital, flawless execution needs to be a fundamental part of the strategy. Healthcare has historically not been as competitive as traditional consumer focused industries. This “lack of competition” has created a culture where companies have difficulty delivering on plan and within budget. As the industry shifts to where consumers have increased choice, tolerance for missed deadlines and delivering program capabilities will not be acceptable. Having a program management office is not enough; companies will need to have a program management office that can actually deliver on time and within budget.
► Invest Heavily In Innovation
Healthcare companies that are surviving the current storm have one thing in common – they are innovating. According to a recent PA Consulting Group study, 65percentage of leaders make innovation a major focus for everyone in the organization, and 71 percentage of leaders put it at the heart of culture and mission. Not all innovation will succeed, but having a disciplined, portfolio-based approach is critical. PA reports that 90 percentage of leaders learn quickly from mistakes in innovation. Innovation is the key gateway to new customers and revenue streams. PA believes that innovation needs to be core to the business strategy and can’t be an afterthought or relegated to a side function. True innovation requires senior level support, a disciplined approach and appropriate resources in order to be successful.
“While a good strategy is vital, flawless execution needs to be a fundamental part of the strategy”
The current healthcare environment will continue to present challenges in the years to come as companies struggle to deal with economic fundamentals, regulation, digitization and consumer expectations. We expect more high profile mergers among healthcare payers. Healthcare executives should focus on ensuring that their existing cost structures are efficient and sustainable. Integration and removing silos will be fundamentally important for success. Executing a plan will be more important than ever as IT system integration challenges will increase in the post M&A world. The adage “failure is not an option” will become the new norm as CEOs will be expected to deliver on pre-merger synergy promises. Finally, innovation will be key for these combined companies.