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Consolidation Meets Disruptive Change: Even as merger- and acquisition-based consolidation continues apace among patient care organizations, the emergence of disruptive entities and business combinations into healthcare is threatening the existing order.

The U.S. healthcare system continues to be reshaped by accelerating consolidation among hospitals, medical groups, integrated health systems, and health plans, with huge implications for everyone--and the potential for further disruption by new entrants.

Looking at the traditional healthcare system, the pace of mergers and acquisitions in healthcare sectors continues apace. A PriceWaterhouseCoopers report looking at the healthcare industry as a whole, published in January 2019, found that volume of mergers and acquisitions went up 14.4 percent from 2017 to 2018. Meanwhile, a 2019 report focused on the hospital sector, published by Kaufman Hall, found the average size of hospitalbased organizations involved in mergers continued to growth, with seven 2018 transactions involving sellers with net revenues of $1 billion or greater. What's more, all this activity is shaking up the physician world as well. Indeed, a February 2019 research report by the independent Physicians Advocacy Institute found that "44 percent of physicians were employed by hospitals in January 2018, compared to just one in four physicians in July 2012."

What's stimulating all this activity? Many industry observers are very clear: hospitals, medical groups, and health systems--all competing with one another within their sectors--are trying to grow large enough to become indispensable to health insurance networks, even as health plans are doing everything possible to grow ever larger, so that they can dominate local and regional healthcare markets, and gain control over hospitals, medical groups, and health systems, in annual and regular contract negotiations. And it's no accident that all of this is happening at a time when all the parties involved are looking at lower revenue margins, as the U.S. healthcare system heads towards a cost cliff.

Nevertheless, as numerous entities have been pointing out, industry consolidation has done nothing to lead to cost reductions--clearly. And the public--and regulators, and members of Congress--are beginning to look askance at all the business activity that isn't bringing the value that's been promised, at least in terms of actual cost reduction. Looking at this landscape, Ben Rooks, founder and CEO of the San Francisco-based ST Advisors consulting firm, says, "I think, for one thing, that the Department of Justice needs to summon some courage and realize that the primary driver of this hospital consolidation has been the desire to extract monopolistic pricing from payers. It's very clear that when hospitals consolidate, they raise prices," he says. "It's such an obvious statement, I'm embarrassed to make it. And they do that, and they also play games with location of service; they buy physician practices to drive vertical consolidation."

In fact, Rooks says, "Hospitals still want to maintain their fee-for-service-based position. Ultimately," he says, "that's unsustainable; we as a society can't continue to pay 20 percent of household income to healthcare. It's the classic situation where the irresistible force meets the immovable object. But the government is going to have to push this hard."

And that's why Rooks and others agree, the entrance of new disrupters into the traditional U.S. healthcare system is inevitable, with that emergence potentially threatening existing patient care organizations in unforeseen ways. Indeed, the highly publicized and discussed acquisition of Aetna by CVS, which was completed on Nov. 18, 2018, is already bearing fruit--fruit that may turn out to be quite disruptive of the traditional healthcare system, particularly as the newly merged company moves to create primary care clinics in CVS stores across the country, beginning in Houston. In a blog posted on June 25, Michelle La Vone Richardson, an analyst at Decision Resources Group, a Burlington, Mass.-based analytics solutions provider, wrote that, "Shortly after CVS Health merged with Aetna in November 2018, CVS Health announced the debut of its "HealthHUB" concept stores in Houston. These stores, which feature up to 80 percent of the primary-care scope (barring physicians) plus expanded staff and durable medical equipment, position CVS to become a lead disruptor in healthcare nationwide." The potential is huge, Richardson noted, with CVS planning to outfit up to 1,500 stores with primary care clinics, which will treat patients with manageable conditions like diabetes and asthma/COPD, and eventually, kidney disease, oncology, and rare diseases. And those innovations are emerging from one business combination, even as mega-corporations like Amazon, Google, and Microsoft are trying to figure out how to get into healthcare delivery and operations.

What path forward in the face of disruptive changes?

The potential for market disruptions from all directions is greater than at any time in the history of U.S. healthcare, those interviewed for this story agree. Meanwhile, what do the senior executives at existing, traditional patient care organizations do to manage forward in this moment in healthcare? The reality, says Pam Arlotto, president and CEO of the Atlanta-based Maestro Strategies consulting firm, is that many of the current mergers and acquisitions taking place among hospitals and health systems aren't creating real value. "They're bringing all these entities together, but they're not reconfiguring or redesigning the organizational structures or operating models," Arlotto says. "When you get to that large size, you really need different structures; and it will vary individually. I can think of one client we worked with that had grown fairly rapidly, and they still had a number of IT departments in their regions, and they layered on top of all of that a central IT structure, but nothing was reconfigured. So it's less about who reports to who, and more about the operational model."

Moving forward into the future, Arlotto says, the leaders of hospitals and health systems need to work assiduously to rework their core operations, or risk being overwhelmed by change, including disruptive change, coming from outside the traditional healthcare system. What has to happen, she says, is to get rid of the silos and the layers, and find ways to truly innovate--not just grow ever-larger. HI

By Mark Hagland
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Title Annotation:TOP 10 TECH TRENDS 2019
Author:Hagland, Mark
Publication:Healthcare Innovation
Date:Jul 1, 2019
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