Healthcare’s Merger Mania: Our Diagnosis

Faced with perhaps more uncertainty than any sector, the healthcare industry has been on a merger tear. It's now up to the leaders who pushed the deals and want to revamp healthcare as we know it to make it all work.

The latest potential deal is a tie-up between hospital giants Ascension and Providence St. Joseph Health. News of merger talks between those two organizations follows last month's $69 billion deal between CVS Health Corp and Aetna Inc. The CVS-Aetna deal came in the wake of UnitedHealth Group Inc’s purchase of a large physicians group.

Without doubt, experts say, the industry needed to do something. With the future of Affordable Care Act in the U.S. so uncertain, and with pressure to finally create more affordable and efficient options globally, healthcare leaders knew they needed to focus on an enormous task: fundamentally, shift the way healthcare is delivered. To billions.

“Vertical mergers like the UnitedHealth Group and CVS Health are new ground, creating convergence in the industry with the goal of optimizing care," says Kae Robertson, a Korn Ferry senior client partner. "Horizontal mergers, like Ascension, to create scale, continue at record pace. In addition to scale economies, data analytics and insights are intended products of both vertical and horizontal mergers. Analytics are critical for value-based care and the digital disruption in healthcare."

To many, the recent run of deals is more a function of the industry's rapid switch to value-based care, a system that ties reimbursement to clinical outcomes and patient experience in an attempt to improve quality, safety, and service while lowering costs. “Healthcare organizations are starting to reach out to the community to get people more engaged with managing their health needs,” says Tom Flannery, Ph.D, a senior client partner at KornFerry Hay Group.

The impetus for this outreach is not solely altruistic. Since the way physicians and hospitals will drive revenue in the future will be dramatically different than the way they do now, the most effective and efficient way to maximize profit margins is to increase education, monitor patient data to identify critical care issues before they emerge. To do that, however, healthcare leaders must walk a delicate tightrope between innovation and privacy. Heightened consumer demand for safe, transparent and quality care runs counter to the regulatory restrictions on privacy and the healthcare industry’s legacy opaqueness with employees and the public.

"M&A is high risk business so getting the right, learning agile leaders, operating at high performance with an enterprise mindset in place quickly is critical for success," Robertson says. "Redundant executive roles slow down decision-making and create organizational confusion.  Aligned and focused leaders will need to unite dramatically different cultures, build new leadership and workforce capabilities while also maintaining patient satisfaction and quality of care."

A key element to the current consolidation wave is aligning incentives between how healthcare organizations make money and promoting better health among patients. But that has rarely been the outcome — the healthcare industry’s inability to lower drug or patient care costs as a result of consolidation is well documented. In fact, the reverse usually happens.