Most of the strategy I’m working on these days ends up being reduced to just a few questions:
- Should my organization have a “broad” service offering (full-service approach and/or primary and specialty care integration and/or broad consumer population)? Or, should my organization be a “niche player” (discrete services focused on a discrete population)?
- What are the metrics for sustainability for either market positioning choice (margin, performance requirements, price point, size/scale, vertical contracting strategy, capital reserves, etc.)?
- Should we achieve our growth objectives via organic growth or a merger/acquisition/affiliation?
For many organizations, the answer to the first question is changing as we speak. Recent unexpected merger and acquisition activity has me rethinking what it means to offer a broad service spectrum. First there was the recent shake up of the retail health care space with the CVS Health acquisition of Aetna (CVS Health To Buy Aetna For $77 Billion). Then there was the Optum acquisition of DeVita (see The Merger Of Retail With Health Plans-Strategy, Please and Optum To Acquire DaVita Medical Group For $4.9 Billion) and the Humana acquisition of Kindred (Kindred HealthCare Sold To Humana & Equity Firms For $4.1 Billion). These acquisitions are going to reshape the primary care market, the chronic care management market, and the home health market at least partially due to their size. Aetna has over 2.2 million health plan members and CVS has over 9,700 pharmacies, 1,000 “Minute Clinics,” and over 80 infusion clinics. Optum serves over 115 million individuals, has a network of over 67,000 pharmacies and over 110,000 clinical professional, while DeVita has over 2,470 dialysis clinics in the U.S. and serves over 196,000 consumers each year. Humana has over 20 million members and more than 300 health care centers (through subsidiary Concentra), while Kindred operates at 2,475 locations in 45 states. Need I continue?
At the same time, we’re seeing mega-mergers of health systems such as Advocates and Aurora, Ascension and Providence, and Catholic Health and Dignity (see The Race To Be Big – Mergers & Acquisitions Were Big News In 2017, Ascension & Providence St. Joseph In Talks To Form Largest Hospital Operator In The U.S., and Catholic-Dignity Merger To Form Non-profit Health Giant). Not only do these organizations provide services, they all also have accountable care organization entities and behavioral health/chronic care management interests.
That doesn’t mean that a broad service offering is out of the question. It is a strategic decision dependent on your market, the key health plan market share and health systems, and the competition. And, going niche is no picnic. There is just as much merger and acquisition activity among specialty provider organizations – Universal Health Services (UHS) Acquires Mississippi Behavioral Health Hospital & Clinics, Magellan Health Expands LTSS Presence With $400 Million Purchase Of Senior Whole Health, Centerstone & Uspiritus To Merge, Civitas Solutions To Acquire Minnesota-Based Habilitative Services, Acadia Healthcare & Reading Hospital Building New Psychiatric Hospital, and more.
In this shifting environment, executive teams must make the hard choices about market positioning and service lines. (I always think of the Indiana Jones and the Last Crusade quote: “You must choose, but choose wisely.”) From those choices, executive teams must plan to meet the performance metrics needed for sustainability—most importantly the chosen growth strategy.
The growth strategy issue always brings up the question of organic growth versus growth by merger, acquisition, or affiliation. There is, unfortunately, no right or wrong answer. Some very successful organizations in the health and human service space have stuck with organic growth models and others have gravitated toward growth through merger. How do you decide and put together a plan? For an answer to this, I reached out to my colleague and OPEN MINDS Senior Associate, Ken Carr, who explained:
There is certainly big market momentum around growth through merger and acquisition (M&A). For the third quarter of 2017, M&A activity was brisk in the overall health service market, and behavioral health care grew in both quarterly and annual terms. For the previous four quarters, there were 942 health care deals totaling $94.8 billion, and behavioral health care deals increased by 44%, according to PWC Health Services Deals Insights.
Growth via M&A offers ‘instant positioning’ for organizations by expanding markets and diversifying service lines, as well as creating economies of scale. Those economies of scale can make the organizations more competitive in a market moving toward population health management, value-based reimbursement, and tech-enabled services. But a decision to grow via M&A is not a given—mergers and acquisitions are expensive, time consuming, and disruptive—and frequently fail to achieve their strategic objectives.
There are some distinct advantages to organic growth including the ability to leverage profitable, high-value programs by increasing current market share and expanding with those services into new markets. Organic growth is consistent with organizational focus and a steady expansion trajectory. But, on the flip side, organic growth is slow – and if your organization doesn’t have core profitable services to ‘leverage’ or the market share and/or profitability of those services is being eroded by increased competition, organic growth may be difficult to sustain without significant capital investment.
|Advantages & Disadvantages Of Types Of Organizational Growth|
|Type of Growth||Advantages||Disadvantages|
|Organic||1. Know your current market well – can innovate based on experience
2. Steady, controlled growth
|1. Ultimately grow to a point where competition is difficult lacking economies of scale
2. Takes time to move to scale
3. Capital is needed to bring new services to scale
|M&A||1. Can rapidly expand market, diversify services, and achieve economies of scale2. Acquired companies gain from expanded talent and infrastructure||1. Integration challenges require planning and talent
2. Acquiring companies need capital and may need to refinance debt
I recommend that organizations develop strategy that includes both organic growth and growth via selected M&A. (For example, one large national provider organization recently posted operating results showing showing 48% of their growth via M&A, and 52% via organic growth activities.) The right balance depends on both internal operational factors and the external environment. To succeed with organized growth, your organization needs a culture of innovation, payer/consumer marketing expertise and investment, and capital to bring innovations to scale. On the M&A side, successful M&A requires knowing what organizations strengthen your market positioning rather than diluting executive attention; identifying merger partners with similar cultures; and ensuring speedy post-merger integration into one efficient organization. Both need to be considered in your strategy for sustainability.”
As you consider these strategic questions, a few thoughts to add to the mix. First, I think it is dangerous for organizations to rely too heavily on M&A growth at the expense of building a “marketing machine” to drive organic growth. M&A growth allows senior leadership to get out of touch with customers, masking fundamental service line and customer service issues. This ultimately erodes the value of organizations that are acquired. My closing comment is that not every organization can be “the acquirer” and succeed. Markets, market share, and market metrics are changing rapidly – and for some organizations, in some market sectors, being acquired by a larger, well-positioned, and well-capitalized organization may be the right choice.
For more on combining leadership vision, strategy, and innovation with your operations, join Ken Carr on June 6 at The 2018 OPEN MINDS Strategy & Innovation Institute, for his session, “Challenges In Making Mergers & Acquisitions Work” – featuring Danita Johnson Hughes, PhD, President & CEO, Edgewater Health and Nicholas C. Riehl, JD, MBA, VP of Corporate Development and General Counsel, ncgCARE.