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Health care organizations using transactions to help transform their business often fail to achieve expected synergies or effectively execute the integration plan, according to an EY-Parthenon analysis of key health care deals over the last 10 years.
Overcoming the challenges in executing transactions is even more essential today for several reasons. The pace of transactions is picking up, along with the urgent need to transform care delivery models and improve patient outcomes while managing costs. New and existing players are seeking to enter a larger part of the patient care continuum to address these challenges. However, faced with regulatory and market challenges, leaders often lack a clear vision and practical experience when creating a new health care business model using transactions.
EY-Parthenon studied more than 2,000 health care transactions over the past decade and identified 37 large and complex deals in the “transact-to-transform" category for further analysis.¹ Unlike other health care M&A that seeks to create economies of scale or enhance existing products or services (see Figure 1), these transactions are premised on a strategic vision to tap into new markets and transform health care operations.
Acquisitions can be characterized as one of four types, with transformative deals focused on transactions in which buyers enter new markets and transform the industry.
Source: EY-Parthenon analysis
Transformative deals often require significant capital investment. But to reach growth and synergy goals, which can take time to unfold as part of transformative M&A, leaders need a more robust transaction strategy, planning and diligence. While this may sound obvious, a surprising number of high-profile deals in the last decade failed to deliver stated synergies — and some fell apart. The EY-Parthenon deal analysis identified how to avoid three common pitfalls in transformative health care M&A.
One of the major pitfalls in health care M&A is the failure to develop an actionable business strategy that outlines key capabilities required in the combined business model to capitalize on the intended commercial and delivery model. This strategy should drive integration priorities, while putting in place a flexible execution framework to navigate unforeseen risks. Companies must assess what critical capabilities they aim to buy or build to transform their existing business — whether it is expanding value-based care capabilities, innovation or enhancing operational efficiencies. (See "Three major trends in 37 transformative health care deals" section above.)
For example, those acquiring provider capabilities to excel in the value-based care (VBC) and Medicare Advantage space must deeply understand the market. To inform the priorities and timeline of the acquisition’s execution, they should possess enabling strategies across capabilities like payer contracting, care model transformation, patient access, coding and data and analytics.
In addition, these transformative transactions usually take multiple years to get to the target state and provide a return on investment. To maintain resilience and protect the anticipated value from the acquisitions, it is important to anchor the execution to the original business strategy and continuously reassess the market and regulatory changes that impact the deal thesis — and then boldly make pivots.
Since 2021, significant regulatory changes — including stricter Medicare risk adjustment models, value-based incentives, heightened standards for Medicare Advantage star ratings and data interoperability requirements — have challenged health care organizations. Each change carries financial risks if not proactively addressed. For example, stricter Medicare coding requirements can threaten reimbursement levels, while new standards for Medicare Advantage star ratings can impact bonuses tied to patient outcomes. By fostering adaptability and focusing on building the right capabilities, health care organizations can mitigate risks, effectively integrate transactions and capture the intended value of their acquisitions.
Change management is essential in any deal — and even more so in transformative health care deals, those that reimagine how the industry operates and pioneer new business models. It is as important to promote change in the target organization as it is to promote change in the acquirer’s organization. The future combined business will require a new model that meets the requirements of both businesses in a transformative deal. Additionally, it is critical to institute a governance structure above both businesses to align to the new value streams, and drive incentive alignment across the management teams. The EY-Parthenon analysis shows that in many transformative transactions, acquirers often set out with an integration plan that simply absorbs the target into their current business but falls short when it comes to enabling the new commercial model and revenue streams. Or worse, the target company’s management, who possess the key talent and experience to make the transformation successful, is resistant to an unfamiliar and unaccommodating operating model that was forced on the target.
The challenges of pushing for change during the integration process are significant, especially when acquiring provider businesses, given the human element in care delivery. But this is not insurmountable.
In one payer and provider transaction, an acquirer launched an enterprise organizational design exercise that evaluated critical requirements from the future integrated business model and augmented or transformed existing areas of the organization to remove any constraints. This allowed the future organization to attract and retain health professionals and encourage engagement and stability. This was critical to achieving high-quality patient care and for effective management of the high turnover that the legacy operation was unaccustomed to. During implementation, the acquirer also established a robust change management program to ensure physician and nurse leader buy-in of the new model. This helped align them with the new organizational vision and goals, enhance transparency and minimize disruption. These efforts led to the successful integration of both businesses on a shared platform to enable future business model expansion and growth.
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Read moreA meticulous and health sector-specific due diligence analysis can prevent costly oversights in transformational health care deals.
Health sector experience is an asset in conducting diligence, given the need for operating model knowledge and a clear understanding of the target’s market dynamics. This can help a buyer avoid costly surprises, while helping with a smooth integration and achieving transaction goals.
One diversified health care business, for example, faced more than $30m in unexpected annual costs after acquiring a care provider. The buyer had failed to recognize during diligence how impactful the cost to harmonize total employee compensation would be, given the benefit program structure differences between the two business models and the large population of caregivers employed by the target business.
A retail pharmacy business acquiring a care provider for $5.2b failed to anticipate and risk adjust for the challenges related to physician recruiting and patient panel management in its expansion plan. The optimism in its expansion forecast and valuation has resulted in a $12.4b impairment charge to the value of the business just a few years after the transaction.
These challenges are not limited to acquisitions of care providers. One global software and cloud solutions tech giant acquired a major EMR company with the goal to modernize and innovate health care technology and reimagine the revenue model with cloud offerings. In doing so, the tech giant underestimated the resources and effort required to maintain and renovate a legacy platform, as well as the disruption to customers associated with this change. This resulted in slow innovation and a much longer cycle to stabilize its revenue or capture new market share.
Before seeking transformation through transaction, health care leaders need to be clear about what the combined business model looks like, and they need to understand the risks and changes required to achieve their goals among the key pitfalls to avoid in transformative health care transactions is the lack of strategic clarity to guide — and flexibility to adjust — the transaction integration plan. In addition, the target business model in a transformational deal likely will have unique requirements that should be thoroughly addressed in integration execution, with robust change management. Finally, the lack of thorough diligence tailored to the sector risks can destroy value creation in transformational health care M&A.
Thank you to Emma Tan, Tim Cleary, Rena Song, Brandon Schupp, Herb Jackson and Tony Kong for their contributions to this article.
