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Looking down the road at the competitive and market implications of the Affordable Care Act (ACA), most healthcare executives expect that the law will drive consolidation among healthcare providers. This won’t be the first time in the healthcare industry’s history that internal or external events have led smaller organizations to seek refuge by merging with a larger organization, or that larger organizations have seized an opportunity to improve their competitive profile. We have witnessed consolidation waves in each of the past three decades. This time, the factors driving consolidation are different, and the criteria for selecting a good partner have continued to evolve. Let’s take a look at how population health management and accountable care organizations (ACOs) have added a new twist to partner selection criteria.
Size. Over the past 20 years, the overtly stated advantage of size generally focused on achieving cost efficiencies and economies of scale. Improved negotiating leverage with payers represented a close second, even if it needed to be more subtly pursued. In today’s environment, the advantages of size also depend on critical mass for risk-based contracting. In this case, value is created through stronger actuarial leverage, while the traditional advantages of cost efficiencies and negotiating leverage remain.
Geographic access and coverage. The definitions of a population catchment area have broadened to include the employer perspective. Comparing a health system’s geographic market coverage against the geographic workforce distribution of large employers in the market has become increasingly important. Providing appropriate geographic coverage will enable health systems to pursue narrow network and direct contracting strategies that will appeal to employers. Patient convenience remains important. The traditional geographic filters of distance to provider access points and alignment with school commutes and shopping patterns will make health systems more attractive to individuals purchasing health insurance through exchanges.
Clinical coverage. Under fee-for-service, developing a large referral base to feed higher-end tertiary services continues to be important, as it has been traditionally. Physician acquisitions in the 1990s were intended to secure and potentially expand the referral base and protect it from being redirected by payers or other providers. Today, adding primary care physicians through purchases of physician practices or acquisitions of niche health systems expands the acquirer’s bandwidth for population health and wellness care. The aim is to secure covered lives while managing access to tertiary care.
Access to capital. The reasons for accessing capital are changing. Instead of securing the ability to finance new building projects (still an important consideration if an old facility is in involved), access to capital has evolved to include access to clinical IT. Beyond affordable electronic health records, which have become essential, forward-looking providers are focused on securing access to population health data and reporting platforms, which require scale to satisfy the cost-benefit equation.
Population health capabilities. Along with the above considerations, understanding a partner’s population health strategy, competencies, and infrastructure is essential for planning for the future. Although population health capabilities may be involved in provider-to-provider mergers, accessing these capabilities often will require relationships with successful health plans (either payer or provider-owned plans). Criteria for these health system-payer partnerships involve typical strategic, operational, and cultural alignment, for which the specifics cannot be addressed in a single blog post.
As the paradigm shifts from fee-for-service to population health and accountable care, the nuances of what defines competitive advantage will continue to evolve. It is important to apply these nuances when selecting strategic partners and executing integration strategies.
Stephen Thome is a senior manager in the Ernst & Young LLP Advisory Health Care practice and is based in Cleveland.
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.
Publication Date: Thursday, November 21, 2013
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