As a wave of consolidation continues to inundate healthcare providers and payers, M&A transactions among healthcare vendors and suppliers also are moving at a brisk pace.
For many of the companies that offer goods and services to healthcare providers and payers, bigger is better.
Both the volume and the value of healthcare M&A transactions increased in the first quarter of this year compared to the last quarter of 2016, according to HealthCareMandA.com. Volume increased 7%, to 395 deals. Value increased 56%, rising from $37.8 billion in Q4 2016 to $58.7 billion in the first quarter of 2017.
Information technology was among the hottest healthcare sectors for M&A activity to open the year, with a 57% increase in transactions compared to the last quarter of 2016. Only physician medical groups posted a higher increase in M&A activity, with a 78% increase in transactions.
Vendor and supplier consolidation activity is already off to a hot start in the second quarter. On April 18, Cardinal Health announced the $6.1 billion cash acquisition of the patient care, deep vein thrombosis, and nutritional insufficiency divisions of Minneapolis-based Medtronic.
The primary drivers of consolidation among healthcare suppliers and vendors are tied to their provider customers, including the industry's shift to value-based care models, Russell Davis, managing director at The Advisory Board Company, said last week.
"Strategically, it is a fundamental shift. Some of this is being driven by economies of scale—that is the obvious stuff. But increasingly, what we have been seeing is that some of the acquisitions are being driven by a supplier needing to add broader capabilities to its portfolio, so it can more holistically serve customers in the value-based world."
The uncertainty associated with the shift to value-based care models and other major healthcare reforms has helped spur supplier and vendor M&A transactions, he says. "As a supplier, you never want to be without a tool in your toolbox that your customer needs… Generally speaking, the more capabilities you have, the better."
Nashville, TN-based Intermedix Corporation acquired a machine-learning company this spring mainly to expand the data-analytics firm's capabilities and service offerings for healthcare providers, according to Joel Portice, the company's CEO.
"When I look at our business and the WPC Healthcare acquisition, we have strong data-analytics capabilities, and a strong understanding of data and the action-ability of data to help our customers make good decisions. What we wanted to do was adjacently expand from our core capabilities, and machine-learning functionality within WPC was not a capability that we had developed internally."
Portice declined to disclose the terms of the WPC acquisition, but said the deal reflects Intermedix's financial strength and hefty scale. "Intermedix has about 2,500 employees. We do business in 29 countries. We have large scale and growth. Our year-over-year bookings trend above market averages."
From the perspective of healthcare providers, Davis says there are advantages and disadvantages associated with supplier and vendor consolidation.
"The suppliers who get this right should be able to offer a much better product at a competitive price. They should be able to offer a better value to their customers than they have in the past. In some cases, it will be lower prices. In other cases, prices may be similar or higher, but the value delivered will be greater."
There are two primary risks, he says.
"One is in the M&A transaction itself. Relationships ultimately exist between people. When a company is acquired, that transaction is typically followed by a reorganization and existing business relationships get disrupted."
"The other risk on the provider side is too much concentration can leave you beholden to an individual supplier. Some organizations fear that; some organizations embrace that."
The electronic medical record (EMR) business is a prime example of a highly concentrated vendor marketplace and the associated risks, Davis says.
"By definition, every provider had to make a bet on one and only one EMR vendor. So, you have seen tremendous concentration of market share among EMR vendors."
"Once you get to that place, you better trust the people you are working with. Plan B is always expensive."
Christopher Cheney is the CMO editor at HealthLeaders.