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10/17/2013

Convergence in health care: The opportunity in uncertainty


by Phil Pfrang
Partner, M&A Transaction Services, Deloitte & Touche LLP

There is no question that significant change is occurring in the health care industry and nobody really knows exactly how all of this is going to play out over the next couple of years. In light of all of this uncertainty, one of two scenarios could have played out: players in the health care industry could have sat on the sidelines, waited it out to see what happens, and avoided the potential risk that comes with uncertainty. Instead, the alternative scenario is playing out with organizations across all parts of health care using change as an opportunity to make bold plays from a strategic perspective. Some of that is manifesting itself in consolidation within sectors, and some of that is manifesting itself in convergence across sectors.

Quite frankly, it feels like a refreshing and even surprising response from the industry in light of significant uncertainty. Let’s consider three players in the system: hospitals, physicians, and health plans.

One thing many industry participants predict is that there will be downward pressure on revenue, leading to a fair amount of the consolidation activity in a race to achieve scale. In the last couple of years, there was also a race by the hospital systems and the physician community toward alignment that looked like an employment model. What now seems to be occurring is an emerging alignment between physicians and health plans. Independent practice association (IPA) models and risk bearing types of arrangements are beginning to form. The health care industry trend toward consolidation will likely continue for the foreseeable future. However, the industry is probably just seeing the tip of the iceberg from a convergence stand point.  Some of the types of transaction activity the industry is seeing are strategic as companies position themselves to take advantage of new and emerging opportunities. These companies are trying to be at the leading edge of where our health care system is headed.

Health plans and physicians are still playing the role of significant influencers in our health care system. The movement toward a physician employment model may have been an initial reaction to the reimbursement cuts associated with health care reform, but now there appears to be more of a strategic reaction. Health plans and physicians are beginning to align and change the way health care services are delivered.

The major theme here: there are a lot of different emerging business models; some of them may be successful and some of them may not.  Change is always a catalyst to innovation. Responses to uncertainty in our industry could manifest in one of two ways: people could go underground and wait out the storm, or they could embrace the change and use this as an opportunity to take risk. And, for some who take those risks, there will likely be great rewards.

Consolidation and convergence are going to help transform our health care system. There is a tremendous amount of experimentation happening, but how far in the process of reforming our health care system can we get without trying something new? 


Phil Pfrang, Partner, M&A Transaction Services, Deloitte & Touche LLP

Phil Pfrang is the lead partner of the Health Care & Life Sciences Merger & Acquisitions Transaction Services group. He has served some of Deloitte’s most important strategic and private equity clients and has extensive experience in international and cross-border transactions. Phil has been involved in transaction services for more than 18 years, assisting clients either avoid completing a transaction that was destined to fail or negotiating a significant reduction in the purchase price as a result of the advice he provided.

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