Hospital Purchasing and MA Trends: Looking Good

Hospital Purchasing and M&A Trends: Looking Good

Maria Shepherd • Data Decision Group

It is no surprise that big changes are occurring in U.S. hospitals. And, although Accountable Care Organizations are reported to be imminent, no real definition or timeline has yet emerged.

Why it is Important

The battle is brewing over who, or what, will control the U.S. healthcare dollar. The goal of the Obama administration is to create integrated networks of physicians and hospitals that will share the care of a population of patients. Sharing care means that one payment will be made per patient, putting downward price pressure on everything about that care, including the price of medical devices.

Doctors, hospitals, and insurers are scrambling to forge alliances and create new models for delivering reliable care more affordably, spurred on by the perfect storm of rising healthcare costs, shrinking Medicare and Medicaid reimbursements, and growing requirements of the new national healthcare law.

Hospital M&A Trends

Merger and acquisition (M&A) activity among hospitals and healthcare systems is increasing and can be used as a benchmark for the medical device industry to assess the future trends in hospital spending.1

“Health systems are paying more, since they have some capital to work with. They are buying single practices and multi-specialty groups, facilities and hospitals,” said Mike Reibolt, of Coker Capital Advisors. “Clinical integration has become the predominant strategy, driving mergers and acquisitions among hospitals, health systems and physician-led medical groups.”

Hospital M&A activities grew substantially in 2010, particularly during the third and fourth quarters, driving the total number to 77 hospital-related deals. This is nearly a 50 percent increase compared with the 52 deals reported in 2009. As a benchmark, 77 hospital deals is the highest level of M&A activity seen since 2001, when 82 deals were reported.

The total dollar amount also was impressive, with transactions totaling $12.6 billion, an enormous increase compared with transactions totaling $1.8 billion in 2009. Another pre-recession benchmark is that last year’s $12.6 billion transaction amount is the second-highest hospital M&A dollar amount ever recorded. In 2006, the hospital M&A dollar amount was a staggering $35.5 billion.

Could this mean that the recession is over for hospitals? We can only hope.

There is more evidence that hospital purchasing may be creating new opportunities for medical device companies. A survey of 200 senior level hospital managers yielded very encouraging results for overall hospital budget increases. Within the next 10 years, these hospital administrators indicated they would increase purchasing in facilities, large and small medical devices,and disposables.

A Positive Trend in Hospital Spending

One purpose of the EMR (electronic medical record) is to address possible federal reimbursement models that will be based on proving and measuring clinical outcomes and quality of care. (Editor’s note: See the March 2011 Datawatch column titled “Alphabet Soup: EMRs, ACOs and Meaningful Use: What do the Statistics Say?” for more information on this subject.)
 

Expect an increase in cost pressure, especially as group purchasing organizations (GPOs) assume a more prominent role helping hospitals manage their budgets. In a recent survey, some hospital managers anticipated that their use of GPOs would increase.3 The new twist is that while GPOs are expected to be more active in their traditional markets of disposables and commodity products, they also may be extending their reach to capital equipment and high-end medical devices.

In addition, hospital management is recognizing the value of new or disruptive technologies that can reduce medical errors or track quality improvements, and have indicated a willingness to pay for this type of technology. In Chart 3, senior hospital administrators were asked how much they would pay for disposables that were proven to reduce medical error. Medical error can be a significant cost to healthcare systems now that the “never event” Medicare legislation prohibits hospitals from billing payers for events due to medical error. Litigation expense due to medicalerrors also can be a high cost for hospitals.

Innovation still pays in the medical device industry. Expect hospitals to reward medical products that can prove better outcomes and reduce both errors and costs.

References:

1. Mark Reiboldt, Coker Capital Advisor, presentation to the

Medical Group Management Association 2010 Annual Conference. Oct. 25, 2010.

2. http://www.fiercehealthfinance.com/story/hospital-ma-ended-2010-torrid-pace/2011-02-08.

3. Jackson, S., LaVoie, R. www.LEK.com; Healthcare Reform Shifts Hospital Priorities.

Maria Shepherd, founder of Data Decision Group, has 20 years of leadership experience in medical device/life-sciences marketing in small startups and top-tier companies. The firm quantitatively and qualitatively sizes opportunities, evaluates new technologies, and assesses prospective acquisitions. Shepherd can be reached at (617) 548-9892 or at [email protected] or www.ddecisiongroup.com.