INTELLIGENCE REPORT 73 % MERGERS, ACQUISITIONS, AND PARTNERSHIPS: EXAMINING FINANCIAL AND OPERATIONAL IMPACTS PERSPECTIVE... 2 ANALYSIS...

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1 73 % of respondents say their organizations would choose to participate again in their most recent map activity INTELLIGENCE REPORT MARCH/APRIL 2018 MERGERS, ACQUISITIONS, AND PARTNERSHIPS: EXAMINING FINANCIAL AND OPERATIONAL IMPACTS PERSPECTIVE... 2 ANALYSIS... 3 SURVEY RESULTS... 6 METHODOLOGY RESPONDENT PROFILE...21 An Independent HealthLeaders Media Report Powered by: SPONSORED BY: HEALTHLEADERSMEDIA.COM/INTELLIGENCE

2 PERSPECTIVE IN SETTING STRATEGIC INITIATIVES Don t Chase a Distant Future but Focus Upon Sustainable, Consumer-Focused Models of Care In almost a daily ritual, today s senior health system leaders read each morning about new and potentially transformative developments. Whether Amazon s announced entry into healthcare, United/Optum s acquisition of Davita Medical Group, or the contemplated merger between CVS and Aetna, the U.S. healthcare landscape is certainly undergoing changes that are beyond the more traditional horizontal (hospital-to-hospital) mergers. Facing these potentially transformative, new or enhanced competitors is not for the faint of heart. The response of today s prudent senior executives and boards of trustees should not be action for the sake of action. A further consideration is that most nonprofit health systems do not have the mission imperative or availability of excess capital to allow them the luxury of executing material moves designed to address ambiguous future threats without reasonable historical metrics as to the probability of success. Clearly, the growth of narrow networks, new competitors, disruptors, and consumer choice as a result of high-deductible health plans require that senior health system leadership determine actionable mid- to longterm strategic plans that focus on ensuring their system s respective sustainability. These pressures, perhaps now more than ever, require health system leaders to evaluate their well-intentioned strategic transactions and strategic imperatives and objectives from both a mid-term foreseeable perspective and also a longer-term perspective. Of 190 surveyed participants, 71% believe their organization s merger, acquisition, or partnership activity will increase within the next three years. It may be asking too much for a strategic plan to attempt to ensure the long-term success where such a plan relies on a long-term forecast or futurists view of how healthcare will be administered, reimbursed and sourced. This author s view would be to advocate Brent McDonald Head of Healthcare Strategic Advisory Services, Managing Director Bank of America Merrill Lynch that the focus of senior leadership be on achieving those strategic goals and objectives that strengthen the Triple Aims, the relevance/attractiveness with employers and payers and the convenience and connectivity with actual patients, both in terms of the digital ease of patient encounters (i.e., web- and app-based telehealth, scheduling/records and communication) and convenience of care delivery access points (e.g., urgent care, community-based clinics). Of the senior leadership responding in this year s survey, more than 60% state the goal of their merger, acquisition, and partnership activity is to focus upon the financial/operational and clinical care delivery equally. To paraphrase an old Texas football coach, sometimes the faster a team runs only puts them further out of position when they make a mistake. In connection with senior leadership strategic planning and setting of goals and objectives, it would be prudent to keep a keen focus on positioning health systems with their key stakeholders in mind and on becoming/continuing as the healthcare delivery network of choice and a must have. Chasing a futurist s view of the healthcare delivery system must be viewed with ample scrutiny as health systems allocate finite resources into an uncertain future. HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

3 WHAT ARE THE IMPACTS OF MAP ACTIVITY? Healthcare industry merger, acquisition, and partnership (MAP) activity remains strong, with little change in momentum after years of consolidation activity. Driven by the move to value-based care and provider needs for greater scale and geographic coverage, MAP activity shows few signs of a changing trajectory. Notably, MAP activity has also remained largely unaffected by an administration in Washington that has repeatedly pumped the brakes on healthcare reform. With much of the uncertainty around the administration s early plans for the industry quelled, the MAP trend continues in force. According to the 2018 HealthLeaders Media Mergers, Acquisitions, and Partnerships Survey, for example, 71% of respondents expect their organizations MAP activity to increase within the next three years (Figure 12), a compelling result indicating that MAP activity levels will remain strong for some time. Only 20% say they expect MAP activity to remain the same, and only 2% expect this to decrease. I believe that the healthcare market is still under a lot of pressure from continuing reimbursement and regulatory challenges, says Pamela Stoyanoff, MBA, CPA, FACHE, executive vice president, chief operating officer at Methodist Health System, a Dallas-based nonprofit 35 integrated healthcare network with 10 hospitals and % 28 family health centers, and the lead advisor for this Intelligence Report. The competitive landscape is also changing, with companies entering the healthcare space that haven t been there of respondents say quality outcomes increased after MAP activity Jonathan Bees HealthLeaders Media Senior Research Analyst ANALYSIS before, like Amazon, and unique partnerships forming like Optum buying the Health Care Advisory Board and CVS buying Aetna. One area of inquiry about MAP that has mostly gone under the radar, however, is determining the kind of financial and clinical impacts providers are seeing from investments in MAP activity. What do operating margins and net patient revenue look like post-map, and has the cost of providing care come down due to greater scale? Has MAP activity had a beneficial effect on patient readmissions, HCAHPS scores, and most importantly, quality outcomes? Financial and clinical impacts. The majority of respondents report positive views on the financial impact MAP activity has had on their organization, with 74% saying that net patient revenue either increased (46%) or remained the same (28%), and only 6% indicating that it decreased (Figure 6). Further, 72% say that operating margin either increased (39%) or remained the same (33%), and only 11% report that it decreased. However, the response for cost of providing care is somewhat less positive with 35% saying that costs remained the same. Yet the overall outlook is still positive given that more respondents say costs decreased (26%) than increased (18%). The picture for clinical impacts is also encouraging, with respondents generally indicating positive views on the impacts their organization experienced after its most recent MAP activity (Figure 7). For example, a greater share of respondents say that patient readmissions decreased (18%) than increased (11%), although 40% say this remained the same. Further, a greater share say HCAHPS (or other CAHPS) HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

4 ANALYSIS scores increased (17%) than decreased (4%), although 46% indicate that this remained the same. Perhaps best of all, a greater percentage say that quality outcomes increased (35%) than decreased (4%). Forty percent say this remained the same. Stoyanoff notes that financial considerations generally drive most MAP activity, and that quality improvements, while greatly appreciated, aren t the core objective. I don t think that the primary purpose behind most mergers and acquisitions is quality-related. If respondents achieved improved quality outcomes, this is probably an added benefit of the merger versus one that was sought out necessarily from the beginning. While overall these impacts represent fairly modest improvements to respondent organizations, the most telling data on their views about MAP is the following: Nearly three-quarters (73%) of respondents say that their organization would choose to participate again in its most recent MAP activity (Figure 8), a very positive finding given the costs and complexity of such undertakings and the many ways a MAP deal can get sidetracked. Note that only 8% of respondents say that they would not choose to participate again. Continued MAP growth? The prospects for continued growth in MAP activity appear strong, with the majority of survey data supporting several more years of growth. On the other hand, there are a few indicators suggesting that activity may be slowing. The case for sustained activity levels over the next few years can be seen in the following: 36% of respondents say that their organization s MAP plans for the next months consist of both exploring potential deals and completing deals underway (Figure 10). If you combine this result with the response for exploring potential deals (32%), the total reveals that 68% of respondents say they are exploring potential deals, a strong indicator for future MAP activity. Only 12% of respondents say they will be completing deals underway and mention no plans for future MAP activity. Evidence of slowing momentum is also present, but it is relatively minor. For example, in last year s survey the combined result for both exploring potential deals and completing deals underway (40%) and exploring potential deals (34%) was 74%, six percentage points higher than in this year s survey. Further, the result for no MAP plans is also noteworthy; this was 13% in last year s survey, and increased eight percentage points to 21% in the current survey. Another aspect that reflects bullish sentiment is the dollar value of MAP activity, with 73% of respondents expecting the dollar value of their organization s MAP activity to increase within the next three years (Figure 13). Only 15% expect MAP dollar value to remain the same, and only 2% expect it to decrease. These results are considerably more positive than last year s survey results, which were increase (55%), remain the same (34%), and decrease (12%). MAP preferences. Survey results reveal some interesting correlations involving organizational preferences for specific entities during MAP activity. For example, there is a clear preference for a MAP with a health system in respondents most recent MAP activity (Figure 5), with health systems (33%) topping the list by a wide margin, followed by hospitals (19%) and physician practices (17%). However, it is worth mentioning that 35% of the respondent base for this survey is from health systems (see Respondent Profile on p. 21), and respondents generally indicate that they prefer MAP activity with a provider from the same or similar setting. Examples of these preferences are plentiful. For example, a greater share of health systems (45%) and hospitals (43%) than physician organizations (14%) say that their most recent MAP activity is with another health system. Further, a greater share of hospitals (28%) and health systems (24%) than physician organizations (3%) mention activity with a hospital. And a greater share of physician organizations (45%) mention activity with a physician practice than hospitals (13%) and health systems (11%). This data suggests that providers favor increasing scale along similar lines of business, and that increasing infrastructure diversity throughout the care continuum is a secondary strategy. Respondent expectations for the upcoming year reveal shifting organizational preferences (Figure 11). Forty-eight percent of respondents HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

5 ANALYSIS say that their organization has a high interest in pursuing a physician practice through MAP activity within the next year, down 11 percentage points from 59% in last year s survey. Responses for health systems (37%) come next, up 10 points from 27%, followed by hospitals (29%), which are up three points. The strong response for pursuing physician practices is likely because primary care physicians are a key component of population health management and clinical integration initiatives, although the trend may be starting to lose momentum, as many physician practices have already merged or been acquired. As with the results for most recent MAP activity, there is also a correlation between industry setting and the type of entity respondents say their organization has a high interest in pursuing through MAP activity within the next year, with respondent organizations generally pursuing like or similar entities. For example, the top two entities that health systems are pursuing are physician practices (58%) and health systems (49%); for hospitals, it is physician practices (43%), with hospitals (40%) and health systems (40%) in a tie; and for physician organizations, it is physician practices (70%) and physician organizations (43%). Failure to launch? When providers identify a potential MAP candidate and begin the task of performing due diligence, there are no guarantees that a formal agreement will be concluded. In fact, there are a number of ways that a potential deal can be derailed, both financially and operationally. On the financial side of the due diligence (Figure 15), respondents report that the top three reasons a MAP involving their organization was abandoned before or during the due diligence phase are concerns about assumption of liabilities (21%), costs to support the transaction were too high (19%), and concerns about price (19%) in a tie. Note that the full extent of a prospective organization s financial liabilities may not be apparent until the due diligence phase is completed, which may explain why this aspect plays a major role as a deal breaker. Operationally speaking, respondents say that the top three operational reasons that a MAP involving their organization was abandoned before or during the due diligence phase (Figure 16) are incompatible cultures (30%), concerns about governance (24%), and concerns about the operational transition plan (21%). Interestingly, based on net patient revenue, a greater share of large organizations (47%) than small (25%) and medium (17%) organizations mention incompatible cultures, an indication of some of the challenges providers face when integrating large organizations with disparate cultures. Stoyanoff points out that organizational culture exists both at the senior leadership level as well as throughout an organization, and problems can arise because sometimes they can be different. You have two senior leadership teams sitting in a room trying to agree on deal points and reach a philosophical agreement. Oftentimes, you have cultural compatibility at the senior level (those who are consummating the deal) but find that culture throughout the remaining levels of the organization is not as conducive to a merger. That is something you don t necessarily see until later, after the deal is done. Organizational culture is king. Of all the financial and operational considerations to explore during any MAP negotiation, perhaps the most important is determining the extent to which the respective organizations have cultural compatibility. Without some level of cultural synergy between the organizations, a MAP could be destined for failure. Note that earlier we mentioned that 73% of respondents report that their organization would choose to participate again in its most recent MAP activity, and only 8% say that they would not choose to participate again (Figure 8). The No. 1 reason that these 8% cite for why their organization s most recent MAP activity fell short of expectations (Figure 9) is incompatible cultures. Let there be no doubt about the finding organizational culture is king. Jonathan Bees is senior research analyst for HealthLeaders Media. He may be contacted at jbees@healthleadersmedia.com. HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

6 FINANCIAL OBJECTIVES Percentage of respondents who say that increasing market share within their geography is one of the financial objectives responsible for driving their MAP planning or activity. Figure 1 What are the financial objectives of your merger, acquisition, and/or partnership (MAP) planning or activity? > Financial objective parity. Parity of survey responses suggests that no single objective is responsible for driving MAP planning or activity. The top four responses are separated by only four percentage points: improve financial stability (63%), improve operational cost efficiencies (61%), increase market share within our geography (60%), and improve position for payer negotiations (59%). $ 60 % $ $ + > Focus on geography and market share. Responses from health system respondents are generally more focused on geographic expansion while hospital respondents mention mostly financial objectives. For example, the top two responses for health systems are increase market share within our geography (70%) and expand geographic coverage (68%), while for hospitals the top two are improve financial stability (65%) and improve position for payer negotiations (60%). Improve financial stability Improve operational cost efficiencies Increase market share within our geography Improve position for payer negotiations Expand geographic coverage Expand position in care continuum 48% 63% 61% 60% 59% 55% > Objectives based on organizational size. Respondents from large organizations are more focused on geographic expansion than small organizations, which cite mostly financial objectives. The top two responses for large organizations are increase market share within our geography (78%) and expand geographic coverage (69%), while for small organizations the top two are improve financial stability (63%) and improve position for payer negotiations (61%). For medium organizations, the top two are improve financial stability (65%) and improve operational cost efficiencies (62%). Improve access to capital 35% Improve access to operational expertise Improve access to financial management 19% 25% Other 3% Base = 190, Multi-response HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

7 CARE DELIVERY OBJECTIVES Improving the position for care delivery efficiencies, clinical integration, and population health management, and gaining care delivery cost efficiencies through scale are the top care delivery objectives of respondents MAP planning or activity. Figure 2 What are the care delivery objectives of your MAP planning or activity? > Top care delivery objectives. Improve position for care delivery efficiencies (65%) is the top response for care delivery objectives of respondents MAP planning or activity. Improve clinical integration (55%), improve position for population health management (54%), and gain care delivery cost efficiencies through scale (53%) round out the list of top care delivery objectives. 53 % 54 % 55 % 65 % Improve position for care delivery efficiencies Improve clinical integration Improve position for population health management Gain care delivery cost efficiencies through scale Expand into new care delivery areas Expand position in care continuum Improve or enhance clinical talent Divest to sharpen strategic mission 12% Other 3% Base = 190, Multi-response 65% 55% 54% 53% 49% 49% 42% > Health system focus. Respondents from health systems show a strong interest in population health management, and improving care delivery cost efficiency by increasing scale. For example, a greater share of health systems (70%) mention improve position for population health management than hospitals (47%) and physician organizations (47%). And a greater share of health systems (65%) cite gain care delivery cost efficiencies through scale than hospitals (40%) and physician organizations (39%). > Divestiture. Few respondents mention divest to sharpen strategic mission (12%), an indication that, for the most part, MAP activity hasn t expanded organizational scope such that providers have strayed from their core strategic missions. HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

8 PRIMARY OBJECTIVE FOR MAP ACTIVITY Figure 3 What is the primary objective of your MAP planning or activity? > Primary objective. Approximately two-thirds of respondents (65%) say that the primary objective of their organizations MAP planning or activity is both financial/operational and clinical/care delivery equally. Twenty-six percent say that the primary objective is financial/ operational, and only 7% say that it is clinical/care delivery. > Financial/operational objectives. Compared with last year s survey, the response for both financial/operational and clinical/care delivery equally is down nine percentage points, financial/operational is up 10 points, and clinical/care delivery is down one point. This indicates an increase in importance for financial/operational objectives. Percentage of respondents who say that the primary objective of their organizations MAP planning or activity is both financial/ operational and clinical/care delivery equally. 65% 65 % 26% > Correlation with industry setting. A greater share of health systems (74%) than physician organizations (64%) and hospitals (58%) mention both financial/operational and clinical/care delivery equally, and a greater share of hospitals (33%) and physician organizations (28%) than health systems (18%) cite financial/operational. Both equally Financial/operational 7% Clinical/care delivery Other 2% Base = 190 HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

9 NATURE OF MAP ACTIVITY Figure 4 Please describe the nature of your most recent MAP activity. > Non-MAP activity tops list. A contractual relationship, but not M&A (29%) and acquiring another organization (26%) are the top two answers regarding the nature of respondents most recent MAP activity. Only 12% of respondents say that their organization has had no activity recently, nearly identical to last year s result (14%). Note that the use of non-m&a partnerships is expected to grow because this type of agreement is typically less expensive than traditional M&A and usually doesn t require an exchange of assets or a change of local governance. A contractual relationship, but not M&A We acquired another organization A merger of two organizations into one No activity We were acquired by another organization 12% 11% 15% 26% 29% Percentage of respondents who say that a contractual relationship, but not an M&A, is one of their most recent MAP activities. 29 % > Correlations with industry setting. A greater share of hospitals (38%) and health systems (35%) than physician organizations (11%) mention contractual relationships, but not M&As as their most recent MAP activity. Further, a greater share of physician organizations (38%) and health systems (32%) than hospitals (13%) say they have acquired another organization. Note that a greater share of physician organizations (19%) than hospitals (12%) and health systems (6%) say they have had no activity. Other 7% Base = 190 HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

10 ENTITY INVOLVED IN MAP ACTIVITY Figure 5 What kind of entity was involved in your most recent MAP activity? > Health systems top activity list. The top responses for the kind of entity involved in survey respondents most recent MAP activity include health systems (33%), hospitals (19%), and physician practices (17%), which represent 69% of the total MAP activity. Compared with responses in last year s survey, health systems increased six percentage points, hospitals fell one point, and physician practices declined 10 points. Health system Hospital Physician practice Physician organization Long-term care, SNF Ancillary, allied (e.g., home health, rehab, lab) Ancillary (e.g., diagnostic, therapeutic, custodial) Ambulatory surgery center Retail clinic/urgent care clinic Health plan, insurer Other healthcare organization 1% 1% 2% 2% 4% 5% 8% 8% 17% 19% 33% Health system is the top response for the kind of entity involved in survey respondents most recent MAP activity. 33 % > MAP organizational preference. Note that some of the preference for health systems can be explained by the fact that 35% of the respondent base for this survey is from health systems (see Respondent Profile on p. 21), and respondents generally prefer MAP activity with a provider from the same or similar setting. For example, a greater share of health systems (45%) and hospitals (43%) than physician organizations (14%) say that their most recent MAP activity is with another health system. Further, a greater share of hospitals (28%) and health systems (24%) than physician organizations (3%) mention activity with a hospital. And a greater share of physician organizations (45%) mention activity with a physician practice than hospitals (13%) and health systems (11%). These responses appear to indicate that providers favor increasing scale along similar lines of business, and that increasing infrastructure diversity throughout the care continuum is a secondary strategy. Other non-healthcare organization 0% Base = 168, Of those involved in MAP activity. HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

11 FINANCIAL AND CLINICAL IMPACTS Figures 6 and 7 Describe the financial and clinical impacts your organization experienced after its most recent MAP activity. Financial Impacts > Positive financial reviews. Respondents generally give positive reviews for the financial impacts their organization experienced after its most recent MAP activity. Seventy-four percent say that their net patient revenue increased (46%) or remained the same (28%), and only 6% say that it decreased. Likewise, 72% say that operating margin increased (39%) or remained the same (33%), and only 11% say it decreased. The response for cost of providing care is somewhat less positive, although more respondents say costs decreased (26%) than increased (18%). > Decreased costs. A greater share of health systems (31%) mention decreased cost of providing care than hospitals (23%) and physician organizations (17%). Financial Impacts Increased Remained the same Decreased Don t know Net patient revenue 46% 28% 6% 20% Operating margin 39% 33% 11% 18% Cost of providing care 18% 35% 26% 21% Clinical Impacts Increased Remained the same Base = 168, Of those involved in MAP activity Decreased Don t know Patient readmissions 11% 40% 18% 30% HCAHPS (or other CAHPS) scores 17% 46% 4% 33% Quality outcomes 35% 40% 4% 21% Base = 168, Of those involved in MAP activity Respondents have generally positive views on the financial and clinical impacts their organizations experienced after their recent MAP activity, with many saying that operating margins and quality outcomes increased. 39 % 35 % Clinical Impacts > Positive clinical reviews. Respondents have generally positive views on the clinical impacts their organization experienced after its most recent MAP activity. For example, a greater percentage say that patient readmissions decreased (18%) than increased (11%), although 40% report that this remained the same. And a greater percentage say HCAHPS (or other CAHPS) scores increased (17%) than decreased (4%), although 46% say this remained the same. Perhaps best of all, a greater percentage say quality outcomes increased (35%) than decreased (4%) 40% indicate this remained the same. > Clinical don t know responses a concern. While overall responses are promising, the high response rates for don t know for clinical impacts are concerning. The don t know responses come in at 30% for patient readmissions, 33% for HCAHPS (or other CAHPS) scores, and 21% for quality outcomes, indicating a lack of awareness for these critical metrics. HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

12 PARTICIPATE IN MAP AGAIN Figure 8 Looking back, would your organization choose to participate again in its most recent MAP activity? Percentage of respondents who say that their organization would choose to participate again in its most recent MAP activity. 73 % > Most respondents would do a MAP again. Nearly three-quarters (73%) of respondents say that their organization would choose to participate again in its most recent MAP activity, a very positive finding given the costs and complexity of such undertakings and the many ways a new provider relationship can get off track. Only 8% of respondents indicate that they would not choose to participate again. 8 % No > Correlation with organizational size. A greater share of respondents from medium (84%) and large (79%) organizations say that their organization would choose to participate again in its most recent MAP activity than small organizations (67%). 73 % Yes 20 % Don t know Base = 168, Of those involved in MAP activity HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

13 REASONS WHY EXPECTATIONS NOT MET Figure 9 What are some reasons why your organization s most recent MAP activity fell short of expectations? > Incompatible cultures. Respondents indicate that the top reason their organizations most recent MAP activity fell short of expectations is incompatible cultures (54%). Responses for governance problems (31%), operational transition problems (31%), financial goals not achieved (31%), and disagreement about organizational mission (31%) are clustered in a second tier. Incompatible cultures Governance problems Operational transition problems Financial goals not achieved Disagreement about organization s mission Costs to support the transaction too high Lack of community support Other 15% 15% 23% 31% 31% 31% 31% 54% The top reason that respondents say their organizations most recent MAP activity fell short of expectations is incompatible cultures.? 54 %? > Everything starts with culture. In Figure 16, incompatible cultures (30%) pops up again as the top operational reason respondents mention for a MAP involving their organization that was abandoned before or during the due diligence phase. Matters of culture are best resolved before a MAP takes place; otherwise, the new relationship could be an unhappy one. Don t know 0% Base = 13, Multi-response, Of those who say would not participate again in a MAP HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

14 MAP ACTIVITY NEXT MONTHS Percentage of respondents who say that their organization s MAP plans for the next months consist of both exploring potential deals and completing deals underway. Figure 10 Please describe your organization s MAP plans for the next months. 36 % > MAP momentum on the rise. Thirty-six percent of respondents say that their organization s MAP plans for the next months consist of both exploring potential deals and completing deals underway. Combining this result with the response for exploring potential deals (32%) reveals that 68% of respondents say they are exploring potential deals, a strong indicator for future MAP activity. Only 12% of respondents say they will be completing deals underway and mention no plans for future MAP activity. Both exploring potential deals and completing deals underway 36% 32% 21% 12% Exploring potential deals No MAP plans Base = 190 Completing deals underway > Slowing momentum? Interestingly, 21% of respondents say they have no MAP plans for the next months, which is up eight percentage points from 13% in last year s survey. While this result could be interpreted as an indication of slowing MAP momentum, the majority of survey data points to increased activity levels. > Correlation with organizational size. Based on net patient revenue, a greater share of respondents from large organizations (47%) mention both exploring potential deals and completing deals underway than medium (41%) and small (25%) organizations. And a greater share of small (24%) and medium (24%) organizations say they have no MAP plans for the next months than large organizations (8%). HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

15 TYPE OF ORGANIZATION PURSUING Figure 11 What entities does your organization have a high interest in pursuing through MAP activity within the next year? > Physician practices top choice. Nearly half of respondents (48%) say that their organization has a high interest in pursuing a physician practice through MAP activity within the next year, down 11 percentage points from 59% in last year s survey. Responses for health systems (37%) come next, up 10 points from 27%, followed by hospitals (29%), which are up three points. The strong response for pursuing physician practices is likely because primary care physicians are a key component Physician practice Health system Hospital Physician organization Ancillary, allied (e.g., home health, rehab, lab) Long-term care, SNF Retail clinic/urgent care clinic Ambulatory surgery center Ancillary (e.g., diagnostic, therapeutic, custodial) Health plan, insurer Other healthcare organization Other non-healthcare organization 2% 8% 14% 18% 23% 20% 20% 19% 29% 27% 37% 48% Percentage of respondents who say that their organization has a high interest in pursuing a physician practice through MAP activity within the next year. 48 % of population health management and clinical integration initiatives, although the trend may be starting to lose momentum, as many physician practices have already merged or been acquired. > Second choice, a similar entity. Besides a clear preference for MAP activity with a physician practice, a correlation exists between industry setting and the type of entity respondents say their organization has a high interest in pursuing through MAP activity within the next year, with respondent organizations generally pursuing like or similar entities. For example, the top two entities health systems are pursuing are physician practices (58%) and health systems (49%); for hospitals, it is physician practices (43%), with hospitals (40%) and health systems (40%) in a tie; and for physician organizations, it is physician practices (70%) and physician organizations (43%). Base = 128, Multi-response, Of respondents exploring potential deals and completing deals underway HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

16 LEVEL AND VALUE OF MAP ACTIVITY IN NEXT THREE YEARS 71 % Activity 73 % Value Figures 12 and 13 Within the next three years, do you expect your organization s MAP activity and/or the dollar value to increase, remain the same, or decrease? Level of MAP Activity > Strong prospects for activity. Seventy-one percent of respondents expect their organizations MAP activity to increase within the next three years, a bullish result indicating that MAP activity levels will remain strong for some time. Only 20% say they expect MAP activity to remain the same, and only 2% expect this to decrease. These results are more optimistic than last year s survey results, which were increase (61%), remain the same (32%), and decrease (6%). Dollar Value of MAP Activity > MAP dollar value increases. Nearly three-quarters of respondents (73%) expect the dollar value of their organization s MAP activity to increase within the next three years, and 15% expect the MAP dollar value to remain the same. Only 2% expect this to decrease. As with the results for MAP activity levels, these results are considerably more positive than last year s survey results, which were increase (55%), remain the same (34%), and decrease (12%). > Health systems and hospitals most bullish. A greater share of health systems (76%) and hospitals (71%) than physician organizations (57%) expect the dollar value of their organizations MAP activity to increase within the next three years. > Correlation with profit status. A greater share of respondents from for-profit organizations (80%) expect the dollar value of their organizations MAP activity to increase within the next three years than nonprofit organizations (68%). 71% 20% Activity 2% 7% Increase Remain Decrease Don t know the same Base = 128, Of respondents exploring potential deals and completing deals underway 73% 15% Value 2% 10% Increase Remain Decrease Don t know the same Base = 128, Of respondents exploring potential deals and completing deals underway HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

17 CUMULATIVE TOTAL DOLLAR VALUE Percentage of respondents whose organizations estimated cumulative total dollar value of MAP activity over the next three years will be between $10 $49.9 million. Figure 14 Please estimate the cumulative total dollar value of the MAP activity your organization will be exploring over the next three years. > Smaller budgets? Respondent expectations for cumulative total dollar value of the MAP activity their organizations will be exploring over the next three years reveal that 47% of the total dollar value falls below $50 million, and 30% is $50 million and above. Compared with last year s survey, there appears to be a shift toward lower cumulative total dollar value: the less than $50 million range is 14 percentage points lower (47% versus 61%) than last year, and the $50 million and more range is nine points lower (30% versus 39%). 21 % > Softening total spend. Given that respondent expectations for MAP activity levels is robust (Figure 12), the data here suggests some softening in the number of transactions per provider organization, or possibly the size of the individual transactions, over the next three years. 21% 23% 13% 13% 13% 10% 7% Less than $5 million $5 million $9.9 million $10 million $49.9 million $50 million $99.9 million $100 million $499.9 million $500 million or more Don t know Base = 128, Of respondents exploring potential deals and completing deals underway HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

18 FINANCIAL REASONS FOR ABANDONMENT The top three financial reasons for respondent organizations to abandon a MAP are: concerns about assumption of liabilities, costs to support the transaction were too high, and concerns about price. Figure 15 Thinking back to the last time a MAP involving your organization was abandoned before or during the due diligence phase, which of the following were among the financial reasons that the deal did not proceed? > Range of financial reasons. Responses for the top three financial reasons that a MAP involving their organization was abandoned before or during the due diligence phase fall in a tight range: concerns about assumption of liabilities (21%), costs to support the transaction were too high (19%), and concerns about price (19%). These responses are comparable to last year s survey results. Concern about assumption of liabilities Costs to support the transaction too high Concern about price Regulatory issues Concern about risk/revenue sharing Other party s decision, for reasons I don t know Could not agree on capital expense commitments Uncertainty about the economy Unable to arrange financing Other Did not abandon negotiations Don t know 8% 7% 5% 5% 13% 13% 13% 14% 19% 19% 21% 20% 21 % 19 % 19 % > Concern about liabilities. A greater share of respondents from health systems (26%) than hospitals (17%) and physician organizations (14%) mention concerns about assumption of liabilities, and a greater share of health systems (24%) than hospitals (21%) and physician organizations (10%) cite that costs to support the transaction were too high. > Did not abandon negotiations. Twenty percent of respondents say that they did not abandon negotiations. A greater share of respondents from physician organizations (34%) than hospitals (21%) and health systems (15%) mention they did not abandon negotiations, perhaps reflecting the greater complexity of health system and hospital MAP transactions. Base = 168, Multi-response, Of those involved in MAP activity HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

19 OPERATIONAL REASONS FOR ABANDONMENT The top operational reason respondents say that a MAP involving their organization was abandoned is incompatible cultures. Figure 16 Thinking back to the last time a MAP involving your organization was abandoned before or during the due diligence phase, which of the following were among the operational reasons that the deal did not proceed? > Top operational reasons. The top three operational reasons respondents say that a MAP involving their organization was abandoned before or during the due diligence phase are incompatible cultures (30%), concerns about governance (24%), and concerns about the operational transition plan (21%). Only 9% of respondents say that their organization did not abandon negotiations. Incompatible cultures Concern about governance Concern about operational transition plan Mistrust between parties Concern about fate of organization s mission Other party s decision, for reasons I don t know Lack of community support Other Did not abandon negotiations Don t know 1% 8% 9% 15% 14% 17% 18% 21% 24% 30% 30 % > Challenge of organizational culture. Based on net patient revenue, a greater share of large organizations (47%) than small (25%) and medium (17%) organizations mention incompatible cultures, an indication of the difficulties when integrating large providers with disparate cultures. Base = 135, Multi-response, Of those involved in MAP activity HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

20 METHODOLOGY The 2018 Mergers, Acquisitions, and Partnerships Survey was conducted by the HealthLeaders Media Intelligence Unit, powered by the HealthLeaders Media Council. It is part of a series of thought leadership studies. In January 2018, an online survey was sent to the HealthLeaders Media Council and select members of the HealthLeaders Media audience at healthcare provider organizations. A total of 190 completed surveys are included in the analysis. Base size varies between 13 and 190 according to respondents knowledge of the question. The margin of error for a base of 190 is +/- 7.1% at the 95% confidence interval. Survey results do not always add to 100% due to rounding. What Healthcare Leaders Are Saying Here are selected comments from leaders regarding the advice they would give to an executive at an organization considering a potential MAP. Assess cultural fit, and medical staff engagement and input. Chief operations officer at a large hospital Be certain that you will retain your current board of trustees and a fair amount of control at your facility. CEO at a small hospital Consider cultural factors as much as you consider financial, strategic, and clinical factors. VP/director operations/administration at a medium hospital Ensure you evaluate both cultures, and don t merge out of fear. CEO at a small health system Be sure you and your staff can live with all the anticipated and planned details of the change; DO NOT leave staff out of the end game loop... they need to know what the future vision is for both parties. VP/director of compliance at a small hospital Focus on the core clinical objectives such as PHM [population health management] with the goal of increased financial and organizational capacity to support those objectives. Chief medical officer at a small health system CLICK HERE TO JOIN THE COUNCIL TODAY! About the HealthLeaders Media Intelligence Unit The HealthLeaders Media Intelligence Unit, a division of HealthLeaders Media, is the premier source for executive healthcare business research. It provides analysis and forecasts through digital platforms, print publications, custom reports, white papers, conferences, roundtables, peer networking opportunities, and presentations for senior management. Senior Research Analyst, Intelligence Unit JONATHAN BEES jbees@healthleadersmedia.com Vice President, Product Development & Content Strategy ERIN E. CALLAHAN ecallahan@h3.group Interim Editor in Chief and Leadership Programs Director JIM MOLPUS jmolpus@healthleadersmedia.com Senior Managing Editor ERIKA RANDALL erandall@healthleadersmedia.com Senior Client Services Manager CATHLEEN LAVELLE clavelle@healthleadersmedia.com Intelligence Report Contributing Editor PHILIP BETBEZE pbetbeze@healthleadersmedia.com Intelligence Report, Art Director DOUG PONTE dponte@healthleadersmedia.com Intelligence Report, Designer BRENDA ROSSI-NIKOLOUZOS Opinions expressed are not necessarily those of HealthLeaders Media. Mention of products and services does not constitute endorsement. Advice given is general, and readers should consult professional counsel for specific legal, ethical, or clinical questions. Copyright 2018 HealthLeaders Media, an H3.Group Brand 100 Winners Circle, Suite 300, Brentwood, TN HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL

21 RESPONDENT PROFILE TITLE Base = % 26% 15% 9% 5% 2% 5% TYPE OF ORGANIZATION Base = 190 Health System (IDN/IDS) 35% Hospital 32% Physician organization (MSO/IPA/PHO/clinic) 19% Skilled nursing facility/nursing home/ assisted living facility/home health agency 13% Ambulatory surgical center 2% CEO, President Clinical leadership CEO, PRESIDENT > CEO, President > Chief Executive Administrator > Chief Administrative Officer > Board Member > Executive Director > Managing Director > Partner OPERATIONS LEADERSHIP > Chief Operations Officer > Chief Strategy Officer > Chief Compliance Officer > Chief Purchasing Officer > VP/Director Operations Administration > VP/Director of Compliance > Chief Human Resources Officer > VP/Director HR/People > VP/Director Supply Chain/Purchasing FINANCIAL LEADERSHIP > Chief Financial Officer > VP/Director Finance > VP/Director Patient Financial Services > VP/Director Revenue Cycle > VP/Director Managed Care > VP/Director Reimbursement > VP/Director HIM Operations leadership Financial leadership CLINICAL LEADERSHIP > Chief Medical Officer > Chief Nursing Officer > Chief of Medical Specialty or Service Line > VP/Director of Medical Specialty or Service Line > VP/Director of Nursing > Chief Population Health Officer > Chief Quality Officer > Medical Director > VP/Director Ambulatory Services > VP/Director Clinical Services > VP/Director Quality > VP/Director Patient Safety > VP/Director Postacute Services > VP/Director Behavioral Services > VP/Director Medical Affairs/ Physician Management > VP/Director Population Health > VP/Director Case Management > VP/Director Patient Engagement, Experience MARKETING LEADERSHIP > Chief Marketing Officer > VP/Director Marketing > VP/Director Business Development/Sales Marketing leadership IT leadership Other VP IT LEADERSHIP > Chief Information Technology Officer > Chief Information Officer > Chief Technology Officer > Chief Medical Information Officer > Chief Nursing Information Officer > VP/Director IT/Technology > VP/Director Informatics/Analytics > VP/Director Data Security West RESPONDENT REGIONS 18% Midwest 24% NUMBER OF PHYSICIANS Base = % % % NUMBER OF BEDS Base = % % % Do not have a standard number of beds 22% PROFIT STATUS Base = 190 Nonprofit 64% For-profit 36% NET PATIENT REVENUE Base = 190 $249.9 million or less (small) 53% $250 million $999.9 million (medium) 19% $1 billion or more (large) 19% None of the above 9% RURAL STATUS Base = 190 No 72% Yes 28% 40% 18% South Northeast HEALTHLEADERSMEDIA.COM/INTELLIGENCE MARCH/APRIL