Contributor: Sheri Shapiro, WG’01
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Healthcare merger and acquisition (M&A) activity has been growing rapidly over the last several years, hitting a record high in volume and value of transactions in 2015. Much of this activity has been driven by a desire for scale, with a belief by many healthcare leaders that "bigger is better" by reducing unit cost through economies of scale, increasing access and capacity to deliver care and, more recently, leveraging joint investments to strengthen providers' capabilities in the transition to value. Recent studies have shown that those benefits either do not materialize or are not sustainable in the long-term.
Given the changing healthcare market economy, scale is a necessary, but not sufficient, component for sustainable growth in healthcare delivery. Growth is no longer about the size of the organization in revenues or beds,
it is about lives served and margin generation in order to reinvest. Now, scale must be relevant scale. More importantly, growth must be strategic growth.
What is Strategic Growth?
Strategic growth can be defined as the ability to develop a market presence comprised of the necessary services and capabilities to optimally delivery high value care consistent with the organization's strategy. There are four dimensions of strategic growth:
- Organic growth is margin growth through increasing operating efficiencies to reduce cost and, more commonly, driving revenue increases through service revenue growth. In other industries, organic growth is often referred to as "same store" growth. This type of growth in existing business lines and business models is something all healthcare providers strive for, regardless of the volume-to-value transition in their market. This is often easier said than done, as it often requires a shift in referral patterns through strong physician alignment strategies, optimizing inclusion in payer contracts, and/or investments in facilities and services to provide a competitive advantage in the market.
- Acquisitive growth is achieved through accretive M&A transactions that enable the organization to increase in size, offer greater access to care, and achieve operational efficiencies in its existing businesses or service lines. If executed strategically, healthcare providers can simultaneously achieve economies of scale and become increasingly relevant to payers and consumers. It is often helpful to develop criteria and a data-driven process by which to evaluate acquisitive growth opportunities, so as not to succumb to the excitement of the deal and lose sight of the strategic impact the organization is trying to achieve. For hospitals and health systems, acquisitive growth evaluation should consider elements such as: geographic complement of the parties, medical staff impact, cultural fit, organizational financial strength, and ability to achieve operational and clinical efficiencies without compromising the quality or access of care.
- Diversified growth is pursued by health systems to obtain new capabilities in order to deliver a broader set of services than currently exist in the organization. As health systems move toward population health and value-based care delivery, there is an increasing need to build, buy, or partner for services across the continuum of care. It is important to remember that these opportunities are often different business models than those of hospitals and will need to be managed accordingly once they are brought into the health system. Examples of diversified growth opportunities for hospitals may include: alternative sites of care (i.e., freestanding ED, urgent care), post-acute services (i.e., skilled nursing facilities, home health), physician practices or clinically integrated networks, care management, or insurance services. Successful diversified growth initiatives should align with the health system's enterprise strategy and enable it to fulfill more of its customers' healthcare needs, increasing the organization's share of the healthcare spend per capita in the market.
- Transformative growth can be achieved through M&A or partnership activity that fundamentally changes the way healthcare is delivered. Given the rise in healthcare consumerism, ongoing regulatory changes from CMS, and potential payer consolidation among other factors, there are numerous opportunities for health systems to pursue transformative growth initiatives. Often these involve new technologies, disruptive solutions, or other innovations focused on achieving the Triple Aim. Careful vetting of these opportunities is important, as there are many nascent companies that claim to have the "silver bullet" to fixing healthcare, driven by an unprecedented level of venture funding in healthcare. This is also the growth dimension with the largest myriad opportunities, including: new health plans, digital health, data and analytics, consumer-focused retail and on-demand services, and community-based solutions aimed at influencing health behaviors and health status. In order to more easily develop, identify, and evaluate these opportunities, several health systems have started innovation centers, venture funds, and incubators to drive their transformative growth strategies. While there are numerous exciting opportunities for health systems to pursue in this arena, it is best to prioritize those that are most aligned with the organization's vision and strategic plan.
Which type of growth is most important?
While organic growth is typically standard in all organizations' strategic plans, prioritizing and managing the four various growth components can be unwieldy and overwhelming. Incorporating portfolio evaluation and management as part of strategic planning allows healthcare leaders to prioritize the importance of each growth dimension at the service line, regional health system, and national levels. A comprehensive portfolio management process requires the organization to answer the following questions:
- What services do we provide today and what is our market performance?
- What are the existing market dynamics among and between regulators, payers, employers, health systems, physicians, consumers/communities, and healthcare alternatives?
- What are the most likely strategic moves by others and future market scenarios?
- What type(s) of growth do we need to strengthen our position in the evolving market under the most likely scenarios?
Strategic growth in healthcare requires active management of the business portfolio. Healthcare leaders need to maintain ongoing market awareness and monitoring and take a disciplined, proactive approach to pursuing opportunities to fill portfolio gaps. To prevent getting distracted by exciting opportunities or feeling compelled to pursue a growth initiative similar to that of a direct competitor, practice steadfast adherence to the organization's strategic vision. With today's rapid industry changes, don't rely solely on strategies that have worked in the past. Be creative, yet pragmatic, in what can be applied from other industries. Above all, there is no substitute for leadership. No model, tool, or formula can develop and execute strategic growth in healthcare delivery. Wharton's focus on data-driven, critical thinking and collaborative management skills provided a strong foundation for us as healthcare leaders to successfully achieve strategic growth in our own organizations.
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