Merging Outside the Lines
A graph of healthcare mergers and acquisitions since 2020 looks suspiciously like a big, scary hill at the end of a roller coaster.
From about 2015 to 2020, there were slight peaks and valleys each year but nothing dramatic. Then came a spike. Private equity M&A dollars shot from about $50 billion in 2020 to more than $200 billion in 2021. Then the downhill ride: 2022 investments dipped to about $100 billion, and they continued downward, to about $50 billion in 2023, according to a report published in November by TPG, an asset management firm based in San Francisco.
The total value of M&A deals dropped dramatically in 2022 and again in 2023.
With investors more hesitant, owners of assets on the market have entertained offers from multiple potential buyers.
The slowing of new acquisitions has benefited companies already in private equity portfolios.
The driving force behind the drop in M&A activity is not due to COVID-19, at least not directly. As part of the response to the pandemic, the government flooded the economy with cash. The Federal Reserve then raised interest rates dramatically. The subsequent constraints on borrowing made investors cautious of spending, particularly with no indication of when the Fed might begin to ease those rates.
“Macro factors and the cost of debt drove the majority of the slowdown in M&A activity over the past 18 months, especially for the healthcare and insurance sectors,” says Matthew Scally, a partner at McKinsey & Company. “This was not a slowdown based on strategic rationale. We see a lot of runway for vertical and horizontal M&A in 2024 and beyond in these sectors.”
Private equity investors have money that must be deployed. But when interest rates are high, investors begin to feel the squeeze and have to be assured they’ll receive enough return on their investment to absorb those higher rates. “It’s just like buying a house at 8% interest,” says Kate Festle, director of healthcare and life sciences for West Monroe, a digital services firm based in Chicago. “You’re going to have to really trust that you have the capacity to flip that into something that you’re going to be able to sell at a higher price than you paid for it.”
This environment, Festle says, makes investors more cautious and more thorough. “This is playing out in a lot more diligence up front,” she says, “and there’s a more competitive nature with investors.”
In previous years, Festle says, most M&A deals tended to be closed, meaning one bidder had exclusivity on a deal for a period of time. But because investors are more hesitant and taking longer to determine return on investment (ROI) and pull the trigger on a purchase, owners of assets on the market are entertaining numerous potential buyers.
“It’s often the bidder, now, who can get to that ROI confidence the fastest that has an advantage,” Festle says. “And at the same time, you’re also getting less direct access to the asset’s management team when you’re one of two or three-plus parties seeking information. It’s changed the process and the life cycle of acquisitions.”
Festle says a lot of private equity firms that are encountering trouble crossing the finish line on new projects are directing their money and attention toward their existing business. The slowing of new acquisitions has benefited companies already in private equity portfolios. This could look like restructuring investment terms or joining management teams to determine actionable priorities for existing companies.
“Teams used to be split between new and existing deals,” she says. “But now there is a lot of interesting sophistication happening within existing portfolio companies that might either not have happened or taken longer to achieve without that spare time.”
Higher interest rates, rising labor costs and high pharmaceutical spend are expected to keep medical inflation elevated into 2025, Scally says. Another market factor at play is the rise of self-insurance among smaller companies. The result has been vertical M&A activity, particularly among third-party administrators (TPAs) of employee benefits plans.
“Solutions combining member engagement with cost containment and administrative services are growing,” Scally says. “Sophisticated brokers have already educated themselves on these solutions and are looking to deploy them for their clients. This gives them an advantage compared to their peers.”
Capturing Market Share
If there was a theme to major M&A activity in 2023, Festle says, it was vertical integration. Organizations are looking to bring in a greater share of the market in payer and provider services and digital technologies. One high-profile example was the approximately $3 billion merger between Virgin Pulse, a well-being and navigation platform, and HealthComp, a health benefits TPA.
“This merger was born out of the philosophy that there’s an opportunity to make the self-insured employer environment significantly better than it is today,” says Virgin Pulse CEO Chris Michalak. “HealthComp and Virgin Pulse have very different capabilities that will come together to really serve the member and the client more effectively.”
The merger allows health insurance and wellness data sets to be combined, which will make each company’s solution more effective in their own spaces.
“This merger adds claims data as a source [for Virgin Pulse], and that’s arguably the most powerful medical data source there is,” Festle says. “Now, instead of trying to connect the dots based on some ambiguous leading indicators of what a person might be experiencing, they have the diagnosis and procedure codes. They’ll be able to funnel the right content to the right employees at the right time. I think that’s going to be the primary value proposition in that marriage.”
HealthComp also brought clinical navigation and advocacy. The company has 200 clinical navigators that help patients make choices about the best, most affordable care.
“They can help determine the right clinical pathway when someone has a backache,” Michalak says. “If you’re in the wrong place, it might always look like surgery. But if you’re in the right place, it might look like physical therapy or a solution other than going under the knife.”
This merger is also an example of a way to manage all the point solutions that are available to employers. Festle says there has increasingly been a shift toward the employer as a customer. Vendors used to sell to payers, providers or consumers. But they have realized that a fourth option—selling directly to employers—may be an easier way to enroll the most bodies.
“What I’ve been seeing is digital solutions that started out direct-to-consumer are now pivoting to the employer market,” Festle says. “If you look at Talkspace, they had their roots with consumers, and they’ve gone on record to say that now their biggest revenue stream is the employer channel. It’s a much more efficient way to scale your business.”
Michalak says the most effective way to deliver those solutions is through a merger like Virgin Pulse’s. First, because it makes it easier for the employer. Going through the vetting and contracting process for every vendor is challenging and time consuming. And for employees, he says, wading through “a vast and dense forest of possible solutions” can make it more challenging to make good health decisions.
With this merger, they can now have one platform with health plan capabilities that can analyze payments and has healthcare navigation, advocacy, well-being and care for chronic conditions. Michalak says the company essentially built its own partner ecosystem with 70 different groups, curated over time, so it can offer solutions employers most want access to, whether it’s smoking cessation, weight loss or help with hypertension.
“Instead of an employer contracting with an MSK [musculoskeletal] provider and a mental health provider and somebody else for gym memberships, all of that can be delivered through a single platform made accessible for members to navigate all of the possible choices that they have.”
Michalak also hopes to impact clients’ bottom lines with HealthComp’s flexible insurance plan design capabilities. “This will appeal to employers that are looking for a different and creative approach to the way that they solve the healthcare cost problem that they’re having,” he says. “It’s for employers that are self-insured and want to be on a different platform because they haven’t seen results from the solutions that they’ve been provided in the past.”
These health plans could include things like reference-based pricing, narrow network plans and direct contracting. These kinds of plan designs are not for all employers, though. Michalak says Virgin Pulse’s sweet spot is employers with 1,000 to 5,000 workers (though they can scale up for some businesses).
Michalak says there are many ways to attack the issue of healthcare costs: plan design, payment integrity, care navigation, preventive care and chronic condition management. “I think there are a lot of different levers,” he says. “I don’t think there’s any one lever that is the way they impact costs. I think we’re pulling a bunch of them across the spectrum of capabilities. And, to me, that’s what an employer needs to be doing with respect to their strategies: figure out which of those levers are most important and what is the best solution to attack it.”
Extending Client Reach
In the wake of COVID-19, employers were looking for point solutions to build more robust benefits and appeal to employees in an extremely tight labor market. But in today’s inflationary market, employers are being faced with the need to cut costs where they can.
With the cost of employee-sponsored benefits rising—the Health Research Institute estimates healthcare costs for group markets will increase by 7% in 2024—many businesses are looking to outsource administrative services and generate efficiencies. This was the theory behind last summer’s acquisition of OrchestrateHR by Risk Strategies. Aside from expanding the company’s footprint into Texas and the U.S. Southeast, Risk Strategies, a risk management consultancy and insurance brokerage, was able to capture products that address high cost and administrative burdens for employers.
John Greenbaum, the national employee benefits practice leader at Risk Strategies, says eBen, an OrchestrateHR affiliate also acquired in the transaction, offers a group-medical product that uses artificial intelligence “to inform risk selection and ultimately product pricing. This is coupled with Orchestrate’s consolidated billing and client interface tools that simplify the employee and employer experience.”
OrchestrateHR also offers payroll servicing, which, Greenbaum says, makes retirement planning, specifically 401(k) products, a potential growth market adjacent to Risk Strategies’ current offerings. He says Risk Strategies would like to broaden OrchestrateHR’s human resource support services to create a “more fulsome outsourced experience” that could include compensation consulting.
This acquisition is building on Risk Strategies’ growth plan: to remain a specialty-focused brokerage while expanding the services offered to clients. In 2022, the company acquired Cambridge Advisors and used it to form Risk Strategies Consulting. This has allowed the company to analyze large volumes of data to support its clients’ business goals and deliver greater value. Risk Strategies has also been able to take tools and resources for Fortune 100-size employers and scale them for middle-market companies.
“We look to partner with companies that bring expertise to new industry verticals or broaden the suite of products and services that we can offer to clients,” Greenbaum says. “This has become a potent accelerant to the success of Risk Strategies. We have been willing to evaluate non-traditional assets, outside of pure insurance brokerage, especially to the extent that they allow us to focus more materially on our specialty segmentation. At our core, we are a specialty firm, and when we can utilize M&A to move more deeply into a specialty, we believe that it is in our best interest to do so.”
The Value Of Tech
According to the TPG report, healthcare accounts for nearly 20% of the U.S. economy but only about 5% of the technology spend. McKinsey’s Scally says digital services that drive consumer engagement are extremely important in healthcare and insurance. Employers and brokers need digital capabilities to educate and insure people who access benefits through their employers.
“Healthcare and elements of employee benefits are becoming more consumerized,” Scally says. “Effective cost-control solutions require meaningful member touch points and engagement levels. Digital capabilities can do just that. What is more, digital engagement means not just cost control but also efficiency in the insurance structure and choices employees and employers make.”
This is one benefit brought by Virgin Pulse to its merger. It is bringing a high-engagement wellness platform to insurance and care navigation.
“What do employees engage with the most frequently?” Festle asks. “It’s going to be your wellness navigation tool. They only do enrollment and interface with your benefits administrator once a year. They may not even have exposure to some cost-containment vendors. But they do have their Virgin, Headspace or Talkspace app that they can consistently and asynchronously engage with. Stickiness really does matter here, and if I were a HealthComp competitor who hasn’t figured out how to capture the wellness value chain, I’d be a little nervous.”
Michalak says the Virgin Pulse engagement platform has more than 50% engagement, with 20% of users going to the app regularly. Point solution partners can be accessed directly from the platform, he says, and those that have that accessibility have higher uptake than those that don’t. That is high touch for healthcare, particularly for insurance. A 2016 survey from the Agency for Healthcare Research and Quality, for example, found that the engagement rate for a typical insurance disease management program is about 13% of enrollees, on average.
Michalak says Virgin Pulse’s high engagement is driven by a few things. One is good content. Another is personalization. Because Virgin Pulse has rich data on all users, it can personalize the user experience. Next, the company offers content via an app that is easily accessible and user friendly. Finally, Virgin Pulse provides incentives to encourage members to take actions that help them develop good health habits and help them make better decisions for their health outcomes.
“I don’t think there’s anybody making the same commitment to that kind of high-tech enablement that Virgin Pulse is making,” Michalak says. “It’s going to be one of the things that truly distinguishes us from lots of solutions in the marketplace. As a user, I’ll be able to see my EOBs”—explanations of benefits—”while I’m working on my well-being and trying to figure out how to navigate an episodic situation. I’ll be able to do that all on a single platform.”
Big Box Medicine
Festle says she looks to big-box retailers—they’re often five years ahead of the rest of the industry—to see what trends may be looming. “Lately,” she says, “Walmart, CVS and Amazon have been at the leading edge of these things.”
One trend she sees possibly coming to fruition in the next few years is the concept of concierge medicine. In this structure, people pay monthly or annual fees to essentially become members of a doctor or healthcare practice. Then those members are able to get in to see a doctor quickly. They typically also have more than the 15 minutes of the typical patient visit.
“I think the investor community has thought that it’s really going to take off in a more meaningful way and it just hasn’t,” she says. “The only company of real note and scale in that space is One Medical.”
Amazon’s purchase of One Medical in 2023 indicated to Festle a possible beginning of a push toward concierge medicine. Amazon now offers Prime subscribers a yearly One Medical subscription for $99. This covers acute and chronic care visits and behavioral healthcare. Members can get care online 24/7 or in One Medical brick-and-mortar practices.
“That’s something I’ll be watching,” Festle says. “I think that’s going to resonate with a lot of Americans who enjoy their health coverage when there’s an acute event but hate that they can’t call their doctor when they need something or get into their doctor for three months for their annual visit. That’s their goal, to create a convenient consumer-forward experience.”
Walmart has also rolled out its offering, Walmart Health, in some areas. It offers primary and urgent care, lab work, X-rays, dental and behavioral health at healthcare practices and 24/7 telemedicine for people with UnitedHealthcare insurance.
In 2023 CVS purchased Oak Street Health, a primary care behemoth, for $10.6 billion. Oak Street specializes in patients with Medicare Advantage, and many of its clinics are based in areas with a high number of underserved people. In a press release about the acquisition, CVS noted that Oak Street is anticipated to have about 300 clinics across the country by 2026, each of which could create about $7 million in annual earnings.
This big-box movement into healthcare is high-tech and has a more consumer-driven platform than much of what you see with traditional health plans and providers. “Things like dental, which have a high degree of out-of-pocket pay, are really just a thorn in the side of most health consumers,” Festle says. “Some would love to be able to pair that with a trip to their grocery store.”