Five insights about healthcare conglomerates from Union’s East Coast Summit
In which we generate insights via our favorite learning experience: An in-person, small-group, candid discussion about ideas
Last week was a huge milestone in the history of Union Healthcare Insight: We held our first-ever in-person East Coast Insight Summit. We were so lucky to spend the day with a discussion-sized group of leaders from diverse healthcare backgrounds (provider, payer, tech, venture capital, and more). In addition to being fun, it hit that goal one dreams of for a learning event: We all learned things. Including, absolutely, us! Our meetings are confidential, with a no-quote policy; but I can share that of all the topics we covered, the topic that drew the most discussion across the day was vertical consolidation as a strategy. We spent a lot of time examining what “big publics” are currently doing, why, and discussing the implications those actions are likely to have across the healthcare ecosystem in years to come.
Five insights from our discussion on vertical consolidation
1. It's not easy to get clarity on strategic objectives that animate big healthcare publics. But it's worth delving into, because the biggest corporate players are so huge at this point that they're ‘making their own weather’ in the market.
The UnitedHealth Groups, Cignas, Elevances, Amazons, CVSs, and Walgreens, of the world acquire, invest, set precedents, and attract new regulations in ways that affect every part of healthcare. They negotiate, partner, compete with, and may someday look to acquire you. (Or, if not you then your customers, partners, patients, investors, and companies you would be looking to acquire, sell to, partner with, etc.). Pretty much any move they make generates ripples of opportunity and threat that strategists at every organization need to keep up with.
The problem: No big public is going to come out and explain its strategy in ways that help the rest of the market build that kind of situational awareness. These are (mostly) household-name companies that are hidden in plain sight. Sure, they publish financials, produce a constant stream of professional PR, appear constantly in the trade press, and employ people you know. None of that tells you what strategy is actually being pursued, or how thinking and goals are changing over time.
To have a hope of predicting the conditions generated by healthcare conglomerates as they pursue their strategies, you have to be plugged in, work at it a bit, and/or become a Union Healthcare Insight member! (Not only is this likely to be an ongoing discussion theme at our events; we also profile these major players. Members can download from the research part of our website, or watch the on-demand recording of the recent webinar we did on this topic.
2. As healthcare players diversify, you have to step way back to see the picture of how activities are crossing traditional industry sector lines.
We spent a lot of time at this meeting discussing the slide titled “The End of the Independent Everything.” Conversation caught on this slide because our attendees agree that it is very illuminating to step back and see how different players are migrating across “swim lanes”, seeking diversification in ever-more sectors.
Some conclusions: Many of these players are diversifying a lot further than we tend to think. Also, perhaps not surprisingly, the more a given sector’s core business margins are under pressure, the bigger its expansion pattern compared to historical focus area/starting point. For example: provider health systems and pharmacy. It is striking to anyone who has spent years in provider world to learn about the extent to which drug revenue has become an economic pillar of large health systems.
3. To make sense of what big players are doing with their various capabilities and assets, try our ‘portfolio, flywheel, platform’ frame.
It may be that someone out there still forms their ideas about vertical consolidation strategy based on the cave shadows of what press releases say. If so, that person definitely thinks all vertically consolidated healthcare companies are diligently working to build integrated platforms that will increase coordination, find efficiencies, and drive healthcare spending down and quality up.
Our meeting participants last week already knew that claims of integrating all businesses together into a synergy-producing healthcare platform are mostly just rhetoric. The new idea that participants told us they gained from our time together was: To make better sense of what conglomerates actually are doing, you need to be able to differentiate and categorize—and our “portfolio, flywheel, platform” framework turns out to be very useful in doing just that.
To use the framework, step one is to get up to speed on these three general strategic goals for vertical consolidation (again, portfolio, flywheel, and platform), Next, look at the facts on the ground to determine which strategic logic is likely most at work, today, at any given healthcare conglomerate.
4. Comparing vertical consolidation strategies and results helps clarify many of the pros/cons of different aspirations.
Here are some insights from the meeting about what happens when you apply the portfolio/flywheel/platform strategy analysis lens to the track record of vertically consolidated healthcare organizations:
The portfolio strategy has a lot going for it. Compiling a diverse portfolio of (vertically adjacent) businesses with very different economics does more than check the growth box when organic and horizontal growth are off the table. As the savvy portfolio-creator knows it also helps make a hedge, hopefully allowing the portfolio owner to survive and thrive no matter how the economic winds may shift.
Flywheels are increasingly common because they’re a good middle ground between the two poles of portfolio and platform. Experience among healthcare conglomerates to date suggests that not every single business needs to be integrated and connected; vertically consolidated players can select and prioritize among the business units that can help one another out. (E.g., the use of “transfer” pricing between the insurer and provider business lines that today helps diversified insurers to maximize their MLR performance.)
While platform-building is an attractive aspiration, with seemingly irresistible rhetorical value, it’s extremely difficult and time consuming to actually do. Most likely the creation of a true, vertically integrated healthcare platform requires building from the ground up over time (think Kaiser). To knit together acquisitions into an integrated platform is a truly daunting idea. No matter how much theoretical appeal platforms hold, it is reasonable for the practical strategist to favor portfolios and flywheels.
5. It’s time to sit up and consider the concept of 'single points of failure in healthcare infrastructure'--and how it could play into big conglomerates' M&A strategy.
As context, “Single points of failure in healthcare infrastructure” is no easy topic to fold into strategy discussions. Because, to discuss it, you have to have a grasp on a wide range of market, tech, strategy, payment operations, cybersecurity and regulatory tools in your conversational toolbelt.
Lucky for all of us, the Union team received a member suggestion. We were already planning to do a business-school-style case discussion as part of the East Coast Summit agenda; the suggestion was that we should focus on Change Healthcare as the case. This was a brilliant idea because it tees up all of the above themes (tech, strategy, payment operations, cybersecurity etc.) in story format. Which all humans love, and which makes sense to our brains.
We were able to work chronologically through the controversial acquisition by United Health Group/Optum, the DOJ antitrust challenge, and last but not least, the massive cyberattack that, two years later, threw a spanner into the works of healthcare payment for months. Then it was facilitated discussion time. We tackled everything from “Why did UHG actually want to acquire Change? to "What were the arguments pro and con in the antitrust challenge and which ones, in retrospect, held water or not?” and our favorite, "How, if at all, do you think the attack will (or should) change M&A strategy for healthcare vertical consolidators?"
Two conclusions from that lively conversation:
The fallout from the Change Healthcare acquisition/hack ranges far beyond its impact to the UHG/Optum/Change organization—and also far beyond whatever stepped-up standards and enforcement we may see in cybersecurity. Specifically, the case created new impetus for antitrust reform—which may or may not solve the underlying problem of single points of infrastructure failure, but, if passed, will certainly change the landscape for vertical consolidation/healthcare conglomerate M&A.
Many healthcare companies are relying, as Change was doing, on a hodgepodge of old IT to enable their transactions. In theory, one implication for vertical consolidators’ M&A strategy could be that they should steer away from merging with companies that have so much exposure to those kinds of risks. But in reality, as the discussion made clear, a mishmash of old and new tech is so pervasive in the underlying architecture of healthcare IT that, if you absolutely have to acquire companies in order to grow, then this type of risk may just be a cost of doing business. (Especially because even the newest systems and technologies appear to be far from secure!)
Our differentiated approach to learning events
Independent strategy research and analysis is the core of Union's identity, and as such, we love the opportunity to bring together savvy healthcare leaders (and learners!) together for a day of in-depth discussion. Not only is it helpful in sharpening market and strategy awareness and skills; it’s also just plain fun.
Stay tuned for an upcoming week in which we will share some the principles that we feel differentiates a meeting experience like this from the learning-event norm (hint: massive conferences definitely do teach you things about the industry...but usually not by way of the things that are on the agenda.)
Want to join our next event? Ask about our West Coast Insight Summit in January, and reach out to discuss becoming a Union member!
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