As the changing environment has focused health systems on preparing for population health and responding to expanding consumerism, certain themes have emerged in resultant provider strategic planning.
The evolving landscape has modified many traditional metrics of success for providers, and has created a need to develop or acquire a new array of skill sets, partnerships and relationships. As described in Jim Molloy's column here last week, this year's Non-Profit Heath Care Investor Conference will provide a forum for leading health systems to describe to debt investors and other industry participants how these two important factors have influenced their strategic direction. Hand in hand with that conversation, we anticipate significant discussion related to specific transactions, partnerships and affiliations that systems are undertaking to achieve their organizational goals.
Many health care systems are aggressively pursuing a range of strategic activities that can be broadly characterized into three general themes: those providing regional scale, those supporting increased diversification and/or integration, and those related to investment in forward-looking disruptive technologies.
The pursuit of greater scale to enhance system economies, efficiencies and value, is not new to health systems. Scale has driven strategic activity among providers for the greater part of the last decade. The potential benefits of scale have clearly been recognized by bond investors and rating agencies that have evaluated strategic transactions on the basis of creating synergy as well as on the capabilities, experience and track record of the management teams. Most recently, however, the requirements of a population health model have emphasized the creation of horizontal scale within regions, rather than creation of a more national presence, with an eye toward developing an appropriate network and amassing a sufficient number of covered lives. Recent consolidation in the broader Chicago market is an example of this more market-focused phenomenon.
Another strategic theme for systems has been investment in the growth of services and providers (post-acute, senior, labs, insurance, etc.) necessary to fill out a vertical continuum and to achieve greater diversification of revenue and business. This strategy serves a dual purpose of preparing for population health as well as providing a hedge for systems against the anticipated movement away from acute care services as the primary money-generator over time. Effective delivery of population health includes coordination with multiple providers along the continuum, with aligned standards of care and financial incentives. Although some systems have opted for ownership of new diverse service lines to achieve the required coordination and control, more have opted to negotiate partnerships with pure play providers that can provide sector expertise and shared investment capital at key points along the care continuum.
One particularly active area of focus for health systems has been investment in the insurance sector. As providers assess new ways to distribute and mitigate risk under population health, a number of partnerships and collaborations have emerged that blur the traditional lines between providers and payers. This convergence can be seen in the increasing number of health systems with an ownership interest in health plans; in fact, approximately half of the provider systems presenting at this year's conference are among that group.
Bond investors have sometimes viewed the entrance of new health systems to the traditional payer space with some trepidation. For some of the most integrated health systems nationally, ownership of a health plan is critical to their operation as a system, and foundational to their strong consistent operating results. However, the standard deviation around the performance of provider-owned health plans is high, and many systems have experienced challenges navigating the cross-incentives of operating a health plan and a provider system simultaneously. Many systems instead have opted to pursue alternative strategic affiliations and collaborations including participation in accountable care organizations that provide some level of risk mitigation and integration short of health plan ownership.
Finally, many health care providers have pursued strategic affiliations and partnerships to fill in capability gaps or to provide access to value-enhancing disruptive technologies. Examples of these investments include technology partnerships to provide greater data analysis and management necessary to predict and manage risk under a population health model, and consumer-driven investment in lower-cost technologies that increase convenience and access for consumers, such as telehealth.
In my career providing strategic advisory services, the current time period reflects one of the most active and most interesting periods of strategic activity for health care systems. We all look forward to seeing what the next year will bring in the way of creative transactions, unusual partnerships and new investments by the health care provider community.
Jeannette B. Price is managing director of Citigroup, a co-sponsor of the Non-Profit Investor Healthcare Conference, along with the American Hospital Association and the Healthcare Financial Management Association.
