In the retail world, consumer spending on holiday gifts is viewed as a measure of how well retailers will fare for the year and of consumer confidence in the overall economy. Applying those maxims to healthcare, things are pretty darn good, economically speaking.
Starting the week after Thanksgiving and accelerating last week, a wave of multimillion-and in some cases multibillion-dollar mergers and acquisitions hit the healthcare industry. The deals may lead to higher revenue and profits for the companies involved, but for the users of the products and services offered by the companies, the transactions could mean higher prices and less choice.
Four deals from a broad range of healthcare sectors were announced last week, but bigger than any of those was the widely reported potential acquisition of cardiac devicemaker Guidant Corp., Indianapolis, by Johnson & Johnson, New Brunswick, N.J., for $24 billion. This possible deal comes on the heels of the proposed acquisition of Definity Health Corp. by UnitedHealth Group, which said it plans to buy Definity for $300 million (Dec. 6, p. 8), and Select Medical Corp.'s plan to buy fellow long-term acute-care hospital company SemperCare, Plano, Texas, for $100 million (Nov. 29, p. 11).
Glenn Melnick, a healthcare economist at Rand Corp., in Santa Monica, Calif., and a professor of healthcare finance at the University of Southern California, Los Angeles, is betting that suppliers think hospitals are fertile ground for their sales staffs.
"Hospitals are doing well now," Melnick said. "Nationwide, hospital revenue and hospital expenses are going up. Here in California, we have real good and current data, even for the first six months of 2004. Hospital revenues are still increasing at 10% or more at an annualized basis, and costs are increasing 9%. They're still spending money. Hospitals are a growing buyer for these suppliers."
Overall, the healthcare mergers-and-acquisitions market, broadly defined, included $140 billion in 652 deals for the first nine months of 2004, far outpacing the $92.8 billion spent in 2003, although last year saw 906 deals announced, according to Irving Levin Associates. Stephen Monroe, an Irving Levin partner, said one huge pharmaceutical deal-Sanofi's acquisition of another French drugmaker, Aventis, for $60 billion-accounted for most of the dollar-value difference. Still, he said, "It's been very active. We don't know what is driving it in the last four, five, six weeks." Some possibilities include a desire to complete deals by the end of the year, lower stock prices in the pharmaceutical sector making deals more attractive and the resolution of the presidential election removing some uncertainty, Monroe said.
"Is there any common thread? I really don't know, other than a lot of people in healthcare feel like they're getting squeezed," Monroe said. In that environment, "size and economies of scale help."
Healthcare economist Paul Ginsburg, president of the Center for Studying Health System Change, said it's impossible to draw general conclusions about how the mergers-and-acquisitions activity in the broader healthcare market may ultimately affect hospitals, insurers and patients.
"Before you can draw a conclusion, you have to categorize the mergers where the principal consideration is consolidation, (compared with) mergers where one company has an asset and another company thinks it can do better with that asset," Ginsburg said.
Joel Hay, associate professor in the Department of Pharmaceutical Economics and Policy at USC, said the government's huge presence as a healthcare payer promotes consolidation.
"A lot of it has to do with the fact that the government, either the federal government or other entities, pays so much of the healthcare dollar, so the reaction of anybody on the healthcare provider side is to merge to give them more negotiating clout," Hay said. The government payers are getting more aggressive in their bargaining, he said, "and so whether it's hospitals, doctors, drug companies, surgical supply companies, you name it, their logical countermove is to merge so they can negotiate more effectively and they're not fighting each other for the government program."
Getting a deal done before the end of the year can bring tax benefits to a company that has already decided to do an acquisition, with merger costs offsetting earnings for tax purposes, said Anthony Buono, professor of management at Bentley College, Waltham, Mass.
"One of the basic thumb rules is that (deal-making) is a reaction to instability, to uncertainty," Buono said. "Smaller companies might be concerned about whether they can make it through an uncertain environment."
Ginsburg and Melnick both said the device market deals are the ones most worth watching for their direct impact on hospitals' and insurers' costs.
Fewer potential players
The potential Guidant Corp. acquisition and another deal announced last week in the device sector-Smiths Medical, based in Kent, U.K., will acquire Medex, Carlsbad, Calif., for $925 million in cash and assumed debt-are part of what Buono said was a "general push toward consolidation" in many industries.
"The general belief is that I can make value much more quickly in buying rather than building, which takes much more investment and much more time," Buono said. This is particularly true in a sector like medical devices where innovation is such an important factor, he said.
Hospitals can expect the Guidant-J&J deal to keep prices for drug-eluting stents from dropping because it would eliminate Guidant as a potential supplier of those stents, said Kevin Roesch, director of product planning for cardiac services at group purchasing organization Premier. Guidant's strengths have been its bare-metal stents and the delivery mechanism that surgeons use to implant the stents in arteries, Roesch said. Abbott Laboratories and Medtronic are developing drug-eluting stents that won't hit the market until late 2006 or 2007.
Roesch cautioned that several of the big devicemakers have had talks with each other over the last five years on consolidation deals that never came to fruition. "That may be the case here, too," he said. "It's been very public that there's talks, but the deal's not done."
Most of the consolidation in the cardiac device sector has involved large companies swallowing smaller devicemakers, Roesch said. For instance, last week, Minneapolis-based Medtronic said in a securities filing that it acquired Angiolink Corp., Taunton, Mass., last month for $45 million. Angiolink was a privately held, 5-year-old company that developed wound-closure solutions for vascular procedures.
Healthcare services had its own consolidation play last week in renal care. DaVita, El Segundo, Calif., agreed to buy Gambro Healthcare US, the U.S. division of Sweden-based Gambro, for $3.05 billion in cash in a deal that would make DaVita the largest dialysis-care provider in the United States.
Adding Gambro Healthcare US' 565 dialysis centers with 43,200 patients and $1.8 billion in revenue will nearly double the size of DaVita. After the acquisition, DaVita said, the company will have about 1,200 dialysis centers, 96,000 patients and $4.4 billion in revenue. Darren Lehrich, senior research analyst for healthcare at Piper Jaffray & Co., said in a research note that antitrust concerns could force Gambro Healthcare US to divest 50 to 100 dialysis centers before the deal can close. With their current portfolios of centers, Piper Jaffray's research showed, the companies have significant overlap in California, Florida, Texas and other states.
Kent Thiry, DaVita's chairman and chief executive officer, said during a conference call last week that no divestitures are planned, but he acknowledged that government regulators are likely to take a look at the potential combined market share in California, where the two companies operate 172 dialysis clinics, according to Piper Jaffray.
Bringing behavioral in-house
Another significant deal announced last week involved a different kind of consolidation-vertical consolidation down the product chain rather than horizontal consolidation of one link in the chain. Aetna, Hartford, Conn., said it would develop its own behavioral health business, starting with a Dec. 31, 2005 buyout of the assets used by Magellan Health Services in its contract to serve Aetna members. Aetna said the move would allow better integration of behavioral health and medical benefits, and simplify administration.
Magellan, Farmington, Conn., said Aetna would pay $50 million to $55 million to exercise its option to buy three behavioral health centers and Magellan's behavioral health provider networks for Aetna members.
Investors want in
Private equity investors showed their continued interest in the healthcare industry, as Onex Partners agreed to buy two healthcare companies from Laidlaw International, Naperville, Ill., for $820 million (for more on private equity deals in healthcare, read the latest Web-exclusive). American Medical Response, an ambulance service company, accounted for $1.05 billion in revenue for the 12 months ended Aug. 31, Laidlaw said. EmCare, which operates emergency rooms for more than 300 hospitals, had revenue of $549.8 million for the fiscal year.
Buono said the key for acquirers such as Onex, Johnson & Johnson and Smiths Medical is to retain the human capital that their acquisition targets have.
"Despite all of the financials and the strategic aspects of these deals, the one challenge is that it's still very much a human experience," he said. "While we can talk about financial capital, we can talk about market capital, what they're really acquiring is human capital. Those individuals can decide to go along with the company or float their resumes and go elsewhere."
-with Joseph Mantone