When healthcare group-purchasing and consulting-services company MedAssets announced last week that it would pay $850 million to acquire rival Broadlane Group, chief executives for both organizations said the deal would allow the combined companies to better serve their hospital clients.
Rivals no more
MedAssets to scoop up Broadlane for $850 million
“The principle reason for this transaction is to position MedAssets to better deliver upon its promise to our clients to help them improve operating margin and cash flow,” MedAssets Chief Financial Officer L. Neil Hunn said during a Sept. 14 call with investment analysts.
But whether the consolidated group-purchasing organizations will actually prove to be a boon for member hospitals is as yet unclear.
Officials at Broadlane and MedAssets declined to be interviewed for this story, but according to a news release, Alpharetta, Ga.-based MedAssets has agreed to pay $725 million in cash upon completion of the deal, which is expected to close in 60 to 90 days. MedAssets will pay the remaining $125 million of the purchase price in January 2012.
The money will go to Broadlane executives, who own 20% of the company, and majority owner TowerBrook Capital Partners, a New York- and London-based private-equity firm. Officials at TowerBrook also declined to be interviewed. Broadlane has had no hospital member-owners since August 2008 when 53-hospital Tenet Healthcare Corp.—one of the GPO's founding investors—sold its shares to TowerBrook. As a result, no hospitals will receive money from the deal.
The deal will allow MedAssets to add a substantial list of provider clients and proprietary services to its portfolio. Once finalized, it could nearly double the size of MedAssets' GPO membership, although it's unclear if there will be overlap in MedAssets' and Broadlane's client bases since some healthcare systems have multiple GPO memberships.
Currently, MedAssets claims 1,700 hospitals among its GPO members while Dallas-based Broadlane claims 1,100, according to a news release issued on the deal. MedAssets also reported 1,700 members in its response to Modern Healthcare's 2010 GPO Survey, while Broadlane reported 1,132 for the 2009 survey—the most recent year it participated (Aug. 30, p. 24).
The acquisition would also allow MedAssets to add two large healthcare system clients of Broadlane's—Tenet and Kaiser Permanente—to its roster of clients should the two providers decide to stay put following the merger.
MedAssets—the only publicly traded GPO—could also experience a hefty boost to its annual revenue with completion of the deal. The GPO reported $341.3 million in net revenue during fiscal 2009. Reconciled net revenue for MedAssets and Broadlane during that same period is nearly $509 million, according to the acquisition announcement. Those figures include revenue for both GPO and consulting services.
The acquisition comes on the heels of nearly 2 1/2 years of extensive change and uncertainty for Broadlane. In June 2008, officials there announced that Tenet was selling its shares in the company to TowerBrook for $155 million (June 30, 2008, p. 11).
That transaction set off a series of leadership changes within Broadlane. In February, Patrick Ryan, who was already serving as Broadlane's chairman, became the third CEO company's in a 20-month period. Ryan's arrival followed a year of losses for the company. Broadlane lost $3.9 million during fiscal 2009, according to financial information released as a part of the deal announcement.
Eugene Schneller, a professor of supply-chain management at Arizona State University's W.P. Carey School of Business, said he believes those rapid changes in ownership and leadership, coupled with a supply-contracting model that often relies on sole-source product purchases to drive up volume and push down prices, made Broadlane ripe for acquisition.
“Even if you're comfortable with sole-sourcing, as you add members they want different products,” Schneller said. He said such practices would have hindered Broadlane's ability to add new clients, especially in a healthcare-provider market that is expected to merge and contract as the delivery model changes and reimbursement rates fall under healthcare reform. Broadlane has “been a company with a very strong model, but I don't think recently you've seen a very strong vision for the company,” he added.
While Broadlane's leadership no doubt views the company's commitment to sole-source contracting on some products as sound strategy, comments made by Ryan during the Sept. 14 analyst call spoke to the company's concerns about future growth.
“We've had a product that has had extraordinary reception from the client marketplace, and one of our thoughts is that it just needed greater distribution into the marketplace,” Ryan said of Broadlane's services. He added that MedAssets' large sales force—the company has a staff of roughly 125 salespersons compared with Broadlane's staff of 27—would allow for a much more concerted effort to win healthcare clients in both the group-purchasing and consulting-services arenas.
MedAssets Chairman, President and CEO John Bardis said during the Sept. 14 call that his company was attracted to the opportunity to acquire Broadlane because it offered an opportunity for MedAssets to broaden its provider-client base and to provide a wider range of services to existing clients. He noted, for example, that Broadlane's single-source contracts portfolio would allow MedAssets to offer deeper savings to hospital clients who were willing to commit to purchasing a high volume of products from a sole vendor.
“We're finding that for hospitals looking around the corner to healthcare reform—and more important healthcare payment reform—cost issues have really taken the leading position among healthcare thought leaders and the leaders of U.S. healthcare institutions,” Bardis said. “So, we believe that the Broadlane team's contract portfolio is going to accelerate both our external opportunities for new client acquisition as well as further penetrate our existing client base.”
The pending acquisition came together in roughly three weeks and was largely hammered out over a single weekend just before the deal's announcement, according to MedAssets and Broadlane officials. Ryan, during the Sept. 14 call, said Broadlane had not been looking for an acquisition or merger opportunity before being approached by MedAssets. “We agreed that we would look at what this meant for our clients, and if we felt that this could drive extraordinary value we would move forward.”
While the acquisition will afford provider clients of both companies access to a broader range of contracting and consulting services it is unclear how much, if any, say those clients will have in shaping the scope of a newly beefed-up MedAssets. As the only publicly traded U.S.-based GPO, stock market investors hold sway with the company's decisions. And, unlike many other GPOs, MedAssets has no hospital systems as member-owners within its GPO.
Nevertheless, industry watchers said they wouldn't be surprised to see additional GPO mergers and acquisitions, as smaller companies attempt to broaden their service lines in order to better address hospitals' needs as they grapple with changes under healthcare reform. The ability to address those needs will be key to GPOs' ability to retain and grow their client bases, said Paul Keckley, executive director of the Deloitte Center for Health Solutions. “It seems to make sense. I think in this domain, if you follow the industry, this is not a surprise.”
But whether the pending acquisition is a sign of things to come will also rest on how regulators view the move. A Senate Aging Committee representative, who spoke on the condition of anonymity, noted that the deal still needs to be reviewed by regulators. He said that while the acquisition may not raise antitrust concerns, legislators likely will closely watch how the consolidated company carries out business, particularly since GPOs are allowed to collect fees from contracted suppliers under a safe-harbor provision that protects them from anti-kickback laws.
“We've seen problems in the industry emerge because of consolidation 25 years ago when Congress gave them protection from anti-kickback laws,” said the Senate Aging Committee spokesman.
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