ore than 200 health care deals representing $72.6 billion were announced in the first quarter of 2018, kicking off what will be an active year for deal making in the U.S. Consolidation plans, pent up private equity demand, new entrants, and other market forces will continue to motivate industry players to reflect, reevaluate their business models, and make strategic bets on deals and partnerships.
New business models are emerging. Their common goal is to drive down costs, create value, and compete more effectively. These deals position major players to transition to a system based on value of care versus the volume of services — a system that better aligns with what consumers have come to expect from their health care experience.
Four archetypes of new health care deals are emerging. As I described in a recent PwC Health Research Institute report, they include:
- Vertical integrators such as Cigna and Express Scripts, which hope to build efficiencies of scale and condense the value chain
- Employer activists such as Amazon, Berkshire Hathaway, and JPMorgan Chase, who seek a better health care offering for their employees
- Technology invaders such as Google or Uber aiming to gain better footholds in the industry
- Health retailers such as Amazon looking to gain market share by better understanding consumer desires and behavior and provide some types of health care directly
If these new models gain steam, disruption will follow.
An arduous journey
Current health care deals have to close in one of the most complex and regulated markets in the world. Before these companies can actually effect change, they will have to create entirely new infrastructures, drive behavior change, and bring on the right leaders to help them navigate twists and turns for years. New entrants — many from fast-paced industries that have long put data analytics and the customer experience at the center of their businesses — will have to endure a grueling pace on the path to change.
The health care industry will transform, but we will likely see more plans on the shelf than in the market. Changes will be slow, but several trends will be more visible this year:
The landscape will keep changing. Announcements of more deals will put pressure on other companies to secure their own acquisitions. Activity begets more activity, and consolidation prompts other companies to acquire — and then likely divest — as they reshape their business. And it’s no secret that private equity has a surplus of cash and its eyes on health care.
Companies will learn to compete differently. As large organizations continue to merge — and they will — small organizations will reposition themselves as more nimble, customer-centric options. They will leverage their size to invest more into building relationships with consumers, winning loyalty points from them along the way.
The customer experience will evolve and drive deals. There is little question among most experts and patients that significant improvements to health services’ customer experience are needed. Health care as an industry has the lowest Net Promoter Score, a tool used to gauge the loyalty of a firm’s customer relationships, of any industry: Health care’s score is 15, compared with tech’s impressive 60. Many companies are looking at ways to use data and technology to improve patients’ experiences.
New models must foster new cultures. For all the reasons it is difficult to enter the health services market, it is even more difficult to create real change that affects the sector’s most important stakeholder: consumers. As companies continue to find ways to deliver more values-based care through acquisition and partnerships, they will also have to explore ways to drive a culture shift. Taking care of doctors so they can spend more time with patients and less time with paperwork and electronic health records, and empowering consumers with the right tools and information to actively participate in their own care, all have distinct roles in the future health economy.
The health services industry can expect to see steady deal making in what will prove to be an exciting time. But amidst all the excitement, we will need to remain cautiously optimistic that this increased consolidation will create value, as the system is incredibly nuanced and slow to change. New entrants will need to have endurance and commitment to succeed.
Thad Kresho is a partner and U.S. health services deals leader at PwC.