Recently, we spoke with Scott Musch, the Vice President of Corporate Development at Cambia Health Solutions, for perspectives on joint ventures and other partnership transactions in U.S. healthcare. Cambia is a total health solutions company headquartered in Portland, Oregon; its family of companies includes Blue Cross Blue Shield plans operating in Oregon, Washington, Idaho, and Utah, as well as interests in other companies seeking to improve the consumer experience in healthcare.
The healthcare industry – particularly in the United States – remains subject to sustained disruption, with companies grappling with regulatory uncertainty, new types of competitors, and an evolving consumer and technological landscape. This flux has generated a substantial volume and diversity of deals, some of which have taken the form of joint ventures. Despite a track record of mixed performance, joint ventures remain top-of-mind for healthcare dealmakers, and in recent years have been deployed as a means to both cultivate innovation and consolidate scale in core competencies. Cambia, in particular, has emerged as a leader in healthcare innovation with substantial experience in partnerships, and we asked Scott for his thoughts on high-level deal trends as well as the particulars of certain transaction structures and terms.
An edited transcript of his remarks follows.
HIGH-LEVEL DEAL TRENDS
By way of opening, Scott shared high-level comments on the continued pace of healthcare dealmaking, articulating some of the objectives for partnerships in the healthcare services sector and commenting on high-profile deals that have emerged in the last 24 months:
Healthcare has been a very active dealmaking industry over the last couple of years. We see partnerships – including joint ventures, alliances, and other types of contractual arrangements – as an increasingly popular deal structure, largely because they’re less expensive than traditional M&A, and because they require less exchanging of assets or changes in local governance. In terms of overall trends, M&A activity this year continues to outpace 2017, and joint venture activity, particularly in the payer [health plan] and provider space remains increasingly active as well, with insurers and providers looking to these partnerships as the industry moves to pay-for-performance models. One interesting tidbit is that fewer than 25% of payer-provider partnerships were joint ventures or co-branded initiatives in 2014, and these alliances have grown steadily each year to the present, with 71% of such partnerships being joint ventured or co-branded in 2017 and 73% as of the first quarter of 2018. That points to remarkable growth in that deal form.
In terms of interesting payer-provider deals, one company to continue to keep an eye on is Aetna. They’re one of the largest drivers of joint ventures and have a stated goal to have 75% of their contracts in value-based arrangements by 2020. They’ve formed joint ventures with many health systems as a model to reward physicians within their networks when they share the bottom line for risk and care coordination.
There is also a general trend in healthcare deals of moving away from horizontal plays – given regulatory challenges – and moving into more vertical plays, including disruptive models that combine different sectors of the healthcare value chain. A general perception is that antitrust enforcement simply does not have at its disposal a highly evolved theoretical or practical framework for analyzing and potentially blocking these types of mergers in the way that they have blocked some horizontal mergers.
Additionally, we’re always on the watch for disruptive deals, especially by non-traditional healthcare players, and the Amazon-Berkshire Hathaway-JPMorgan joint venture wasn’t necessarily a surprise to us. We were obviously very interested when we read the announcement and thought that it had the potential to be very disruptive through combined resources, largely because of the amount of spend those companies control with their combined employee base alone. We are waiting to learn more details about what they’re planning to see how disruptive the partnership might be, beyond a consolidation of purchasing power from their collective employee base. Obviously, depending on where they point that leverage, it could have a big disruptive impact on the industry, but we haven’t yet heard clearly where they plan to aim it.
IMPACT OF U.S. REGULATORY AND POLITICAL CLIMATE
When asked about the impact of the regulations and politics on healthcare dealmaking, Scott described the significant risks that changing regulations can have on deals, and pointed to sectors like pharmacy where political focus has generated a burst of recent dealmaking:
The continued threat of changes to the ACA [Affordable Care Act] and other healthcare-related policies by the Trump administration is something we’re always keeping an eye on. For instance, the elimination of the individual mandate penalty and the expansion of non-ACA compliant health plans may increase the number of uninsured and under-insured individuals, leading to higher costs within health systems. There’s also a general concept in healthcare called the “stroke of pen risk” – meaning, investors and deal prospects are very sensitive to any regulatory changes as the government is the largest payer for healthcare services through Medicare and Medicaid, and any reimbursement changes can have major financial impacts on JVs you might be trying to set up.
Additionally, there continues to be a lot of talk in Washington, DC about pharmacy pricing and high drug costs. What will come out of that discussion is unpredictable – whether it’s through executive orders or legislation – but we are seeing a lot of movement in the pharmacy space, as companies are maneuvering, sometimes by consolidating with PBMs and specialty pharmacy, and trying to get access to cost levers and consumers earlier in the care life cycle. That’s why you’re seeing deals like CVS-Aetna, Cigna-Express Scripts, and Amazon-PillPack – they’re trying to solidify leadership in that space and reduce the cost of drugs to consumers.
IMPACT OF EMERGING TECHNOLOGIES
On the topic of emergent technologies like artificial intelligence and advanced analytics, Scott indicated that many healthcare companies are striking deals short of full M&A in order to move quickly and secure competitive advantages:
Technology is absolutely a key driver of many partnership discussions that I see in our sector. The healthcare industry in general and payers and providers, in particular, tend to be behind other industries in terms of how they’re using these types of technologies to advance their business models. Companies are looking at new technologies to automate some of their common and commodity-type business processes like claims administration, and there’s also an increasing focus on harnessing data through AI and advanced analytics to predict care outcomes and test the effectiveness of treatments. There’s an arms race of sorts in how companies – especially payers – are using JVs and broader alliances and investments to get access to advanced analytics and see which technologies are most effective in helping them advance in becoming more consumer-centric, controlling costs, and moving into value-based payment arrangements.
I do think you’ll see more joint ventures and direct investments as a means to get quick access to those technologies and try them out. While we’re seeing some M&A and JVs around more solidified technologies with strong bases, for the newest advances we usually see companies taking a more cautious approach, like an equity stake in order to get exposure. These companies are also aware that technology can become obsolete so quickly, so they’re careful in how they’re placing bets.
With U.S. healthcare poised for further innovation to advance value-based care, better manage costs, and enhance consumer experience, we agree that the joint ventures and other deals are likely to continue apace.