U.S. healthcare system is poised to begin a new phase in partnerships

Healthcare provider organizations should prepare for an emerging new phase in the evolution of healthcare partnerships, characterized by an increasingly diverse array of choices among care sites and settings for consumers, health plans and employers.

Prior to the COVID-19 pandemic, the U.S. healthcare system had experienced two phases of partnerships:

1. Phase one, which peaked in the 1980s and 1990s, saw many independent hospitals combine into health systems in an effort to contain rapidly rising healthcare costs and to respond to the new demands of managed care.
2. Phase two, which peaked in the 2010s (following passage of the Affordable Care Act), saw health systems combine to attain or accelerate access to the key resources they would need to manage population health, more tightly integrate healthcare services and assume risk.

Even before the pandemic struck, new forces were laying the groundwork for a third phase of healthcare partnerships. Factors such as the ongoing movement of care from inpatient to outpatient settings, technological change and the push toward consumerism in healthcare created opportunities for legacy healthcare providers as well as new providers to focus on specialized market segments without bearing the high costs of delivering acute inpatient services. The specialized segments include, for example, primary care, behavioral health, ambulatory surgery, telehealth, home health  chronic care management.

New avenues for optimized care

As the industry responded to the Affordable Care Act’s encouragement of integration of services across the care continuum, new industry participants began to bring focus and optimization in singular service lines. As a result, avenues have now opened up to optimize various service providers in a single coordinated model.

This trend has driven the increase in participants and alternative care sites and settings alluded to previously, giving consumers, health plans and employers an ever-growing assortment of choices for where they can receive (or pay for) care, and giving providers — both legacy and new — the ability to differentiate themselves by being better, more affordable or faster in the delivery of the services they choose to provide.

Accordingly, health systems will increasingly be asking the rhetorical question “What is our core business?” as they develop and execute strategic plans and initiatives.

The COVID-19 pandemic has further altered the healthcare landscape. Although prior to the pandemic, hospitals and health systems had experienced financial disruptions — as recently as the Great Recession of 2008-09 —  never in recent history have they experienced disruption of their core operations to the extent they have over the past two years. Disruptions in the supply chain and labor market have further pressured operating margins and may continue to do so over the long term. Societal impacts of the pandemic are producing heightened demand for high-touch specialty services in areas such as behavioral health and home health.

3 lessons from the pandemic

As healthcare organizations seek to stabilize their operations and move toward a new post-pandemic normal, their strategy will be influenced by three lessons of the pandemic.

1 Realize the imperatives of scale. Larger systems were better positioned to deploy resources, segregate facilities for infected and non-infected patients and weather the operational and financial impacts of the pandemic that hit different facilities and markets at different times.

2 Focus on core markets and services. Operational disruptions and financial pressures made noncore assets or assets in noncore markets less attractive, prompting divestiture or monetization of these assets.

3 Seek partnerships that add new capabilities or meet consumer demand for new or enhanced services. As discussed in Kaufman Hall’s Q3 2021 M&A Activity Report, health systems are seeking partnerships that can offer consumers access to new services or enhance the delivery of services that require specialized skillsets. These partnerships can enable health systems to focus on their core business and enhance or expand service offerings.

In many markets, hospitals and health systems are positioned to play a central role in navigating and managing a portfolio of offerings tailored to the needs and demands of their markets. They have an established brand, broad physician relationships, care coordination infrastructures (including electronic health records) and the ability to care for comorbidities that more specialized partners are not equipped to handle. We anticipate a greater willingness to engage with specialty providers to complement the traditional inpatient/outpatient services that have been the core offering of hospitals and health systems. 

This article is an excerpt from Kaufman Hall’s 2021 M&A in Review report, published earlier this month. A full copy of the report can be accessed here.

Key considerations for new partnership models

As hospitals and health systems consider new partnership models, they will need to consider the following key questions:

• What is our core business?
• For what services is there strong consumer need or demand?
• Are there potential partners that can provide these services better than we can?
• What do we offer to potential partners?
• What degree of control do we need or want in the partnership?
• What is the optimal structure for the partnership (e.g., ownership, branding, financial commitment, governance, clinical decision-making)?