In recent years the healthcare industry has experienced significant changes, which have been further accelerated by the COVID-19 pandemic. Shifts in healthcare delivery, regulation, and expectations of providers will likely create both opportunities and imperatives for incumbents and new entrants to create new approaches to delivering and financing care.
In this context, many of the largest players are turning to M&A to build new businesses and access new capabilities. In an environment of high competition for innovative assets and the growing involvement of institutional investors, however, many organizations may find M&A increasingly out of reach to pursue on their own. Partnerships—including joint ventures (JVs) and alliances with other healthcare organizations and new entrants—may offer a promising avenue to access new capabilities, increase speed to market, and achieve capital, scale, and operational efficiencies.
Though partnerships differ in many ways from traditional M&A, they typically require at least as much attention to drive value for all partners. To succeed, organizations must steer clear of five common partnership mistakes: jumping into deal terms without clarity on the vision and strategic plan, defining the operational and governance plan before clarifying the business plan, failing to prioritize potential deal breakers effectively, failing to build long-term agility into the partnership structure, and lacking either leadership commitment or consistent accountability.
Incumbents looking to retain their market position will need to be proactive
Recent years have seen wide-ranging shifts in the healthcare landscape, including a growing disease burden, evolving health needs, rising consumer expectations, and an increasing emphasis on affordable and high-quality care, alongside an increased appetite for value-based models. These shifts have reconfigured the healthcare landscape toward a more interconnected market.
New technologies offer a potential route to address inefficiencies and convenience
Some healthcare services and technology subsegments—including clinical services, health data analytics, and healthcare platforms and technology, to name just a few—have the potential to enable care to be delivered in fundamentally new ways. We expect these subsegments to experience significant growth, in some cases more than 10 percent a year (exhibit). Both for-profit and nonprofit entities can deliver benefits to their stakeholders by deploying these capabilities to improve outcomes for patients; deliver affordable, high-quality, and convenient care; and create more sustainable business models.
The healthcare industry has responded with a proliferation of innovative and often technology-enabled models of delivering, accessing, and experiencing care. To deliver their full potential, these models require new business approaches and new capabilities. As a result, the industry’s recovery from the pandemic is expected to be strong but uneven. We expect to see disproportionate gains in certain subsegments, including government-sponsored insurance markets, virtual care, and data analytics. These gains may address current inefficiencies and accelerate shifts that could enable more convenient delivery of care at a lower total cost (see sidebar, “New technologies offer a potential route to address inefficiencies and convenience”).
Incumbents may have an advantage within this shifting landscape. They can build on their existing relationships (including with consumers, healthcare stakeholders, and community organizations), brand equity, and expertise to deliver new models of care. However, these advantages may erode without meaningful action in the face of trends emerging in the wake of the pandemic.1 While initial evidence suggests payers that are investing in innovative managed-care models are seeing positive results,2 those that maintain the status quo could be left behind.
Given this external landscape, many organizations are considering opportunities to reimagine their own business models and access new capabilities. Yet those same organizations have found it challenging to build new business on their own.3 One factor has been the high cost of driving innovation and unlocking access to required capabilities. While some organizations have the capital and expertise required to build new capabilities, many others are turning to M&A to accelerate their strategies. Between 2010 and 2019, the ten largest public payers and providers in the Global 20004 collectively made more than 360 acquisitions, a significant portion of which were deals that involved adjacent segments.5
The cost of these acquisitions, especially in attractive subsegments with innovative capabilities, can be high. For example, transaction multiples (enterprise value by EBITDA) for healthcare data and analytics assets have traded at 1.5 to 3.0 times the multiples of health system and hospital deals that disclosed financial detail over the past two years.6 As financial and strategic buyers continue to invest,7 M&A may be out of reach for many organizations to pursue on their own.
As a result, organizations may need to consider different approaches to access the capabilities and expertise that they need to succeed. Partnerships, including JVs and alliances, may provide a more financially accessible alternative.
Potential options to unlock value
Before assessing the optimal approach for accessing new capabilities, healthcare organizations can first determine how to respond to the changing healthcare landscape and set enterprise and business unit strategies accordingly. Once these strategies are defined, organizations could then consider whether—and how—M&A and partnerships can help unlock additional value and deliver higher-quality, lower-cost care.8
When it comes to M&A and partnerships, organizations have multiple options to consider (Exhibit 1). The right option—or combination of options—will depend on the organization’s aims, capability gaps, desired timeline, and financial position.
To illustrate the differences among these options and highlight the factors involved in making a choice, consider a payer that wants to respond to recent shifts in how care is accessed9 by making virtual-first engagement a core pillar of its strategy. The payer might consider three paths to access and deploy the innovative capabilities required to enable its strategy:
- Build and scale virtual-first insurance products and associated capabilities.
- Develop a digital platform for consumer engagement that guides members across their healthcare journey in new and innovative ways.
- Assemble a portfolio of leading point solutions, such as consumer self-service and self-care tools, that drive significant value when integrated with existing solutions.
This payer may pursue any of these paths through M&A or partnerships. Once the best path has been selected, the payer can identify the key capabilities required for success, assess the organization’s existing gaps, and determine the best partnership approach to fill each gap.
M&A
Acquisition typically provides the highest degree of control because the integration can be guided by a single corporate entity, vision, and strategy. In this example, the payer may aim to acquire an attractive asset that provides a comprehensive solution or “cornerstone” around which to build a new digital consumer engagement platform. However, potential synergies may not justify paying for control in environments when asset valuations are elevated, and smaller players may not have sufficient scale to justify committing capital to integrate and sustain these assets.
If an internal build, merger, or acquisition is not an option for achieving strategic ambitions, partnerships—including JVs and alliances—may provide a path forward. These approaches may be a practical way to deliver value to stakeholders by pooling capital across more lives.
Joint ventures
JVs allow partners with shared interests to collaborate on a specific opportunity by creating a new entity with a clear mandate to innovate new offerings and improve existing services. There are multiple approaches to consider when creating a JV:
- Contribute existing resources and assets. Partners with existing complementary capabilities may create a new company that combines existing assets and resources under separate, focused management. Doing so could unlock value by eliminating redundancies, unlocking access to both scale and best-in-breed capabilities, and enabling capital efficiency for future investment. In our example, the payer may determine that the digital engagement platform is best built by combining the payer’s own capabilities and expertise (such as medical management and core payer administration) with digital expertise (such as user experience, design, and advanced analytics) from a leading technology company. A new entity with the mandate and resources to build this platform can support the strategies of all partners, enabling each to generate more value than it could by acting alone.
- Create a ‘consortium.’ Partners may consider a “consortium play” in which each partner has a strategic interest requiring new capabilities but lacks the resources to build a competitive offering—especially when there is disproportionate value from adding scale (such as a clinical-data platform to enable cross-industry research). Joint investment can enable partners to both access more capital and deploy it at scale. In our example, the payer may collaborate with other payers to acquire a proven high-engagement wellness platform as the foundation for the digital-engagement platform. Joint ownership can aggregate scale beyond what any few parties may be able to achieve, unlocking both investment efficiencies and greater platform benefits (such as access to bigger and more innovative point solution providers). The partners may then make further acquisitions or contribute specialized assets to further enhance the JV.
In either approach, governance is key. The external environment and competitive pressures will evolve, sometimes significantly, over time. Establishing clear guardrails while maintaining strategic flexibility can enable the JV to adapt as required. Decision rights, dispute resolution mechanisms, and exit options are important considerations for both a successful launch and ongoing success. Balancing the number of participants with speed to market and effective ongoing governance is also important.
Alliances
Alliances can give partners the flexibility to adapt to potential market and strategic changes and are generally easier to put into place than JVs. This approach may be appropriate when the party acquiring the capability does not consider itself the “natural owner” of that capability but realizes the potential value in offering leading solutions to its members.
However, alliances rely on partners to act collaboratively without the management team focus that a JV provides. To mitigate this lack of management focus, some alliances leverage cross-equity holdings to help align incentives. Without this or another mechanism, the lack of formalized or structural linkages between partners can make it easy for one partner to walk away or for the overall effort to simply lose momentum. Alliances are most likely to succeed when both parties clearly understand the case for joint investment.
In our example, the payer may consider a strategic alliance with an innovative point solution start-up to quickly access new capabilities. In return for gaining a core customer base and immediate scale, the start-up may agree to customize its core offering for the payer. Each party has a clear rationale for maintaining the alliance, increasing the likelihood of longer-term success.
Five mistakes to avoid
JVs and alliances are less capital intensive than M&A at the outset, but there are other costs. First, each of the partnership approaches laid out above requires significant investment in up-front planning and execution. To create meaningful value, potential issues can be tackled during the partnership formation phase, rather than deferred for postlaunch resolution. Second, JVs and alliances require an ongoing coordination cost to ensure that independent partners remain aligned on strategic and operational objectives. Potential mismatches between partners’ strategic aims may derail negotiations and long-term value capture, especially if these mismatches lead to indecision that threatens implementation.
This need for both extensive up-front planning and continued investment in partner alignment is one of the principal areas in which the partnership playbook differs from that of M&A. Organizations can follow a specific sequence of steps when developing successful JVs and alliances (Exhibit 2).
Organizations looking to build strong value-creating partnerships may want to anticipate five possible partnership pitfalls—and make plans to avoid them.
1. Jumping into deal terms without clarity on the vision and strategic plan
The first step in considering a partnership via JV or alliance is to define a future-state vision and detail the strategic plan (including the combined value proposition, core value drivers, and what is in and out of scope) that supports it. While the importance of starting with the strategic plan may seem obvious, even seasoned executives have made the mistake of deferring too many decisions in the interest of “not complicating” the dealmaking process. Too often, partners in the early stages of dealmaking skip to deal terms and partnership structure without clear alignment on the strategic plan and vision.10 The result is often a broken deal or a partnership that fails to deliver on the goals of either party.
Aligning on a vision for the partnership requires that partners have a common view on how the industry is likely to evolve, how this partnership will offer a distinctive and lasting solution, and how they will balance potential tension between individual enterprise strategies and the vision for the partnership. Both parties must also clearly understand why they chose this partner and this partnership, in terms of both strategic fit and long-term value creation.
Consider, for example, a potential partnership between two regional health systems to combine and scale their core general and administrative (G&A) functions. One health system may consider this G&A partnership a scalable asset that could serve both partners and other systems nationwide, while the other health system may have limited aspirations beyond optimizing its own G&A cost. If this strategic mismatch is not resolved up front, the partnership could be more likely to break up during later, more detailed negotiations or after the partnership is established.
Once the vision and the scope of the solution space are defined—including products, geographies, and commercialization plans—partners should establish a business case that quantifies the core value drivers of the partnership. They should align on the potential all-in opportunity, distinguishing between the value derived from the combination and the additional value available through more transformative moves, such as new-product development. A rigorous assessment of each value driver is useful, but only if leaders do not become bogged down in overly precise value-capture assessments. In the above example, partners might look to develop a high-level G&A mapping to identify combinational synergies, but may not yet require a full line-level G&A teardown.
2. Defining the operational and governance plan before clarifying the business plan
After partners establish the vision and strategic plan for the partnership, the next step is often to define a business plan for how the partnership will capture the identified value, including high-level governance and operational considerations. Organizations often struggle with the appropriate level of depth for this business plan. It needs to be sufficiently granular to enable alignment on key issues, but not so detailed that it becomes an execution or implementation plan.
The business plan can also address the most important aspects of governance required to deliver on the value thesis for the partnership, including board structure, critical decision rights, decision-making processes, operations, organizational structure, and key IT platforms and systems. However, straying into detailed process mapping and integration planning is not necessarily useful and could slow progress in reaching a deal. Leaving all options on the table can be beneficial at this stage, which means focusing the plan on the major actions required to unlock the full value potential, even if some may be considered deal breakers.
Consider, for example, two payers considering entry into government-sponsored segments with a new joint entity. At the outset, it is useful for the organizations to align on who will control the entity (governance and ownership) as well as on an overall business plan and operating model. Both sides can benefit from understanding how each organization’s capabilities and technologies will contribute to the key value drivers. However, many organizations attempt to begin planning actual integration—for example, through granular identification of how core data and systems should work together. By doing this, leaders may jeopardize potential partnerships by reducing the overall momentum and committing more resources than necessary at this juncture.
3. Failing to prioritize potential deal breakers effectively
Executives from both organizations can benefit from understanding what they consider to be definitive deal breakers when they go into any partnership discussion, but deal breakers need not be the first topic on the agenda. Early engagement should focus on scope, value drivers, and what the organizations aim to build together. Deal breakers can then be considered after partners align on the full value creation potential.
True deal breakers are generally few in number and justified by their impact on value creation for the partnership and the partners. Executives can benefit from aligning with their teams on a handful of “nonnegotiables” that may prevent the parent organization from meeting its strategic goals or delivering on its core mission. Consider, for example, a potential partnership between two regional health systems that have different views on the employee impacts they are willing to consider. One system may be open to an approach that consolidates functions centrally, whereas the other may be unwilling to consider any action that transfers any positions out of their existing service areas. Brand is another common nonnegotiable.
Once deal breakers are identified, parties can look to jointly align on the strategic and financial impact of taking each one off the table. It can be useful to start with the initial business plan, which includes 100 percent of the potential opportunity, and quantify how much value may be eroded by addressing each deal breaker. Some issues that were articulated as deal breakers at the outset may prove to be major value drivers. Parties can then engage in healthy debate, each determining whether a given issue is worth the potential loss in value or walking away from the partnership altogether.
4. Failing to build long-term agility into the partnership structure
The healthcare landscape is constantly changing, and, as the COVID-19 pandemic has made clear, strategic imperatives may change abruptly. These changes can create shifts—and therefore divergences—in partners’ priorities. Strong partnerships are often those that have built-in agility to adapt and investment and operational rules that anticipate change. Clear exit procedures can also be beneficial in case unwinding is required.
During negotiations, parties can benefit from considering both how the partnership will evolve and how it will be poised to address the potentially divergent perspectives and goals of each partner. Clear decision rights are one component, but flexibility in the partnership structure is an important consideration as well. Parties can clearly align on the process to change the partnership structure as needed (such as by bringing in new participants or rebalancing ownership stakes) and expectations around the ongoing performance and contributions of involved parties. In some examples, dedicated partnership management teams11 and associated processes may be stood up to maintain focus on key performance metrics through “health checks.”12 These can help teams spot potential areas of concern and escalate changes to executives before issues arise.
Consider, for example, a partnership in which multiple hospital systems come together to jointly purchase medical supplies, using their combined scale to secure better rates with manufacturers. Successful negotiators might look to set minimum commitments and performance expectations (such as minimum volume of purchase and exclusive sourcing through partnership) from each party, helping to ensure the partnership supports all parties’ strategic aims. But negotiators can also benefit from laying out clear procedures to unwind arrangements if these cannot be met.
Investing the time up front to identify how a partnership can be agile—to add partners, to add capital, or even to unwind—can reduce risk to all organizations in the long term.
5. Lacking either leadership commitment or consistent accountability
Evaluating, structuring, and operationalizing a JV or an alliance requires significant effort. Success is more likely when the partnership is a top priority for every party.
As partnership negotiations begin, each party can designate an executive leader (likely a business unit owner or C-suite executive) as the “deal owner,” empowering that person to act as the single point of accountability across the entire deal cycle. Deal owners are more likely to be effective if they have the authority to make critical decisions quickly and are supported by a core set of deputies—in charge of, for example, business development and legal issues—who help drive forward the partnership assessment.
Deal owners cannot fully delegate important tasks, however, because the deal must remain among their top priorities. Deal owners are more likely to be successful if they maintain a consistent focus on the partnership, commit a consistent amount of time to it, and work closely with their counterparts rather than keeping them at arm’s length. This commitment, particularly early in the process, helps each party develop trust-based relationships, maintain a relentless focus on the partnership’s key value drivers, and ensure partnership momentum.
Looking ahead
Healthcare leaders have a wealth of opportunities as they adapt their strategic aims to succeed in the new normal. Partnerships, including JVs and alliances with other healthcare organizations and with new entrants, are just one way to access new capabilities, unlock speed to market, and achieve capital, scale, and operational efficiencies. In an environment with continued competition for attractive assets and significant capital in play from institutional investors, these partnerships may also be the most accessible way for organizations to capture value in expanding healthcare services and technology value pools.
Though these structures are not mergers or acquisitions, they require at least as much attention as M&A to drive value for all partners. By understanding where to focus efforts early on—and where not to—leaders can help build meaningful partnerships that deploy best-in-class capabilities and that create innovative products and services for patients.
