Becker's ASC Review

34 Transactions & Joint Ventures market became more active again after the legisla- tion passed. "The ACA passing helped accelerate some of the consolidation and helped fuel equity capital investment, both private equity and strong valuations, in the public market," says Managing Director at Edgemont Capital Partners Jeff Swear- ingen. "In addition, the credit markets have been open and supportive." 2. New payment models could push independent groups to align or partner with larger providers. "I think the ACA is on independent groups' minds as it relates to bundled payments, quality measure- ments, IT management infrastructure and all of the investment necessary to effectively lead an or- ganization and not get beaten up by changes going forward," says Mr. Swearingen. "From the indepen- dent hospital-based group perspective, there are challenges ahead in terms of how things are paid for and expertise that will be required. Being part of a large organization may be the solution." 3. There will be increased risk sharing, which makes larger organizations even more attractive. The large organizations can capitalize on their size to provide stability in an environment where risk is increasing. "Having seen risk sharing in groups out there, if you make a slight mistake per mem- ber per month in capitation, that can wipe out your entire profit for a year," says Mr. Swearingen. "If you aren't capitalized to sustain those fluctua- tions, you're out there on the risk spectrum. You don't see a lot of small independent insurance companies because a slight miscalculation really puts a small organization at risk." 4. For many organizations, the physician practices are acquired to serve the hospital, but practice operations don't change very much. "It's all about third party payer contracting, revenue cycle, ben- efits of scale, benefits from provider recruiting and scheduling," says Mr. Swearingen. "Those are main drivers of the attraction consolidators see versus making any clinical operational changes." 5. Office-based specialty consolidation, including primary care, is far earlier in a consolidation cycle. "It's more directly driven by the changes man- dated on the ACA with hospitals seeking to es- tablish accountable care organizations and in- crease the market share in their community, and ensure a referral base," says Mr. Swearingen. "I think we are relatively early in that cycle. We are starting to see more than just the hospital-based specialty consolida- tion in terms of the more competitive dynamic within the payer and hospital market." 6. Consolidation among corporate entities in healthcare is also becoming more common. Am- Surg acquired Sheridan and Surgery Partners acquired Symbion this year. There are payers ac- quiring physicians and other partners. "You have a broader potential universe with which to partner going forward," says Mr. Swearingen. "Figure out which of the organizations are most interested in your practice — a payer, a hospital, a non-acute site provider or another physician group could all make logical partners in the market. The lo- cal competitive environment around the hospitals and their capitalization is often a large part of your potential success." 7. A market with multiple large health systems or aggressive ACOs is extremely competitive. In some markets, providers are offering their own in- surance product. "In some markets there is an ag- gressive move toward acquiring physician groups whereas in other markets hospitals are more frag- mented and you are more likely to see consolida- tion among the hospitals first before they turn to the physician groups," says Mr. Swearingen. 8. Managed care providers may also look to ac- quire physician groups. Insurers acquiring pro- viders is very geography-specific. "A lot of the largest managed care providers are performing tests in their markets to see how it plays out," says Mr. Swearingen. "If it works in one market, they will have a dialogue with potential clients in oth- ers. We expect activity at the managed care level to increase over the coming months well into 2015 for a large spectrum of providers, from urgent care clinics to office-based specialties. 9. There will still be consolidation in the imme- diate future. "I've seen cycles before where we go through consolidation and then three or four years later the deals are unwinding," says Mr. Swearingen. The same could happen again this time around. 10. The big difference with employing physicians and large group consolidation today as compared to the past is data management and availability. The large organizations can track physician per- formance and implement numbers-driven goals. "I think all the constituents in healthcare are better armed with data and IT capabilities than they were previously," says Mr. Swearingen. "That evens the playing field a bit so you won't see one particular constituent being bull-dozed by an- other." n 10 Observations on Healthcare Merger & Acquisition Activity for the Future (continued from cover) Jeff Swearingen ▪ ▪ ▪ gregz@kbic.com andreav@kbic.com • • • "The ACA passing helped accelerate some of the consolidation and helped fuel equity capital invest- ment, both private equity and strong valuations, in the public market." — Jeff Swearingen, Managing Director at Edgemont Capital Partners.

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