A PE fund recently wanted to pick my brains on their investment strategy. They found me through my book. It wasn’t just any investment strategy.
It was about finding their sweet spot in gastroenterology. How should they fit in? How should they stand out? Where’s everything going?
I suspect that by 2020, there will be a lot more investors making a beeline for gastroenterology investments. With more deal announcements (there have been 4 big ones), more investors and GI practices will start seeking out each other.
A ripple-effect is inevitable. Money is a powerful force.
Expect the market to heat up.
But M&A within gastroenterology is not occurring in isolation. Beyond common investor thesis (aging demographics, demand for GI, fragmentation of practices etc.), there are bigger market forces at play here.
To understand what’s happening at the CVS-Aetna level, I spoke to Sid Sahni, Chief Strategy and Corporate Development Officer, Prime Therapeutics. Sid, a friend of mine from Ross Michigan, was previously the VP of Enterprise Strategy of Aetna and VP of Market Strategy, CVS.
He helped me understand present market dynamics in very simple terms.
Healthcare is divided into two camps: Consumer vs System.
1) US healthcare continues to be plagued by big problems. We spend more and yet achieve lower outcomes.
2) There are two big aggregators in the country: CVS and UnitedHealth Group. Taking two different approaches to solve the same problem.
3) CVS is thinking, let’s cover all consumer touch points and influence patient behavior to solve the healthcare problem (Consumer).
4) UnitedHealth Group is thinking, let’s fix the system to solve the healthcare problem (System).
5) The rest of healthcare are variants under one of these two camps: Consumer vs System.
Read Sid’s insightful interview below. It’ll prime you for thoughtful decisions.
Interview with Sid Sahni, Prime Therapeutics
Chief Strategy and Corporate Development Officer, Prime Therapeutics, Minnesota
Former Vice President, Enterprise Strategy Aetna, Former Vice President, Market Strategy, CVS
1) What’s driving the present wave of changes in healthcare
If you think at a very high level, there continue to be problems that plague US healthcare. We spend more, yet our quality of life and outcomes are not comparable to countries that spend far less. The question to ask is why? There are three main reasons:
• There’s fundamental fragmentation in the industry. Different players owning different elements, with no alignment with each other. Even if a player wants to do something right, the incentives are misaligned.
• We work on the mindset of paying for activities versus outcomes. I performed a test or prescribed a drug, so I deserve to get paid. We do not pay for value created or results delivered. Not yet.
• US does subsidize innovation for the rest of the world. The fact is we do spend more here but the benefits are democratized over the rest of the world.
With this line of sight, see what two of the biggest aggregators in the country are doing: CVS Health and UnitedHealth Group. CVS has been taking the consumer route. They are thinking let’s cover all the touch points of patients to influence consumer behavior. Somewhere the benefits to the company will accrue if I focus on changing patient behavior.
United on the other hand is taking a system approach. They are thinking the system is out of whack, let’s fix that first. Let’s reduce costs of hospitals by moving care to clinics, outpatient centers. May be they are building a Kaiser of sorts – a closed system. Somewhere the benefits will accrue if I have the right system.
Most other players in healthcare are taking variants of one of these two approaches: consumer or system.
2) What about new entrants like Amazon?
Well, there are a third-set of players: Google, Amazon, Facebook and so on. They are saying, unlike traditional healthcare companies, we have the trust of the consumer. People are usually skeptical about the healthcare system. The tech companies are thinking you need a fresh approach that’s unconstrained by today’s problems. Insiders can’t fix this. That’s the genesis of the Amazon-Berkshire-Chase approach. It’s also that they see a lot of return on investment if done right. Power to them but I don’t yet see a coherent strategy.
3) When you take a 5-10 year horizon, how do you see the healthcare landscape change because of these changes?
I do think that alignment of incentives, vertical integration, a more closed-loop system will bring healthcare costs down. If you get people to change behavior and be more rational purchasers of healthcare (which is notoriously difficult), it can drive enormous change.
It’s not unthinkable that CVS merged with Aetna. It’s a strategy they’ve been considering for years. So Amazon might not have influenced things beyond a point. Insiders are to leave no entry point for the likes of Amazon.
For example, by partnering with FedEx, Walgreens is experimenting with same or next day delivery of prescriptions nationwide. CVS is piloting a program for delivery of medications to home for an annual $4.99 membership in the Boston area.
The likes of Amazon may bring fresh ideas that might benefit everybody. But they will likely need to work with industry players to implement any idea.
4) Where do you think consolidation amongst private practices lead to?
My contention is that regional consolidation is more beneficial to patient care than national consolidation. If a group in Texas merges with another in Washington, what good will come for a local patient?
When you remove the problems of fragmentation that exist in specialties like gastroenterology, you can unlock greater value. In the future, we may see consolidation of large gastroenterology groups with other specialties. Insurance companies keeping pushing risk down to the providers. One doctor may not be able to take a risk on a certain patient. But when put together with a group (primary care, oncology, pharmacy, social workers), the group may be able to assume greater risk and be accountable for the health of regional populations. It is one of the key ways we will make a transition from paying for services to rewarding for outcomes.
5) What do you think about PE-led consolidation that’s underway amongst private practices?
Essentially, their play seems to be that of bringing efficiency in operations. Even for a minute, I don’t doubt that there’s money to be saved and made. However, this approach reaches its limit reasonably quickly. At some point, you’ll finish consolidating billing, accounting, technology and so on. Then what? You are ultimately always looking out for exit multiples. You aren’t solving fundamental problems with a long-term view. You’ll get some runway but that’s not enough for healthcare. The PE-view is completely different from the approach that someone like Amazon-Berkshire-Chase is taking. Perhaps, you need both approaches to solve our problems in healthcare: remove inefficiencies and innovate.
6) What should practices that are consolidating watch out for?
Just because you bring two entities together financially, it’s a stretch to assume there’ll be a match. Don’t underestimate the role of culture. Culture can take a bite out of the success you want.
By Praveen Suthrum, President & Co-Founder, NextServices.