Healthcare Mergers and Acquisition Guide

Opportunities M&A Brings for Healthcare Payers

Mergers and acquisitions present an array of opportunities for healthcare payers, offering the potential to strengthen their position in a highly competitive industry. Here are some of the key benefits M&A can deliver:

Expanded Member Base and Market Share

M&A enables payers to combine resources and reach a broader audience. By integrating networks and services, organizations can access new markets, attract more members, and bolster their negotiating power with providers and suppliers. However, smaller payers should be cautious—selling to companies with reputations for prioritizing profits, like UnitedHealthcare, can alienate members and tarnish the payer’s reputation. Instead of high-priced marketing efforts with no guarantee of membership growth, it makes perfect sense to consider purchasing a competitor within the same territory and gaining market share. 

Access to Innovative Technologies and Expertise

The healthcare industry is rapidly evolving, with technology crucial in improving patient outcomes and operational efficiency. Merging with or acquiring a company specializing in advanced analytics, AI-powered claims processing, or telehealth services can help payers stay ahead of the curve. On the other hand, selling to corporations focused on consolidation rather than innovation risks stifling growth and creativity.

Improved Operational Efficiency

Economies of scale are a hallmark of successful M&A deals. Consolidating administrative functions, streamlining workflows, and leveraging shared resources can significantly reduce costs while enhancing service delivery. To maintain operational efficiency, healthcare payers should prioritize partners who respect their processes and value member experience over cost-cutting measures.

Diversification of Offerings

Through M&A, payers can expand their service portfolios, integrating complementary offerings such as specialized care management or wellness programs. This diversification meets members' growing needs and creates new revenue streams. However, selling to conglomerates like McKesson often leads to cookie-cutter approaches that stifle innovation and fail to address specific community needs.

Enhanced Competitive Positioning

M&A allows payers to combine strengths, address gaps in their offerings, and solidify their standing as leaders in the healthcare ecosystem. Strategic partnerships with like-minded organizations can boost competitiveness without compromising the payer’s mission or ideals.

While the opportunities are compelling, realizing these benefits requires careful planning and execution. As we’ll explore in the next section, the challenges associated with M&A are equally significant and must be addressed to ensure success—especially when navigating the risks of major conglomerates.

Challenges Healthcare Payers Face During M&A

While the benefits of M&A are undeniable, the challenges can be equally significant and, if left unaddressed, may undermine the transaction's success. Healthcare payers must anticipate and plan for these obstacles:

Cultural Clashes

Combining two organizations with different work cultures, values, and operational norms can create friction. A misalignment of priorities can lead to employee dissatisfaction, reduced productivity, and even the departure of key personnel. For example, when smaller, community-focused payers sell to profit-driven corporations, the cultural disconnect can alienate employees and members. 

Real Life Case Study Example:  One of the mergers and acquisitions I went through had a company with a 100% onsite workplace environment, and the other had a hybrid role. The purchasing company had their claims and provider relations work 95% from home, their clinical management team had a 50% onsite requirement, and executives were allowed a 50% onsite requirement. As part of my consulting, I looked at one word: retention. Retention of employees, retention of providers, and retention of members. By doing this, we were able to ascertain that the hybrid model had higher retention of employees but less retention of providers and members. The lack of oversight for clinical questions and day-to-day operations on authorizations and claims left us to believe there should be at least a 75% to 90% onsite requirement. While it was vital to retain employees, there would be a decline in available positions and market share without providers or members.

Real Life Case Study Example: Besides the workplace environment, you must consider the cost of housing people in commercial buildings. Real estate costs are expensive, so if you bring people back to work, expect a profit loss until productivity grows. During my last M&A consultation, my client stated their headquarters' monthly lease was $14,000. Operational efficiency and security evaluations showed that they could relocate the headquarters to a building that costs $7,000 a month. Moving fees and security upgrades would cost $170,000 in total. The three-year initial real-estate savings would be $252,000, bringing the three-year cost reduction to $82,000. That $82,000 could then be reinvested into new growth projects. This planning helped them and the buyer understand how to save money, reinvest savings, and approach the staff on the changes.

Integration Complexities

Merging technology systems claims processing workflows, and administrative functions is no small feat. Without proper planning, these transitions can lead to inefficiencies, errors, and disruptions in member service. To avoid these pitfalls, payers must invest in robust integration strategies.

Real Life Case Study:   When a past client sold their payer organization to our competitor, they were forced to cancel Virtual Examiner® and adopt a new auditing software. The software no longer performed three-year episodes of care auditing. After meeting the COO at a conference a year later, she stated that her Medical Management and Authorizations department saw an increase in new denials for claims that appeared medically necessary and a lack of transparency on why claims were being paid and/or denied. This led to many complaints about new provider relations, and all her department employees who hadn’t been let go were inundated with even more work.

Regulatory and Compliance Hurdles

M&A in healthcare is subject to intense regulatory scrutiny. Payers must navigate antitrust laws, state-specific regulations, and compliance standards while ensuring the merger does not reduce competition or negatively impact members.

Case Study: Back in 2021, a PCG payer client was bought by our competitor. He stated that not only did he lose his job in less than 12 months after being acquired and replaced with remote personnel after years of service, but the new auditing system was not suggesting up-to-date Medicaid edits. Houston... we have a problem, many problems, prepare the orange suits we're headed to Leavenworth!

Employee Concerns

M&A processes often lead to employee uncertainty about job security, role changes, and the organization's direction. Without clear and frequent communication, this uncertainty can lower morale, reduce productivity, and increase turnover.

Successfully addressing these challenges requires strategic foresight, open communication, and a commitment to preserving the organization's core identity.

Safeguarding Your Personnel, Ideals, and Mission

M&A doesn’t have to mean sacrificing what makes your organization unique. With the right approach, you can preserve your personnel, ideals, and mission while still reaping the benefits of a merger or acquisition:

Prioritize Transparent Communication

Keep your employees, stakeholders, and members informed throughout the M&A process. Address concerns early and often, providing clear updates on what changes to expect and how these changes align with the company’s values.

Case Study:   During the buyout of a pharmacy I helped build over 4 years, we held internal company meetings every week for 30 minutes. Just updates about anything we could disclose for the first 15 minutes, then an additional 15 minutes to discuss wins we had in our territories. The balance between updating on the significant changes and keeping local wins relevant resulted in only 2% of employees resigning within the first 90 days of the sale. 

Reaffirm Your Mission and Values

During M&A discussions, clearly articulate your organization’s mission and values. Make it a condition of the deal that these principles remain central to the merged entity’s operations.

Real Life Case Study:   In 2020, I served as CEO of five entities: a marketing, remote clinical staffing, a billing company, a home infusion company, and a PEO. We were eyeing the purchase of a billing company with 85 clients that only did billing for three specialties in which we didn’t have any market share in. Upon inspection of their Mission, they were branded as a company that only did these three specialties, and their selling could result in losing loyal clients who found this "mission" and "branding" essential.

Our LOI (letter of intent) stated that we could target any specialties and clinics until a purchase was made. However, we were never given their client list until the third phase of the LOI, so during phases 1 and 2, we looked up possible clients who may be using their services based on any and all public information on the internet.

When I, the CEO of a billing company rival, called these potential clients, I did so on behalf of our billing company. I asked each major decision maker if having a billing company that only did their specialty led them to retain services, and over 95% said no. They wanted approvals and collections. 

While this didn’t kill the deal, it was apparent that the company lacked self-awareness. They didn’t even know that their true talent was billing, not specialized billing, and they didn’t know their clients, as they stated. We canceled the LOI because we were not in the business of just buying market share; we wanted the people, the idea, and a significant PR announcement. 

Retain and Empower Key Talent

Recognize the importance of your employees in maintaining continuity and driving success post-merger. Offer incentives such as retention bonuses or leadership development programs to secure their buy-in and loyalty.

Real Life Case Study:   A recent M&A discussion with a payer client led to a dealbreaker; the buyer would not ensure their authorizations and claims team members at least six months of uninterrupted employment and retention of current salaries. We all know how hard it is to retain great auth and claims people, and they had an astonishing 85% or higher retention over three years. The team members were not just loyal; they were pivotal to the company's growth. I advised them to sell to a company with similar employee retention rates who would also understand the importance of empowering key talent. 

Establish a Strong Integration Plan

Develop a detailed integration roadmap that addresses technology, workflows, and employee roles. Assign a dedicated integration management team to oversee the process and ensure it runs smoothly.

Real Life Case Study:   When we sold a nationwide pharmacy to a bigger juggernaut. I already saw the writing on the wall. The buyer had seen 14 months of consecutive decline for their immunology, HCV, and home infusion sectors. Their oncology was the only thing keeping them alive. They bolstered gains by acquisitions, not organic growth. The integration plan called for a reduction of overlapping territories and yep, you guessed it, 20% of our team was to be replaced by the buyer’s team, who, in many cases, didn’t live in the service area or even the same state…

I bring this to your attention because there is a vast difference between integration and overhead reduction. Integration is meant to combine best business practices and move the company forward. When integrations are led solely by financial teams, the result is usually a significant loss for at least the first 12 months. 

Non-Clients Considering Selling or Buying

PCG Software offers the world’s most comprehensive and easy-to-use claims auditing software for risk-carrying payer organizations. Whether you’re considering buying a new plan or selling your existing one, we encourage you to meet with our CSO to explore how launching Virtual Examiner® (VE) can save millions in overpayments, boost compliance, and increase your EBITDA within 12 months. VE is designed to streamline your claims auditing process and ensure financial and operational stability during M&A transitions.

Clients Considering Selling or Buying 

As a valued client, if you are purchasing a new plan, we can help ensure your new lines of business are seamlessly integrated into Virtual Examiner®. If you’re selling your plan, let’s discuss compliance requirements and how to protect our confidentiality clauses to ensure competitors never see or analyze VE. We are here to support you in making your next move both secure and prosperous.

Closing Statement

Thank you for taking the time to read this guide. We hope you found it insightful and helpful as you navigate the complexities of healthcare mergers and acquisitions. Should you have any questions or wish to explore how PCG Software can support your organization’s growth, feel free to contact us directly.