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The move from fee-for-service to the value-based care is obviously a dramatic shift in the cost model that has changed the role of the healthcare financial executive. It’s the No. 1 regulatory issue having the most effect on healthcare M&A, according to a recent survey of 100 dealmakers. For providers, that means they need data to prove value. However, most healthcare companies aren’t positioned with the technology to support value-based care and in the broader technology market, no one has really cracked the nut to figure this out – there is no simple or singular solution.
Because of this, financial executives are more focused on technology than ever. The survey also noted the greatest challenge for healthcare companies is the fast pace of technological change—ahead of regulatory compliance and uncertainty. Historically, the healthcare industry has focused investments on medical technology but now organizations need to take on significant investments in business technology with the anticipation of cost savings and value. Financial executives are expected to lead the charge on this tech implementation, because the stakes for ROI are pretty high. While IT is responsible for the technical components, the onus usually falls on the CFO to make sure it delivers for the business.
Everyone is aware of the frothiness of the healthcare M&A market. So, healthcare executives need to understand which traditional and non-traditional targets are appealing for acquisition—as well as whether they have become a target. This is especially true if they are a public company. The M&A process falls on the financial executives to not only lead the acquisition but also the integration, which can last for 12 to 18 months or longer. Mergers and acquisitions can be instrumental to growth, but can also become a distraction for executives from their “day job.” The most successful financial executives that we see build a small team to support the effort.
What skill sets do executives need to have to execute a successful partnership? What qualities does the healthcare co need to have?
In my experience advising dozens of deals, a financial executive is successful when they are fully aware of the business’ strengths and flaws. They are diplomatic and can articulate the business strategy well, including what they are choosing to pursue and what they are choosing to ignore. Their role clearly goes beyond financial acumen because they take on operational, technological, and other strategic responsibilities. The ability to balance those responsibilities is a quality they must possess.
They also must be in tune with what’s happening outside the four walls of their organization—now more than ever. With the industry moving to value-based care, the industry is becoming more financially and technologically connected, and the CFO can longer simply manage the P&L of their organization. Payers, providers, medical device, biotech and pharma are all working more closely together so the financial practices and philosophies of all these subsectors affect one another. Financial executives must participate in the larger industry conversation, not just their own.
What are they looking for in potential partnerships?
One of the most interesting findings in the survey was that 79 percent of dealmakers are pursuing or exploring joint ventures or alliances. So in this case, healthcare companies are looking to join forces without the financial and legal requirements of a full-on merger or acquisition. With these, they are looking for market expansion, skill sets they don’t want to build or buy, and a management team they can effectively collaborate with. Once all those boxes are checked, it can be easier to enter a partnership that lets you “try each other on” and decide whether a more formal merger makes sense. It’s kind of like marriage-light, with an exit clause. And hopefully, no alimony.
Brad Haller is director in West Monroe Partners' Mergers & Acquisitions practice.