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Healthcare Vertical Integration and Internal Audit’s Role in Strategic Transactions. September 2014. Agenda. Healthcare vertical integration Internal Audit’s role in strategic transactions.
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Healthcare Vertical Integration and Internal Audit’s Role in Strategic Transactions September 2014
Agenda • Healthcare vertical integration • Internal Audit’s role in strategic transactions
Health industry integration is not black or whiteShades of collaboration exist, although the trend is strongly to the right Horizontal Vertical Most ACOs are formed in this space Clinically and financially integrated systems (multispecialty medical groups integrated with hospitals and health plans) Hospital staffs (primary care physicians employed by hospitals), some university/faculty practices Multispecialty group practices (primary care-based practices with full complement of specialty services) Independent physician associations, single specialty groups, hospital chains Clinically integrated delivery systems (multispecialty groups with hospitals) Single MDs; small groups; single hospitals Less integrated or organized systems More integrated or organized systems Source: www.accountablecarefacts.org
Vertical integration has three primary objectivesPayers and health systems are increasingly willing to accept non-traditional risks to preserve their positions in the healthcare supply chain
Integration activity has come in wavesBeginning in the 1980s, a surge in managed care growth fueled health industry integration, both horizontal and vertical
Vertical integration failure is commonWhile the benefits of integration are appealing, realization has been a challenge for most organizations 2002: Piedmont separates from Promina Health, exiting the health plan market 1945: Permanente Health Plan (later named Kaiser) opens to the public, providing both health coverage and access to hospitals 1983: Intermountain Healthcare creates SelectHealth, a non-profit health plan 2011: Highmark acquires West Penn Allegheny Health System 1972: Humana shifts focus from nursing homes to hospitals, eventually acquiring 77 facilities 1990: Cigna acquires majority ownership of Lovelace Health Systems 2000: Rush University Medical Center sells Anchor HMO to WellPoint 1992: Humana spins off 77 hospitals as Galen Health Care to focus exclusively on insurance 2013: Kaiser sells Ohio health plan to Catholic Health Partners (Health Innovations Ohio) 1969: Harvard Community Health Plan opens as a PSHP 2011: UnitedHealth Group acquires 2,300 physician Monarch Healthcare 1986: HealthWest (later UniHealth) launches CareAmerica 1998: UPMC launches UPMC Health Plan 1995 2010 1980 1965 2012: Sutter Health launches Sutter Health Plus 2001: UniHealth divests its medical and insurance practices 1986: Allegheny Health, Education, and Research Foundation (AHERF) begins integration efforts, purchasing physician organizations and hospitals 1998: AHERF files for bankruptcy 1980: Geisenger Medical Center starts the Geisenger Health System (a PSHP) 2011: Humana acquires 300 clinic Concentra Health 1971: Rush Univ. Medical Center opens Anchor HMO 1993: Sutter Health opens Omni Healthcare Plan 2014: North Shore LIJ opens CareConnect 2014: Piedmont Healthcare and Wellstar Health System start Piedmont Wellstar Plan 2002: Cigna sells Lovelace to Ardent Health Services 1994: Promina Health founded by Piedmont Healthcare 1947: Group Health Cooperative opens in Seattle Washington as a PSHP 1999: Sutter Health sells Omni Healthcare to BCBSCA 1984: Sentara opens Optima HMO Health Plan Passage of the Affordable Care Act • Rise of managed care organizations and new reimbursement methodologies (e.g., DRGs, per diems, case rates, carve outs) Traditional fee for service dominated the market
Vertical integration is fraught with riskEndeavors have failed for myriad reasons, but at the core is typically an under-estimation of the risks to be managed Developing organizational capabilities too far in advance of market demand Not clearly defining each entity’s role within the system • Optimistic assumptions regarding willingness of business partners to make concessions • Insufficient • capability to • execute core new functions (e.g., pricing, reserving, practice • management) Strategic, Financial and Operational Risk • Limiting financial wherewithal by taking on too much at once • Paying for productivity gains that do not align with the acquired entity’s new incentives • Inability to effectively coordinate care across the integrated delivery system Inadequate physician alignment, particularly within primary care
The next wave is upon usRegulatory and market changes are prompting both defensive and opportunistic integration moves
Integration is being initiated from all directionsHealth systems and payers are both testing new positions along the supply chain • Provider sponsored health plans • Sutter Health Plus (Sutter Health) • CareConnect (North Shore Long Island Jewish) • Piedmont Wellstar Health Plans (Piedmont and Wellstar Health Systems) • Health plan hospital/provider acquisitions • West Penn Allegheny (Highmark) • Concentra clinics (Humana) • Diagnostic Clinic Medical Group (Florida Blue) • Accountable Care Organizations (ACOs) • More than 500 Medicare and Commercial ACOs have formed since 2010 • Most are hospital or health system led • More than 10 million members are enrolled in commercial ACOs • Major, national health insurers have announced intentions to significantly increase their volume of ACO contracts
Where to begin?Avoiding the mistakes of the past begins with an assessment of the factors that drive success and failure
Agenda • Healthcare vertical integration • Internal Audit’s role in strategic transactions
Background Strategic transactions like mergers and acquisitions (M&A) and divestitures remain some of the most risk-heavy initiatives that any organization can undertake. The proactive involvement of Internal Audit (IA) before, during and after the merger, acquisition or divestiture can help management identify issues and opportunities related to the transaction that might not otherwise be addressed. Acting as an advisor to the program management team, IA is ideally positioned to assess and monitor program management activities, review controls and provide key insights while maintaining independence and objectivity.
How IA can help during strategic transactions • Provide increased visibility into key risks related to strategic transaction changes (e.g., Finance, IT, HR, Operational risks) • Reinforce that risks and controls are the responsibility of management • Identify gaps in the integration or separation project management plan • Suggest opportunities for synergies that would boost the acquisition’s return on investment (ROI) or actions to increase separation-related cost savings • Highlight the impact that the acquisition and its integration, or the divestiture, may have on other parts of the business • Identify potential gaps in the internal control structure • Support management’s prioritization of transition and organizational readiness risks
Role of IA during M&A • There are four key areas where IA can play a crucial role in an organization’s M&A lifecycle: Throughout the M&A process, IA should form a part of the program management team so that it can assess and monitor activities and provide key insights. IA can also audit program management activities to highlight process gaps and areas of future improvements.
The role of IA during divestitures • There are four key areas where IA can play a role in the divestiture lifecycle: Leading practice calls for IA to be embedded as part of the program management team and be involved throughout the divestiture life cycle.
Key benefits • IA provides a critical perspective to strategic transaction deals that many executives may not consider. Without that perspective — right from the start — the organization could find out far too late that the price was not right, or that it has to spend a significant amount of money to fix issues that IA could have identified and helped the organization avoid • Strategically, IA can determine an organization’s readiness for the transaction • During due diligence, IA can alert the organization to potential risk, control or regulatory issues that would cause the organization to overpay or undervalue • Prior to deal close, IA can help prevent deal value leakage • Post-transaction, IA’s involvement can lead to organizational efficiencies and strengthened control monitoring
For further information • See the full “Internal Audit’s role during the strategic transactions life cycle” report • For further GRC thought leadership, please refer to our Insights on governance, risk and compliance series on:www.ey.com/GRCinsights • Please contact: • Sean Lueck, EY Healthcare Advisory (904-505-6572) • Wally Ward, EY Healthcare Advisory (704-331-1907)
