What M&A Might Look Like Under The New Administration
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We take it as a truism that governmental changes to the
health care system, real or threatened, cause unease in the health care industry, leading participants to put their hands on their wallets and reach for their calculators. The national election that is upon us portends a possible sea change in the health care industry. What changes to the health care M&A market is the upcoming change in government likely to spell?
We consider here what an Obama administration might do to M&A in the health care industry. We suspect that a Democratic administration will bring about more of a seismic shift in the market than a Republican administration would have. A Republican approach, we believe, would largely conserve the same trajectories that health care policy has been taking for the past eight years, while tinkering a bit with the tax code. If we had confronted a “Dewey Defeats Truman” moment, we would take a shot at the other side of the debate in an upcoming issue.
One plank of the Democratic platform seeks to “reform” the health care system by extending health care coverage. One direction in which such reform might move, as advocated by recent Nobel Laureate Paul Krugman in a book published last year, is towards a “socialized” form of (health) insurance on par with Social Security and Medicare. It would not be the kind of socialized medicine found in Britain where, for example, physicians are employed by the state. National health insurance plans are already in place in such countries as Canada, France and Germany. Importantly, in those systems, the state is not the only insurer; individuals may also buy additional insurance and often access supplementary delivery systems.
The Managed Care industry would naturally be the most directly affected by the introduction of nationalized health insurance, essentially opening Medicare to every citizen. It seems likely that the government would contract with existing independent health insurers to implement that mandate. Some insurers might opt out of this function and seek to operate independently in a parallel system. In either scenario, the services MCOs sell to government or to individuals would still be subject in part to market forces involving consumers. This means that it may still make sense for independent insurers to engage in M&A to enhance market share, wring out synergies and, perhaps, improve their technology base. An Obama administration would also likely adopt the use of community ratings already in force in some states, which would effectively curtail insurers’ ability to screen customers/patients on preexisting conditions. It is unclear at this point whether the greater risks that insurers would thereby incur would be offset by the absence of a claims denial mechanism and its costs, but such trade-offs are possible. Depending on how aggressive a new administration can be, a national health insurance system which sets itself up as the default source of insurance will over the long term tend to marginalize the now-alternative health insurance industry into niches. Still, extending Medicare to all is relatively far down the list of health care proposals Obama lists on his Web site.
Other sectors of the health care industry that could be affected are Pharmaceuticals and Medical Devices. As the government broadens the scope of health insurance, it may also seek to revoke legal provisions that effectively hog-tie it in negotiating lower prices for drugs and devices. In such a scenario, the government might well seek to bargain prices down to levels being paid by other developed countries with national health insurance regimes. This would exert downward pressure on pricing—and profits—and would in turn provide more impetus for mergers and acquisitions if they can help achieve economies of scale and wring additional costs and waste out of the system.
A national health insurance system, answerable ultimately to taxpayers, would have to find ways to keep costs down. A dominant administrative system, with minimal marketing costs, rather than the current system of many competing insurers, might help achieve that. But a national system would also tend to favor preventative medicine and earlier, rather than later, intervention in chronic conditions such as diabetes. Currently, independent insurers have little incentive to pay for early intervention since in the long run they will probably not reap the benefits of having paid for it as older, sicker patients ultimately transition into Medicare. But an emphasis on earlier intervention would give a fillip to companies in those lines of business, such as disease management and wellness programs. With the portability that a national system implies, retail health centers, such as those now going into many big-name stores, would also likely prosper. In these sectors we can expect to see a continuation of M&A activity.
As disruptive as it could be, change may not be as dire or as quick as this admittedly radical scenario would depict. The Democrats need that elusive, veto-proof supermajority to enact moderate changes, much less radical ones. They also need the funds to implement and regulate any changes, great or small. One clear consequence for either party as it takes office is that the current crisis in the financial and credit markets will spread the implementation of any large-scale plan over a longer time-frame. Further, Obama’s political instincts seem to make him a centrist; and a centrist with a Congress that has moved steadily to the right ever since the Johnson administration, the Great Society and Medicare will likely not seek to undermine consensus. Time will tell whether these are famous last words.
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What M&A Might Look Like Under The New Administration