Health Care M&A Outlook 2008

Rising costs, expanding market demand, and increasing customer dissatisfaction will characterize health care in this decade and help redefine the roles of patients, providers and payors. Simply put, health care organizations face a growing imbalance of supply and demand. On the demand side is a large population of aging patients in deteriorating health who demand more services, pharmaceuticals, and medical breakthroughs. The supply side, however, is hampered by a shrinking pool of investment capital, a shortage of willing caregivers, and aging physical plants straining under the current volume of patients.

Clearly, demand is driving the system and flipping the traditional paradigm in which many health systems attempted to control costs by controlling supply. Under these conditions, health care providers must meet the challenge of effectively managing patient demand while payors must drive patients to the most cost-effective providers. The health care organizations that prosper in this environment will be those that recognize the supply/demand imbalance and respond with flexible and effective processes for delivering superior customer service.

According to the Center for Medicare and Medicaid Services (“CMS”), the Health care Industry accounted for $2.17 trillion in annual spending in 2006, up approximately 9% from $1.99 trillion in 2005. Hospitals, clinics, doctor’s offices and nursing homes accounted for nearly $1 trillion, or 75%, of the 2006 spending, while drug and medical equipment manufacturers accounted for approximately $300 billion, or 14%.

Rising Costs Continue

After a 9% increase in total health care spending during 2006, total expenditures are expected to increase at a 7% annual pace through 2010, reaching $2.88 trillion. The primary causes for increases, which are all heavily debated among politicians, health care providers, insurance company representatives and consumers, range from cost of technological advancement to the price of malpractice insurance, to the abundant profits of managed care organizations. Regardless of the cause, health care expenditures are expected to double by 2016 according to a March 2007 CMS report. This trend will continue to put pressure on the U.S. consumer, government programs (Medicare and Medicaid), health management organizations and businesses offering health benefits to employees.

Infrastructure Investment

As a direct result of rising costs, health care providers are under constant pressure to streamline operations and cut extraneous spending, while continuing to provide high quality patient care. In order to effectively cope with these pressures, many providers are looking to improve their information technology infrastructure through new software programs that more efficiently track billing requirements, catalog patient records and bring the provider in-line with stringent compliance rules. Many organizations have been slow to adopt web-based and web-enable applications because of costs, time constraints and implementation challenges. However, this trend is beginning to reverse itself as many health care providers begin to make systems upgrades, directly benefiting manufacturers of health care software, as well the implementation specialists and consultants.

SOURCE: PricewaterhouseCoopers