Want Healthcare LLC

Warren Buffett, ketchup, airlines, and health care consolidation

February 15, 2013 at 10:00 AM Leave a comment

Berkshire Hathaway is acquiring Heinz.  US Air is merging with American Airlines.  Anthem is hiring a hospital system veteran to become its next CEO.  What do the first two have to do with the last?  How are mergers and acquisitions in other industries related to those in health care?

What the press is saying is that the first two acquisitions have come now because some stability has been restored to the markets, and people feel freer to put capital on the sidelines to work.  Throughout the Great Recession, companies have been stockpiling cash because it increased their flexibility and therefore survivability in an uncertain environment.  The public did the same, paying down debt, holding cash, getting out of stocks and bonds and into safer investments like money markets.  Now, with volatility down, some sense that Europe will not go to hell in a handcart in the short run, companies are buying future capacity.

But why do companies merge in the first place?  There are good reasons not to: the clash of cultures in the airline mergers is legendary, and some mergers fail because of that.  Companies merge because they cannot compete at the level at which they are currently organized.  American Airlines is a good case in point, where even at their size, they are still in receivership in the tough competitive environment that is the airline industry.  They needed economies of scale, and synergies in their route structure to hit the price points of their competitors. 

The airline merger is an example of horizontal integration, the merger of companies in the same business.  But increasingly in health care, we are watching vertical integration, the merger of companies in related businesses, but who do not do exactly the same thing.  Hospitals are acquiring physician practices at an increasing rate.  They are also entering related businesses.  There was a recent announcement here in Denver that the University Hospital system is contemplating building its own health plan.  Rumor is other systems are thinking the same thing.  Now running hospitals is hard enough, as anyone who has tried can tell you.  Why would they want to acquire practices and health plans?

I think it’s because of the same reasons other companies in other industries do: because they can’t compete at the level of their current organization.  If your competitor has an integrated enterprise of hospitals, docs, and health plan functions, you might need the same in order to compete in the marketplace, say, a health benefit exchange. 

This brings me back the beginning of this post, and Joe Swedish taking the wheel at Anthem.  Mr. Swedish is a long-time hospital executive; but Anthem may have recognized that its future disproportionately depends on the integration and efficiency of its provider networks.  And Joe Swedish knows all about those.  

Now that everyone is feeling safer, the cash that has been stockpiled in health care companies will likely be mobilized in the same way it is in other industries.  I will be watching for more integration of assets, both vertically and horizontally.

Entry filed under: Uncategorized. Tags: #healthcare reform.