How ‘Adjacent Space’ Acquisitions are Changing the Healthcare Industry

The healthcare payer industry has been consolidating for years, driven by the need to achieve greater scale and lower costs, and the desire of companies to acquire their way into growing businesses.

Traditionally, these efforts have been accomplished when payers acquire payers: Anthem’s acquisition of Amerigroup and Aetna’s acquisition of Coventry are good examples. Today, however, a combination of factors has caused a new consolidation model to emerge: horizontal or “adjacent space” acquisition, which is simply the combination of dissimilar companies that occupy different spaces in the overall healthcare value chain. The proposed CVS-Aetna, Cigna-Express Scripts, and Walmart-Humana combinations are all good examples of “adjacent space” acquisitions. 

Why Now?

There are several reasons this type of consolidation is occurring. The U.S. Department of Justice blocking of the Anthem-Cigna and Aetna-Humana mergers in 2017 signaled that the traditional payer consolidation model had come to an end—or would at least be harder to complete in the current political and regulatory climate. The shift to value-based care and consumerism also are drivers behind this change, causing companies to look for ways to own larger pieces of the value chain to enable them to administer value-based care models and to bring customers a more complete, “healthcare on demand” experience. Think, for example, the value to CVS of owning Aetna, where Aetna can create insurance benefits and provider networks that will drive Aetna members into CVS’s retail pharmacies for both prescription drugs and, increasingly, healthcare treatment through CVS’s in-store primary care clinics. 

The threat of non-traditional competitors entering the market, particularly Amazon, also is a driver behind this type of merger where companies are attempting to protect their businesses by owning a broader piece of the value chain, making it harder for a company like Amazon to displace them. The potential combination of Walmart and Humana is particularly interesting when considered in light of Amazon. Humana is a market leader in the Medicare Advantage market. That same senior demographic shops at Walmart, and, at least at this point in time, are the lowest utilizers of online shopping services such as Amazon. The combination of Walmart and Humana solidifies the bond between the companies and the senior consumers, and provides the combined entity with the opportunity to broaden the products and services that they can bring to the senior demographic, building loyalty before a company like Amazon tries to step in.

Once different entities merge, the combined organization gets more visibility into the lives of healthcare consumers and, as a result, more opportunity to fulfill the needs of those consumers across their healthcare journeys.

Are We Done Yet?

Are these consolidations over? The answer appears to be “No.” We expect to see more of these combinations announced over the next several months as companies buy their way into the healthcare space or join with like-minded organizations that share a congruent business model and vision. 

While these changes will continue for some time, it’s hard to say at this point which companies will be winners or losers. It’s likely that not all will survive, at least not in their current form. 
  • Some (perhaps many) will be part of these combinations, either by choice or necessity. 
  • Others will find themselves facing increased competition (or, very likely, a new style of competition) forcing them to adapt their business models or consolidate with a larger player in the market.
  • Those that can’t adapt quickly or adjust their business model to compete likely will shrink or, in some cases, simply fail due to a lack of action, vision or innovation.
 
Determining the right path in the future is important for healthcare organizations. A misstep may be the difference between an assimilation or an alliance. For success, businesses should seek assistance to shape and transform their business models, and adjust to compete in this changing market by utilizing new technologies, new strategies and a new vision, all of which are required to disrupt the status quo and remain relevant.
 
Larry Bridge is Senior Vice President of Strategy and Corporate Development at TriZetto, a Cognizant Company.
 
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