In this article, we’ll explore the high-level rational and potential market consequences in 2 major segments of the US healthcare environment. The first segment is the healthcare systems and hospitals that deliver care. The second is pharmaceutical manufacturers, who develop new drug therapies for the patients served by the health systems.
Health Systems/Hospital Mergers
Merger and acquisition (M&A) activity in 2020 was dampened somewhat by the COVID pandemic, but remained within the range of activity seen since 2010, with 79 announced transactions. While COVID likely confirmed the rationale for mergers among health systems already in process, it may have coaxed others to examine the value of potential mergers. What does it mean for patients and pharmaceutical manufacturers when health systems merge?
Depending on the merging systems, patients may see reduced access to certain services or access. In the Pacific Northwest, the merger of CHI Franciscan and Virginia Mason will limit patient access to procedures forbidden by Catholic church doctrine, as happened when the Providence Health System merged with Swedish Medical Center in 2012.
Conversely, the following example points out that mergers may ensure access to poor and rural areas be maintained or enhanced. The proposed merger of Einstein Healthcare Network and Thomas Jefferson Health is meant to bolster Einstein’s ability to render care in Philadelphia’s poorest neighborhoods. The theory behind the deal was to disperse the costs of maintaining access to these communities across a larger population. The merger was held up by the Federal Trade Commission’s claims that it would harm competition for inclusion in health insurance company’s hospital networks. After a judgement denying the FTC’s request for a temporary injunction on the merger, the matter has been withdrawn from adjudication and may go forward this year.
The impact on manufacturers is primarily related to consolidation of customers. In one sense, the merger of customers means fewer opportunities to gain access to patient populations. However, the actual impact may be different than suspected, because of the growing popularity and membership in Group Purchasing Organizations (GPOs).
GPOs are essentially aggregators of demand that bolster health system buying power through collective action. Depending on the merger’s net effect on a GPO’s bargaining position (net neutral, net population gain, net population loss) manufacturers may have altered negotiating positions.
Pharmaceutical Manufacturer M&A
Similar to health systems, M&A activity in 2020 was down from 2019, partly due to COVID-19, but also the need to take a breath from the previous year’s deals. A large chunk of 2019’s $184 billion-dollar activity was attributed to BMS buying Celgene with Celgene selling Otezla to Amgen. The Otezla side deal was required in order to address the Federal Trade Commission’s concerns about the BMS/Celgene deal.
In 2020, the number of deals announced were down by a smidgeon over 2% from 2019 levels; dollar volume clocked in at just $184.2 billion, over 48.6% off the pace set in 2019 according to PwC. Looking forward to 2021, pharma will continue to use M&A to bolster their key therapeutic areas in terms of products and know-how. Hot areas continue to be oncology, cell, and gene therapy.
In general, pharma/life-science M&A, especially of smaller oncology and rare-disease biotechs, helps to assure that commercialization of new and breakthrough therapies proceeds apace. On the flip-side are the issues of affordability and equity. Concerns about unsustainable healthcare spending and fair and equitable access, to not just specialty care, but to care in general, were major pillars of the Biden campaign.
Manufacturers could see the concerns about affordability and equity garner more concern under the new administration. We will likely see greater scrutiny about large mergers as they may tend to consolidate markets more and gain of the public’s attention. However, it’s likely that other ‘bolt-on’ acquisitions may be more heavily scrutinized by regulators in an effort to manage market consolidation.
A bulked-up pharma/life-science company, especially with efficacious break-through therapies, may have an easier time working deals with GPOs and their downstream clients than a smaller biotech. The smaller biotech may not have the deal-making experience of the larger pharmaceutical manufacturers and therefore be at a greater disadvantage when dealing with GPOs.
In the current environment, it’s likely that activity will increase, not only as COVID-19 (hopefully) recedes as a driver of the US and global economy. Current political turmoil in the United States as well as the transition to a new administration may create additional impetus to drive a resurgence in M&A activity.
The take-away message is that the effects of M&A in these sectors is not just reflected in financial position or stock prices. They may, in very real ways, impact the lives and livelihoods of patients and consumers.
 2020 M&A in Review: COVID-19 as Catalyst for Transformation, Kaufman, Hall & Associates, Chicago, IL copyright 2021.
 Seattle Times. Proposed Virginia Mason-CHI Franciscan Merger Increases Worry About Catholic Limits on Health Care in Washington State. https://www.seattletimes.com/seattle-news/health/proposed-virginia-mason-chi-franciscan-merger-increases-worry-about-catholic-limits-on-health-care-in-washington-state/. Published August 3, 2020. Accessed January 19, 2021.
 Federal Trade Commission. Thomas Jefferson University, In the Matter of. https://www.ftc.gov/enforcement/cases-proceedings/181-0128/thomas-jefferson-university-matter. Published January 6, 2021. Accessed February 4, 2021.
 PwC. Pharmaceutical & Life Sciences Insights: 2021 Outlook. https://www.pwc.com/us/en/industries/health-industries/library/pharma-life-sciences-quarterly-deals-insights.html. Accessed February 4, 2021.