Cain Brothers Newsletters: Industry Insights
“Industry Insights” is a bi-weekly email newsletter published by Cain Brothers, a division of KeyBanc Capital Markets. The newsletter features innovative and original perspectives about healthcare services, healthcare IT, and life sciences from our team of experienced investment bankers. Read the latest newsletter content below, and subscribe to start receiving the newsletter in your inbox.
History Repeats Itself: No Margin, No Mission, Therefore Reality Drives Healthcare M&A
January 23, 2025 – Banker Commentary by Todd Rudsenske
There is no shortage of articles, government studies, and papers recently with the false narrative that healthcare has become corrupted by for-profit enterprises that are merging for the purpose of profits rather than quality of care. This is not a new debate. When I joined the healthcare services ecosystem 30 years ago, healthcare was just starting to consolidate “at scale.” Here are just a few of headlines from late 1993 and early 1994, the year in which I completed my first healthcare M&A deal as a banker: United Healthcare to Buy Ramsay HMO for $500 million; Columbia Healthcare (founded and run by now Senator Richard Scott) and Hospital Corporation of America (HCA) complete $7.3 billion merger; and Merck & Co. and Medco Containment Services complete $6 billion merger. (Express Scripts later acquired Medco from Merck in 2012 for $29 billion, and the company traded again to Cigna in 2018 for $67 billion.) In those three headlines, again from 30 years ago, are the makings of the largest for-profit Managed Care and Hospital providers in the country today as well as one of the big three PBM providers.
Even then, there was a raging debate going on against for-profit hospitals because Richard Scott through Columbia, which he founded in 1988, began acquiring tax-exempt hospitals from counties and faith-based institutions that had determined that in their markets they needed be part of “a network” to survive. There was also much debate about the then up-and-coming for-profit payers, with names like U.S. Healthcare and Oxford, that operated as either Staff Models (HMOs that employed physicians) or Group Models (HMOs that contracted with physicians). Something else interesting happened in 1992 when not-for-profit Blue Cross of California became the largest IPO of a health insurance firm at that time with a $400 million offering for its for-profit subsidiary, WellPoint Health Networks, which later became known as Anthem in 2014 before changing its name again to Elevance in 2022. These are but just a few of the stories of stories of healthcare consolidation and not-for-profit conversions over the past 30 years. It’s incredible to me how little the headlines have changed in that time, except for the need to have scale and to be “part of a network” has gone beyond hospitals and payers and now includes nearly every type of healthcare services provider.
And the reasons still hold as to why: there is financial efficiency at scale. And with financial efficiency, comes survivability. Without duplicative costs coming out of much smaller and less efficient operators, financial margins would not exist to invest back into the system to provide the services that are needed by an ever-growing number of people with ever more complex healthcare needs who access their care via the U.S. healthcare system. Reasonable margins are required to access the capital needed to fund the growth in these services. As I learned from nonprofit hospital providers 30 years ago, without a margin, there can be no mission. For those who seek via their rhetoric to steer investors and capital away from the healthcare sector by imposing heavy handed regulation and approval processes for mergers done by both for-profit and tax-exempt organizations, my belief is that, should they be successful, they will cause access to become more limited to those that are most in need of it. That would be a tragedy.
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