System Transformation in Confidential Merger Studies

Confidential Consolidation, Mergers and Delivery System Transformation An Examination of Unusual Life Forms January, 2019

Consolidation, Mergers and Delivery System Transformation Confidential Today Merger Mania why and what to expect Nostradami Reed Tuckson Jack Sokolove Responder: Paul Rothman Blackstone

Consolidation, Mergers and Delivery System Transformation Confidential Mergers Are Occurring at Historic Rates (in thousands) ($ in billions) Blackstone 3

Consolidation, Mergers and Delivery System Transformation [Section Title] A Market-Based System Attracts Capital Blackstone

Consolidation, Mergers and Delivery System Transformation Why INTRA-SECTOR Cost pressures lead sectors with excess capacity, waste and pressure to consolidate Regulatory requirements, e.g. increased IT, changes in payments, etc., demand scale Legacy paternalistic system misfit for 21st century patient/consumer Population and value-payment health model needs scale Defense is the best offense: consolidation begets consolidation ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ EXTERNAL TO SECTOR Attractive sector for external investors and lots (and lots) of capital around Biology & data science (true) paradigm shifts Blackstone

Consolidation, Mergers and Delivery System Transformation Horizontal M & A: He Said-She Said or She Said-He Said or She Said-She Said or He Said-He Said Confidential NEJM Perspective: The Good Merger Leemore S. Dafny, Ph.D., and Thomas H. Lee, M.D. Integration leads to higher quality Market power leads to higher prices Population health enabled Harder for innovators to enter Sick patients want care not consumer choice Less choice for patients Scale needed for IT, data science Most mergers fail Prediction: No one wins the argument; although anti-trust will make it more difficult horizontal mergers and consolidation will continue but at slower pace Blackstone 6

Consolidation, Mergers and Delivery System Transformation Confidential Vertical Mergers : Usual Life Forms Vertical Merger: the merger of two or more companies involved at different stages in the supply chain process for a common good or service Usual Life Forms Hospitals buying doctor practices or post-acute facilities Health insurers buying PBMs Medical practice buying scribe service Why They Will Increase Less anti-trust scrutiny In the right circumstances can lower costs and improve quality (although there is a graveyard full of attempts which ended up collapsing of their own weight, e.g., doc purchases in the 90 s, hospitals buying post-acute care Blackstone 7

Consolidation, Mergers and Delivery System Transformation Unusual Life Forms: Funded by Deepest Pockets Ever Seen in Healthcare ULF Potential Impact DRUG STORES AND INSURERS: CVS-Aetna; Walgreens- Humana; Walmart and somebody Outpatient care moves out of hospital; lab tests, etc., done at pharmacies; pharmacy has referral power; Less coordinated care HEALTH INSURERS BUYING PROVIDERS: Optum buying physician groups, surgicenters Even greater market dominance with power over networks and pricing in specific markets AMAZON AND PILL PACK (just the beginning? Remember Amazon bought Whole Foods) Short-run, retail pharmacies could lose volume; Longer term risk to drug distributors and PBMs REAL ESTATE AND PRIMARY CARE: Villages Health Move care out of hospital; specialist referrals at risk GOOGLE HIRES DAVID FEINBERG, VIVIAN LEE AND OTHER HEALTHCARE SERVICE STARS; APPLE HIRES TWO DOZEN HIGH-LEVEL PHYSICIANS Who knows? AMAZON/JP MORGAN/WARREN BUFFET fund start- up to lower healthcare costs Most disruptive outcome could be new ideas for Amazon Blackstone

Consolidation, Mergers and Delivery System Transformation Key Question for the Nostradami Klaatu Klaatu barada barada nikto nikto ? ? Blackstone