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Former Apple, Pepsi CEO: The next wave of hospital consolidation to be shaped by disruptive innovation

Sculley, who is now CMO of RxAdvance, weighs in on what the next phase of big deals signals for the industry's future.

Jeff Lagasse, Associate Editor

Photo by Brad Barket/Getty Images for Kairos SocietyPhoto by Brad Barket/Getty Images for Kairos Society

Mergers and acquisitions saw a record-breaking first quarter this year, posting numbers not seen in a decade, and that wave of consolidation doesn't appear to be slowing down anytime soon. 

On top of that, there have been some pretty big blockbusters in recent months. The Amazon, Berkshire Hathaway, JPMorgan Chase trio just named Atul Gawande, MD, as its CEO. CVS-Aetna has made some big headlines, and of course there was the Cigna-Express Scripts deal, and then there's the Celgene-Juno collaboration. 

Such recent activity reads like a who's who among healthcare giants, but that begs the questions: Why are so many big-time deals going down? And most important what does it mean for the future of healthcare?

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John Sculley, chief medical officer of pharmacy benefit manager RxAdvance -- and a former CEO of Apple and Pepsi -- said the trend is more than just a string of one-off deals that just so happen to be epic in scale. Instead, it's symptomatic of major customer problems that need solutions.

By way of example, Sculley said that chronic care patients represent about 86 percent of total health spend in the U.S. More specifically, 5 percent of the population -- the most seriously ill -- account for about half of the total $3.2 trillion annual health spend.

"It's just not possible to solve the unsustainable cost of the U.S. health system without significantly lowering the cost of care for the chronically ill," he said. "The key to a solution is reducing costs related to prescription drugs and related therapies. The current wave of M&A activity has been about reducing costs via consolidations."

Previously, he said, large health plans attempted horizontal M&A deals but were typically turned down by the government. Now, big vertical mergers are in vogue, and Sculley said the industry is still in the early days of these transformative mega-partnerships.

"Payers all understand that solutions to significantly improve chronic care patient outcomes and reduce healthcare cost inefficiencies require shifting systems to cloud platforms that are patient-centric," said Sculley. "Payers are rapidly acquiring patient care companies and investing in platform technology companies."

Even Sculley's own company, RxAdvance, recently entered into a partnership with Centene to reduce avoidable drug-impacted medical and administrative costs. He sees many of thee deals as being positive; the Amazon-Berkshire Hathaway-JPMorgan Chase in particular, he said, has the potential to change the industry by focusing on how to make the healthcare system sustainable -- something the government leadership had failed to do effectively, in his view.

Still, there are risks.

"The obvious M&A deals are between large public healthcare companies looking for big savings through consolidation," said Sculley. "The truly transformative M&A deals will increasingly involve entrepreneurial companies who want to partner. The risks are that healthcare incumbents with less experience with platform technology solutions and some experienced high-technology companies often don't have deep domain expertise in healthcare."

In a best-case scenario, these deals should drag healthcare into the present. The industry is about a decade behind other sectors such as financial services, telecommunications and media when it comes to adopting cloud platforms and actionable analytics to solve big customer problems, said Sculley. The recent spate of M&As should disrupt the industry by forcing it to adapt, evolve and move into the future.

"The next wave of M&As will be shaped by disruptive innovation," he said. "Smart, actionable data; much lower cost-of-care workflows; advanced technology replacing call centers; and platforms replacing siloed functional organizations."

Focus on Innovation

In September, we take a deep dive into the cutting-edge development and disruption of healthcare innovation.

Twitter: @JELagasse
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