The Rising Vertical Integration Trend in Health Care M&A

Feb 28, 2023
Munsch Hardt Legal Health Care Update

2023 presents a market ripe for deal making in the health care industry, as companies add data and technology capabilities, “acqui-hire” to fight the labor shortage and roll-up fragmented market sectors. While deal volume was down in 2022, a recent string of megadeals was announced in the second half of the year. Amazon announced in July that it planned to acquire primary care platform One Medical. CVS Health announced in September that it entered into a definitive agreement to acquire home health provider Signify Health. Walgreens-backed VillageMD announced in November that it planned to acquire primary care, specialty care and urgent care provider Summit Health. CVS Health kept the ball rolling into 2023, announcing on February 8 that it entered into a definitive agreement to purchase primary care provider Oak Street Health. These transactions are all prime examples of vertical integration, a growing trend in health care M&A. 

Horizontal integration, where a company acquires another company providing the same or similar services, has been popular in health care for years. Private equity has displayed continued interest in transactions where similar provider groups are consolidated into a single platform. Horizontal integration will continue as long as various providers, clinics and services remain fragmented. However, the recent megadeals underscore a shift towards vertical integration as the next trend in health care M&A.

Vertical integration allows a company to streamline operations and possess greater control of an industry through direct ownership of the key suppliers, distributors and retailers across its supply chain. Since health care doesn’t have as linear of a supply chain, where products move in one direction from suppliers to manufacturers to retailers,  the health care industry can be better described as having a value chain. The value chain consists of health care product manufacturers, pharmaceutical producers, retailers and pharmacies, hospital systems and health care providers. The value chain is very patient-centric, as patients interact with almost every part of the value chain, unlike a supply chain where the retailer is often the only part of the chain to come in contact with the consumer. 

The recent Walgreens, CVS and Amazon transactions show vertical integration in action, as they seek to acquire additional parts of the health care value chain. Some advantages of successful vertical integrations are lower costs, simplified logistics and access to more customers. As health care companies continue to become more vertically integrated, they seek a balanced integration, where the company is engaged in and, to a large extent, controls, every part of the value chain. Data and technology will continue to play a huge role in this trend, as advances in A.I. and cloud computing will assist companies in integrating, sharing, analyzing and synthesizing data across the value chain. Ultimately the balanced integration creates a full-service health care company, capable of handling every aspect of a patient’s health needs. 

In theory, vertical integration leads to better care and outcomes for patients, however, there is no guarantee these benefits will be felt by the patient. There is concern that consolidation of the health care market through vertical integration may instead lead to fewer options for care, increased costs and lower-quality care for patients. Furthermore, vertical integration is not without risks for the company either. It is a long-term process that requires a large investment up-front to acquire the right target company and successfully integrate it into the existing company. Seeking counsel from experienced health care attorneys can help companies navigate any potential risks and successfully vertically integrate the existing companies. 

We expect that health care M&A deal volume and value will continue to rebound from 2022. Health care transactions aimed at both horizontal and vertical integration will continue throughout 2023, as more companies seek to enter and expand their reach in health industries.

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