Conditions should be ideal for health care mergers and acquisitions in 2021.
Mike Mauldin, Group Head, Healthcare Specialized Industry Group at Regions Bank, anticipates mergers and acquisitions (M&A) in the health care sector will pick up speed in the coming year, even compared to 2020’s rapid pace.
Private equity firms, which have snapped up individual companies and rolled up entire medical specialties in recent years, are flush with investors’ money. Likewise, the Federal Reserve has indicated that it will keep interest rates low for the foreseeable future, making it cheaper for companies to borrow money for deals. And, if the stock market continues to rebound, publicly traded companies have a highly valued takeover currency in their shares.
“For larger players — the ones doing the acquiring — it’s a wonderful time to acquire,” Mauldin says. “The pandemic demonstrated to some sellers that they did not have the scale or the expertise to work through challenges like this.”
How 2020 Changed the Health Care Industry
Throughout the pandemic, mergers and acquisitions in the health care sector continued, but at a slower pace compared to 2019. By the second half of 2020, deal volumes had begun to pick up, accelerating as some of the uncertainties of the spring and summer melted away. The 2020 election brought clarity about the new administration, which is likely to bring a favorable regulatory landscape for health care, increased coverage, and stable reimbursement rates. While the enforcement of antitrust laws may rise under the Biden Administration, it should only affect larger deals.
The health care sector — and the public’s perceptions of the industry — has changed dramatically over the last year. The country has seen mass adoption of less conventional services like telehealth, which went from a rarely reimbursed extra to a major pathway for quarantined Americans to seek care.
“Over time, people will figure out which things work clinically through a telehealth model and which things need to be done face-to-face for diagnostic and treatment reasons,” Mauldin explains.
There’s also a new emphasis on home health care and ambulatory care services, which have continued to treat patients even as hospitals have shifted part or all of their capacity to COVID-19 patient care. EBITDA (earnings before interest, taxes, depreciation and amortization) multiples in those sectors have grown materially year-over-year.
The pandemic has also amplified existing trends in the industry. For example, health care organizations continue to seek scale in a bid to gain revenue synergies and streamline their operations. In this technology-driven world, with artificial intelligence (AI), electronic medical records (EMRs), and patient technology becoming increasingly important, smaller health care organizations often struggle to afford the necessary software and tech staff to compete with larger groups.
“Capital expenditures can lead people down the path of M&A,” Mauldin says.
The COVID crisis has also exacerbated the move by the insurance-driven parts of the sector to new reimbursement models like accountable care organizations or other membership-fee structures, including concierge care.
As an example, Mauldin cites one particular primary care practice in Florida, which includes some 500 physicians and providers from Tampa to Naples. The group is a Medicare accountable care organization, sharing financial risks instead of getting reimbursed on a fee-for-service basis. The group has hospitalist doctors on staff and aggressively manages the care of Medicare patients to keep them healthy and out of the hospital. Despite the industry-wide challenges of COVID-19, the group continues to do well.
The Advantages of Health Care M&A
As health care companies seek to achieve scale through both horizontal and vertical mergers and acquisitions, they are looking for strategic value. But the challenge — as always in dealmaking — is in melding together companies’ cultures and missions. Execution is everything in successful M&A, and this is particularly true in health care, with its purpose-driven workforce and values.
In health care, mergers and acquisitions can make sense for different reasons depending on the stakeholder group. For patients, the benefits of coming to a larger hospital or outpatient system for treatment include potentially better clinical outcomes due to closer coordination of care between providers, and an easy and rapid connection to the next provider in the continuum. For doctors, working with a bigger network can mean a better care model, a sense of stability, access to the latest technology and EMS platforms, and the ability to focus on medicine rather than administrative tasks. Joining a larger group or hospital can also mean doctors save on many of the expenses that they would have to cover at a smaller practice.
Vertical Mergers vs. Horizontal Mergers
There are two main kinds of health care mergers that we may see over the next year: vertical and horizontal.
Vertical mergers, which involve combinations between organizations that treat patients all along the continuum of care, have the advantage of capturing the patient for a longer period of time as providers refer their patients to affiliated providers and facilities. This enables the patient to receive much of their care for, say, a knee replacement from the same health care organization, moving from inpatient rehab to outpatient rehab to home health care. And the benefits for the organizations themselves are clear: they are well-equipped to treat a patient not just for one episode of care, but for a lifetime. Not only does this level of coordination of clinical care often lead to better patient outcomes, but it’s often cheaper to provide due to a decrease in avoidable complications and hospital readmissions.
According to Mauldin, one example of vertical integration through M&A is an inpatient rehab hospital organization in Alabama that expanded into home health care and hospice care. The newly-established network has specific goals for coordinating patient care between rehab and home health care in each of its markets and relies on continuous measurement to make sure providers are always improving. Clinical groups collaborate on building pathways for care, which leads to a better experience for the patient.
However, vertical mergers can also present some unique challenges. For example, they typically don’t lead to expense synergies. If the merging entities operate under different care and reimbursement models, it can be difficult to get some to change behaviors. And in hospital-hospital mergers or acquisitions, interoperability can often be a challenge, in part because the implementation of electronic health records (EHR) and other databases can take between three and five years. Likewise, it can be difficult to encourage providers to exchange information about patients quickly within the organization to ensure seamless care. Overall, execution can be the biggest impediment to a successful vertical merger.
On the other side of the merger spectrum, horizontal mergers or roll-ups have a different logic. These sorts of deals make sense when a health care organization wants to expand in its existing service lines or extend its reach geographically. Often, a roll-up will target many medical practices in the same specialty — dermatology, radiology, or primary care, for instance. Merged organizations aggressively go after expense synergies by combining back office functions and reducing staff in non-patient care areas.
Looking Ahead
As dealmaking picks up in 2021, most sectors of health care should see M&A activity rise. Among those expected to be the most active:
- Home health care
- Hospitals merging into larger systems
- Outpatient providers, including ambulatory surgery and diagnostic imaging
- Durable medical equipment
- Pharmaceutical companies and manufacturers
- Skilled nursing
For health care executives, this next year, while difficult, will also present plenty of opportunities. It makes sense to think about where you want your organization to be five years from now and whether you have the resources to get there. If not, M&A might be a logical strategic move for all parties involved.
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