Depending on your perspective, healthcare has been one of the most exciting or scariest business sectors over the past 5 years. Between sweeping government regulations from the ACA, changing consumer demands and demographics, and the required investments to meet pay-for-performance opportunities, the healthcare industry has been going through some huge adjustments. It’s important for both healthcare M&A advisors and owners of healthcare businesses to understand these new healthcare M&A trends so they can plan the future.
Trend 1 – Surge in healthcare M&A activity
There has been a significant surge in healthcare deals over the past few years. Changing market conditions have encouraged healthcare businesses to do deals as they try to adapt to new financial pressure and opportunities. At the same time, private equity activity has been increasing because healthcare deals have been more profitable than other industries. A McKinsey study estimates that from 1995 to 2014, private equity investors made 2.3 times their money on healthcare deals compared to only 1.7 times their money on all private equity deals. These returns have further increased the amount of deal capital available to healthcare providers. In most cases, this is good news for small providers considering selling their businesses.
Trend 2 – Demand for cost accountability from healthcare businesses
Healthcare providers are under pressure to change their business model to better manage costs and improve quality of care. The Fee for Service model, where healthcare providers are paid separately for every medical service they offer, has been criticized as too wasteful. Instead, providers are under pressure to adopt new compensation models, like bundled payments and shared savings models, to keep costs under control. These new models of payments are requiring providers to invest in new infrastructure to coordinate care and engage the patient outside the traditional medical office setting. New infrastructure requirements have lead to capital deployment opportunities for investors in both providers and technology vendors with care coordination solutions.
Trend 3 – Increase in cross-segment acquisitions
Often times when a change in strategy is required, larger organizations will acquire the expertise or capability rather than develop it from the ground up. This is an increasing trend for healthcare providers that are pursuing payment models that require integrated care models. Just after the ACA was passed in March 2010, hospitals went on a buying spree of physician medical practices. The trend has continued as skilled nursing facilities have acquired home healthcare companies while hospitals and insurance companies have acquired companies that have care coordination capabilities. As payment models evolve and providers gain more experience operating in a value-based environment, cross-segment acquisitions will pick up pace.
Trend 4 – Customer demand for better quality service and technology
Healthcare businesses are facing new demands from their customers. Consumers are seeing their costs go up with higher deductibles and want more for their money. They expect healthcare businesses to better explain their services and want more ways to review their treatment options, like a website to compare options online. These patient expectations are driving investments for new patient engagement technologies. Whether it is disseminating educational material or monitoring patients in their home, capital deployment opportunities in patient engagement products and technologies will be a popular segment of healthcare for the next several years.
Trend 5 – Smaller healthcare businesses are being pushed into mergers with larger ones
Altogether, these trends are making it harder and harder for smaller businesses to compete. In many cases, small providers are competing in high patient volume markets, which usually means very low margins. It’s expensive and difficult for many small healthcare providers to access capital in order to invest in new technologies where they can participate in new payment models opportunities. With limited opportunities to compete at a reasonable market rate smaller providers are being pushed to sell to larger healthcare businesses
These trends are creating a more challenging market for healthcare but also new opportunities. By preparing for these changes, owners of healthcare companies can get more out of their practice and any future mergers.