Healthcare M&A trends: 5 insights for healthcare executives

September 11, 2016

As external pressures such as government regulations continue to mount and alter the approach to deal making in the healthcare sector, there are five things health services executives should watch.

Health services deals of varying sizes and structure types continue to receive ongoing investment interest by both corporate and private equity buyers regardless of external pressure (such as the examples noted below), and the second quarter of 2016 proved no exception.

Overall in the U.S., the health services market was active with 239 announced deals worth a total of $16.1 billion in deal value. Both deal volume and value in this sector increased by approximately 8% and 4% quarter-over-quarter compared to the first quarter of 2016, respectively.

As external pressures such as government regulations continue to mount and alter the approach to deal making, there are five insights health services executives need to know:

1. There is positive and steady interest within health services.

KreshoWhile we have witnessed a quarter over quarter increase in both value and volume, when compared to one year ago (the second quarter of 2015) there is a 39.4% decrease in deal value and a 15.5% increase in total volume. Overall though, the second quarter of 2016 is the seventh consecutive quarter of significant deal activity with more than 200 announced transactions. However, unlike the pharmaceuticals and life sciences sector, mega deals are not a major driving force of market activity in health services, with only two announced transactions exceeding $1 billion for a total of $8.9 billion in value.

2. Deals with physician medical groups continued to reign supreme in total deal value.

Mainly due to its largest announced mega deal of the quarter, worth $6.7 billion, the physician medical groups subsector accounted for 42% of all health services transactions in the second quarter in terms of value. However, the long-term care subsector led the market in activity with 87 deals, contributing to 36% of total deal volume.

Next: Governmental review of mergers is not new

 

 

3. Governmental review of mergers is not new.

The potential that a transaction may be challenged by the Federal Trade Commission has always existed and has yet to deter deal-making activity, however, government regulation has encouraged deal makers to rethink how to best approach potential agreements and illustrate efforts to not create an anti-competitive marketplace. Additionally, the companies involved in mergers are working to provide greater efficiencies that can be passed along to consumers, helping control costs and allowing for reinvestment into consumer-friendly models, like more flexible point of care models and consumer-friendly enabling technologies. If one or more of the currently proposed blockbuster health insurance mega mergers are not completed, we should expect to see renewed interest in joint ventures, more advanced accountable care organization models, additional smaller-scale mergers, or other deals that promote collaboration. These efforts are with the expectation to help the industry reduce costs, better manage care through population health models, and continue to trend toward a pay-for-performance, value-based care system.

4. Interest rates and financing dictate deals.

Private equity firms have increasingly been buyers at the table, and if interest rates and financing trends are attractive, this trend will likely continue. With the emergence of healthcare-specific investment teams in many of the firms and healthcare centric funds, private equity firms have become increasingly sophisticated about investing across the sector, but may be shy to invest in subsectors that tend to be reimbursement heavy.

5. “Informatics” and “affiliations” are new trends.

Increasingly we are seeing activity in informatics (or the use of data analytics for predictive and prescriptive analyses). Payers and providers are acquiring data companies to help manage costs and improve care for patients. As cost pressures persist across the system, we may continue to see payers and providers developing networks together to best connect-the-dots, though many deals may be local in nature. Separately, another emerging trend that has become an increasingly more prevalent type of transaction is “affiliations” or other contractual relationships (e.g., joint-operating agreements) between various payers and providers in different markets to help with back office system efficiencies.

The U.S. Health Services market maintains a positive outlook for deals, with ongoing steady and healthy appetite for transaction activity.

Thad Kresho is lead partner, PwC Health Services Deals Practice.