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The story behind the billions spent in healthcare mergers and acquisitions

Aug 21, 2019

After a record-setting year in 2018, healthcare merger and acquisition activity has continued its march forward this year and doesn’t show any signs of stopping. 

In fact, it appears to only be increasing. 

With $11.3 billion in transactional revenue, in healthcare M&A was four times higher in the second quarter of 2019 compared to the previous year. 

Mergers continue to appeal to providers who are trying to meet the quadruple goal of increasing access to care, decreasing cost, improving the quality of care and improving doctor experiences.   

On the other side, mergers are appealing to buyers eager to tap into the security offered by senior care as aging baby boomers pour more money into the market.    

But despite the heavy merger and acquisition pace, the market remains relatively fragmented and uncertain due to evolving technology requirements, the future of the Affordable Care Act, and the implementation of value-based reimbursement and alternative payment models industry.  

Some common themes from 2018 continue to drive M&A activity in 2019:

  • Smaller, community-based hospitals are partnering with large regional players to ensure survival and longevity.
  • Larger regional, statewide and multistate health systems are combining in mega-mergers to achieve a larger breadth of service coverage.
  • Nonprofit healthcare systems are buying for-profit hospitals to fill service gaps, such as behavioral health and rehab services.
  • Mega-deals, cross-country integrations, disruptive partnership models and interest from private equity firms continue to account for most transactions. 

Besides technology, the most prominent healthcare sectors that have experienced a considerable amount of M&A activity and interest include: 

  • Ambulatory surgery, diagnostic imaging, and dialysis centers 
  • Behavioral health 
  • Urgent care centers 
  • Specialty practices 
  • Senior living /post-acute care 

Here is a breakdown of what’s fueling growth in each.

Ambulatory surgery/imaging centers 

More routine surgeries, diagnostic imaging and dialysis are moving outside hospitals and increasing the demand for outpatient services.  

Ambulatory surgery centers in particular are ripe for M&A since they remain highly fragmented, with approximately 72% of freestanding ASCs being independently owned and operated. 

The remaining 28% of the ASC industry is controlled by large players, including AmSurg Corp, United Surgical Partners and HCA, among others.

Behavioral health 

The opioid crisis is a key driver behind growth in behavioral health, which includes drug abuse and detox facilities. 

In October 2018, one year after declaring it a national emergency, President Trump signed one of the most significant legislative overhauls aimed at fighting the opioid epidemic in recent history.

PE firms entering the behavioral health industry are aiming to capitalize on these regulatory tailwinds. Approximately 44% of behavioral health companies acquired by private equity firms in 2018 had office-based opioid and substance abuse treatment programs.

A secondary driver is increased awareness and assistance for those with autism, learning disabilities and psychiatric conditions.  

The Mental Health Parity Act of 2008 raised mental health coverage to the level of physician health coverage, and the ACA brought many new patients into the system with the expansion of Medicaid eligibility and funding.  

Approximately 1.1 million children in the U.S. are on the autism spectrum, which totals $16.5 billion in direct costs of treatment each year.

Urgent care centers

Urgent care center visit volumes continue to outpace other facilities, which makes them attractive for M&A. 

The growth is driven by several macro factors: 

  • Consumers continue to demand accessible, on-demand health services. 
  • Patients are bearing more financial responsibility for their own healthcare, leading to increased price scrutiny.
  • Patients are expecting a digital healthcare experience in line with their online retail digital experience (e.g., Apple and Amazon). 
  • A number of large commercial payors are changing their policies about what qualifies as a reimbursable visit to the emergency room.

Specialty medical groups 

There is a growing interest in physician services due to a number of factors, including:

  • The need for substantial capital to invest in advanced electronic medical records and data analytics.
  • The desire to expand supplemental ancillary services, such as lab, therapy, infusion and durable medical equipment.
  • The competitive benefits of professional and centralized management to help navigate the industry changes and strategically position themselves.

Dermatology remains one of the most highly sought-after specialties. With the mix of commercial payors and self-pay, and cosmetic procedures, the specialty has been the darling of private equity investors, who have continually looked to partner with strong physician platforms and execute on a number of regional and national add-on acquisitions. 

While dermatology and ophthalmology continue to see a considerable amount of invested capital flood in, several other specialties saw an increase in investment. 

Areas such as OB/GYN, gastroenterology and, most notably, orthopedics and urology are experiencing an uptick in interest from the private equity community. 

Driven by the many parallels to highly consolidated specialties, these fragmented sectors will likely see the bulk of platform investments from private equity funds during the next 12-24 months.

Home health/hospice  

The need for scale and efficiency, driven by the transition from fee-for-service to value-based payment models and the continued emphasis on outpatient care to reduce healthcare costs, has attracted attention to the home health and hospice industry. 

In 2018, private equity firms accounted for approximately 59% of home health and hospice transactions, while private strategic operators accounted for 20%; public strategic operators accounted for 18%, and payor acquisitions accounted for 3%. 

Private equity firms targeting home health agencies are looking to take advantage of perceived inefficiencies in site of care economic differentials. They aim to capitalize on changing reimbursement models, which focus on value of care, rather than frequency of care. Additionally, as Medicare and private insurers continue to push towards lower costs care settings, PE firms aim to capitalize on increasing home health volumes.

Senior living/long-term care/post-acute

The recent activity in the senior living and long-term care sector, which includes skilled nursing and assisted living facilities, continues to soar, driven in large part by a number of factors. These include: 

  • The ongoing health industry transformation to providing care in the most cost-effective setting (with long-term care facilities being less costly than hospitals).
  • Aging baby boomers entering their 70s, 80s and beyond.
  • Pressure to reduce healthcare costs by limiting readmissions to hospitals and improving the quality of care provided.
  • Significant financing provided by real estate investment trusts, private equity firms and well-funded healthcare systems seeking to capitalize on this growing sector.

Who is investing?

Private equity firms are expected to close more than 700 healthcare deals in 2019 — almost triple the amount just 10 years ago — and up from roughly 600 deals in 2018.

PE firms are eager to cash in on healthcare’s return on investment, which was the highest in the current investment cycle (2009-2015) compared to all other industries.

PE investors and strategic investors approach the same target with different lenses.

Strategic investors typically use their company capital structure to acquire businesses. They seek to enhance returns by identifying synergies and fully integrating the acquired business into their existing operations. 

On the other hand, PE firms typically use a leveraged recapitalization model to purchase an interest in a business. 

They provide board oversight and resources such as access to capital, management experience and operational efficiencies to help the company grow, with the idea that they will seek liquidity through a sale in three to seven years to a larger PE firm. 

PE firms seek to enhance returns by using access to low-cost debt, as well as growth of the company, over the holding period. 

In recent years, potential synergies have increased in importance for PE acquisition targets due to the increasing prevalence of “add-on” acquisitions by PE firms.

The healthcare industry is also appealing because private equity investors value:

  • Stability
  • Built-in demand
  • Recession resistance
  • Insulation from trade wars and tariffs

What’s next for healthcare?

The M&A pace is expected to continue through 2020. How much and where will be influenced by three main factors:

  1. Technology will continue to be a key driver in healthcare, creating more opportunities for collaboration — and M&A. Physicians spend more than 21% of their time on paperwork, time they’d rather spend with patients. You can expect to see more M&A as everyone in the healthcare industry tries to leverage the use of artificial intelligence, robotics and cognitive technology to improve connectivity and care.
  2. You can also expect to see an increased emphasis on wellness and prevention over treatment; doctors and providers are looking to expand care to cover patient lifetimes. 
  3. Political uncertainty — and increasingly complicated regulations — could shake investor confidence.

How Wipfli can help

Our specialized teams sit at the intersection of healthcare and mergers and acquisitions. Learn more about how we can help build proven solutions for healthcare providers or how our M&A specialists can help with strategy and execution. 


Larry Elisco, CPA/ABV, CCS-P
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