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INSIGHT: Health-Care Consolidation Strong in 2019—Expect Even Stronger 2020

Jan. 27, 2020, 9:01 AM

Last year ended strong with 187 health-care transactions announced or closed in December, making it the most active month of 2019.

The continued proliferation of technologies to improve patient care, the accelerating development of biomedical innovation, and the sustained focus on delivering high-quality, low-cost care through value-based approaches drove investment activity in 2019 with the overall closed/announced deals for 2019 reaching 1,588 through December, a healthy increase from 2018, reflected by the following figures:

  • Long-term care remained the most active area of investment for 2019 at 295, up from 207 deals in 2018.
  • Healthcare IT & software accounted for 203 deals in 2019, up from 141 in 2018.
  • Physician practices and services accounted for 219 deals in 2019, substantially up from 2018.
  • Life sciences transactions announced or closed increased to 174, a significant increase from the prior year.
  • Hospital/health systems saw a decrease transactions in 2019, with only 131 deals announced or closed.

Consolidation and a changing U.S. health-care market continue to drive investment activity to record levels. Despite the political unknowns of the elections in 2020, as long as the economy remains strong, we believe that investment activity is likely to continue to be relatively robust through the summer and up until the elections.

Investment activity could moderate after the election, depending upon outcomes and possible changes a new Congress or administration could bring; however, we still anticipate increased deal activity and the possibility of reaching close to 2000 health-care industry transactions in 2020.

Physician Practices and Services (Including Dental Practice Management)

Physician services remained an area of great interest for investors in 2019, and is likely to continue at the same or faster pace in 2020. We anticipate that activity in this sector will reach 250-300 deals in 2020. Demand for outpatient services continues to grow as a result of changing reimbursement incentives for patients to receive care outside of hospitals, and in the most cost-effective setting necessary.

Although physician specialties with one or more ancillary revenue streams (e.g., ambulatory surgery, imaging, laboratory, etc.) continue to be the most attractive targets for private equity recapitalization transactions, many 2019 transactions also involved primary care physician groups, as the “gatekeepers” who have the best opportunity to control the cost of quality care.

2019 was a robust year for private equity “add-ons” in the ophthalmology, dental, pain and eye care sectors. In “newer” target specialties—such as orthopedics, gastroenterology and urology—there were a number of new platform investments, as well as add-ons by platforms launched in the last few years.

There are also signs that hospitals are jumping back into the fray acquiring physician groups, as a defensive move because many practices in their catchment areas are being pursued by investor platforms, as well as to bolster their growing clinical integration and population health initiatives.

Hospitals/Health Systems

Although the number of transactions involving hospital and health systems consolidating declined in 2019, several major mergers did occur. Overall activity declined because hospitals in major metropolitan regions have already undergone substantial consolidation, and many of the deals transacting now (and into 2020) involve either:

  1. Health systems, both three to five hospitals and 10 to 15 facilities, merging to create larger regional and multi-state mega-health systems;
  2. Solo hospitals and small systems outside of metropolitan areas—which were not as active in deals the last five to 10 years—increasingly becoming targets for consolidation now; or
  3. Hospitals in suburban areas that previously resisted the urge to merge are now changing their strategic outlook or engaging in joint ventures and other less permanent, alternative forms of combination with other hospitals and systems.

All of this activity is being driven by changing reimbursement, rapidly increasing operating expenses, the need for capital to invest in advanced IT systems (e.g. EMR, virtual care platforms, etc.), data analytics and population health initiatives, as well as growing their outpatient care capabilities—all to effectively address growing competition in their markets.

Larger organizations clearly have much greater capital for these investments, and many have already invested hundreds of millions and are seeking to gain economies of scale by providing the benefits of these investments to a much larger group of affiliated facilities.

Long-Term Care

Long-term care led all sectors during 2019 with nearly 300 transactions announced or closed, a 40% increase from the prior year. This upward trend is expected to continue in 2020 and beyond as the baby boomer population ages into their seventies and eighties, boosting the growing demand for post-acute care providers and facilities across the long-term care “continuum”—ranging from adult day care to home health, and assisted living to rehab and nursing homes.

For example, the Ensign Group, a publicly traded provider of post-acute health-care services with regional subsidiaries nationwide, continued its acquisition growth strategy with 26 acquisitions in 2019. Moreover, the acquisition activity in the home health sector has also increased significantly, with many deals involving both public and private investors.

Healthcare IT & Software

The Healthcare IT & software sector continued its steady pace of deal flow with over 200 transactions announced or closed in 2019, also up by approximately 40% from 2018.

Health IT remains a sector of great interest for investors because data collection and analysis is one of the crucial components of successful value-based care initiatives. This includes interest in companies with artificial intelligence (AI) technologies (to improve diagnostics, early detection and research studies), mobile apps for connected devices, and enhanced cybersecurity.

Moreover, virtual care platforms are increasingly being implemented across the country, and these platforms are expected to become the “first point of entry” for a majority of clinical interactions due to patient convenience and efficiencies.

Although these entrants will compete with retail clinic and urgent care strategies of many large players (CVS/Aetna, Walmart, etc.), we still expect growth of outpatient and urgent care clinics.

Life Sciences, Pharmaceutical & Medical Device

Continued biomedical innovation drove a significant uptick in the number of life science and pharmaceutical transactions announced or closed in 2019 relative to 2018. Despite growing attention to pharmaceutical pricing, investment interest is likely to continue in 2020 given the potential for significant ROI for leading edge treatments driven by new gene therapy innovation, precision (personalized) medicine, and new biological drugs.

Deal sizes in this sector continue to be some of the highest ever; for example in December International Flavors & Fragrances Inc. announced its acquisition of DuPont de Nemours Inc.'s Nutrition & Biosciences business for $26.2 billion.

Similarly, interest in medical device companies was strong in 2019, as providers and payers search for ways to effectively manage costs and improve outcomes for patients with both acute and chronic conditions.

Behavioral Health

Transaction activity in the behavioral health sector reached nearly 50 deals announced or closed in 2019, and the pace of activity in this sector is expected to continue as behavioral health attracts more investor interest.

Driving this investment interest is the growing awareness of, and funding for, behavioral health services, to effectively treat autism, depression, anxiety, and substance use disorders (especially in light of the national opioid crisis). For these reasons and others, we expect this sector, broadly defined, will be a target for increased consolidation in 2020 and beyond.

Cannabis

Medical marijuana is legal in close to 40 states now, and announced or closed transactions in the cannabis sector grew to nearly 60 last year, with most deal activity in the second half of the year. This continued growth trend is expected to further strengthen through 2020, and could easily reach the 100 deal mark.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Gary W. Herschman is a member of Epstein Becker & Green in its Newark, N.J., office. Anjana D. Patel is a member of Epstein, Becker & Green in Newark. Larry Kocot is a principal at KPMG LLP in Washington, D.C. Hector M. Torres is a principal with ECG Management Consultants in Chicago.

Zachary S. Taylor, of Epstein, Becker & Green in Newark, N.J.; Aaron T. Newman, of ECG Management Consultants in Chicago; Nicholas B. Davis, of ECG Management Consultants in Chicago; Christopher McGuine, of ECG Management Consultants in Chicago; Carole Streicher, of KPMG in Chicago; and Brett S. Glover, of KPMG in Dallas, contributed to this article.

Epstein Becker & Green P.C. did not comment on any particular transaction or party discussed or listed in this article.

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