Merger and acquisition activity in the health-care industry has been growing leaps and bounds ever since the passage of the Affordable Care Act in 2010 with its mandate for reducing cost, increasing quality of care and resulting value-based reimbursement.
The effect, over the last several years, has been increasing consolidation in major sectors of the industry. Health-care transactions in 2020 started off at the same fast pace as prior years, but much of the activity has slowed down as the coronavirus pandemic sweeps through the nation.
One reason for the decline in transaction activity is obvious. As the nation locks down with piecemeal stay-at-home/shelter-in-place and social distancing orders, management meetings and site tours were canceled and are only now either being done virtually or postponed to later in the year.
Other, more significant, reasons include concerns from investors about the corporate debt markets where the cost of borrowing, especially for mid-market deals, has gone up. As a result, transaction activity, especially involving private equity (PE) sponsors in the middle market which have historically been leveraged with this type of debt financing, are slowing down. Increasingly, investors are reaching out to their lenders to gauge their appetite for financing new investments in a potential global recession.
Other reasons include the impact of the pandemic on many physician specialties such as dental, dermatology, GI, and urology, which, almost overnight, closed down or had to substantially reduce services due to various emergency orders, laws and the like. As these practices struggle to remain day-to-day operations, investors in these practices are reluctant to enter into new or add-on transactions until the dust settles from the pandemic.
As new guidance comes out almost on a daily basis from various federal government agencies like the Centers for Medicare & Medicaid Services, Office of Inspector General for the Department of Health and Human Services, etc., new and different opportunities are arising for many practices. For example, on March 30, the CMS announced that, if consistent with a state’s emergency preparedness or pandemic plan, ambulatory surgery centers can contract with local health-care systems to provide hospital services or enroll and bill as a hospital during the emergency declaration.
The Dust Will Settle
Once the dust settles from the pandemic—and the dust will eventually settle because it is important to note that, for the most part, the health-care industry is recession-proof—there is going to be a flurry of investment activity, at least in some areas of the industry.
Deals that were well into the process before the worst of the pandemic are unlikely to be significantly impacted and will close in the next couple of months. Others that are in the early stages could see delays until late summer/fall.
In fact, major investment bankers are predicting that PE deal activity will be robust again this summer, as investors have a ton of dry powder, and will be thirsting for deals. Deals for “distressed” companies will also be the focus for many investors seeing opportunities there.
There may even be a “pivoting” as certain targets become more lucrative than others—for example, the coronavirus pandemic has demonstrated the urgent need for health-care services and innovation in health-care sectors such as:
- Pharmaceutical and life sciences companies developing tests, treatments and vaccines;
- Medical device and supply companies manufacturing high-end and critical medical equipment (e.g., ventilators) and protective personal equipment or PPE (e.g., masks, gloves and disinfectants);
- Hospital and long-term care facilities with capacity for the sickest patients; and
- physicians and mid-level professionals who are the front-line of diagnosing and treating patients.
We anticipate that the following health-care sectors may remain, or become, hot markets for post-Covid-19 transactions:
Medical Device and Supplies and Pharmaceutical
New scientific discoveries, including vaccines, PPE, ventilators, gene therapies, precision medical treatments and new biologic drugs based on advanced, AI-driven clinical research trials, aimed at effectively treating health-care conditions at lower costs are being developed at a fast pace.
Covid-19 will just accelerate the innovation in certain of these areas. Deal sizes in this sector are also some of the highest because of rapid innovation and the huge potential upside.
Physicians are key “quarterbacks” in controlling health-care costs, but they require the support of advanced EMR, data analytics, and a vast infrastructure, all of which require substantial capital and the management capabilities of larger organizations.
This dynamic is drumming up demand for physicians and competitive offers. Physician practices and services accounted for 219 deals in 2019, substantially up from 2018. In fact, the top consolidators of physician groups include:
- Large national health-care companies, both public and private;
- Large hospital and health-care systems; and
- Specialty platforms backed by private equity (PE) investors.
Health-Care Information Technology
Advances in analytics and science are key to aiding health-care providers in the early detection and treatment of health-care conditions and to safely deliver quality, lower-cost care. This includes, for example:
- Advanced, interoperable EMR system;
- AI and data analytic technologies that improve diagnostics and early detection, such as use of AI-aided breast cancer detection;
- Virtual care (telemedicine) platforms that enhance access to care and treatment in the ever-increasing digital, personal device, and consumer-driven health-care economy;
- Mobile apps and IT “connected” medical devices that enhance prevention and detection of illnesses, and can guide care for individuals managing chronic diseases, such as diabetes; and
- Cybersecurity to protect our health information and technology-dependent health-care delivery system.
Hospitals & Health Systems
We continue to expect consolidation among hospital systems, both nonprofit and publicly owned. The Covid-19 pandemic may make most hospitals and small health systems that are still independent finally decide they need to be part of larger systems
Long-Term Care Services
Long-term care has been a leader in all sectors and is expected to continue to lead the transaction market in light of increasing demand for all components along the continuum of care. There will be a continued focus on aging in place, through home health agencies and adult day care centers.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Anjali N.C. Downs is a member of the firm in the Health Care and Life Sciences practice, in the Washington, D.C., office of Epstein Becker Green. Her practice focuses on fraud and abuse and federal and state regulatory compliance within the health care industry.
Gary W. Herschman is a member of the firm in the Health Care and Life Sciences practice of Epstein Becker Green. He advises and assists health-care providers in strategically positioning themselves in the rapidly changing health-care marketplace.
Anjana D. Patel is a member of the firm in the Health Care and Life Sciences practice, in the Newark and New York offices of Epstein Becker Green. Her practice focuses on health care transactions and regulatory compliance counseling.