The increased pressure to provide patients with affordable, convenient and quality care while adapting to expanding value-based reimbursement programs buoyed investment activity across the health-care industry in 2018.

Last year was headlined by two mega mergers: CVS Health and Aetna, and Cigna and Express Scripts. This bullish industry outlook from large-cap investors has trickled down into the lower and middle markets, resulting in increased interest and premium valuations from private equity firms and strategic consolidators.

Several new trends and factors have emerged in 2018 that are likely to carry over and grow in 2019. In particular, 2018 saw several nontraditional companies enter the health-care industry, including industry giants such as Amazon, Apple, Berkshire Hathaway, and JPMorgan.

These retailers and other nontraditional health-care companies hope to lower the cost of providing employee health coverage, while satisfying the need for consumer-centric health-care solutions.

Health-Care M&A Activity Outlook for 2019

The outlook for 2019 suggests an increased volume in transactions as compared to 2018. The continued demand for quality and cost-effective health care and the attendant pressures on third-party payers, government funding, and providers, will likely lead to more providers seeking strategic alliances with well-capitalized partners.

Private equity (PE) and other investment firms are forecast to increase their stake and activity in the health-care industry, given their increased access to capital and other resources that are not as readily available to providers and health systems.

As more investment firms enter the health-care sector, we can also expect to see an increase in acquisition prices. This was seen in 2018, as PE firms and national companies competed with each other to acquire the same targets, and most definitely will continue on an upward trend in 2019.

Continued Consolidation of Hospitals and Health Systems

Activity in the hospital and health system sector is expected to continue in 2019, especially as various regional mega-systems merge with each other. For example, last year’s mega-deals included (1) Advocate and Aurora in the Chicagoland and Southeast Wisconsin market; and (2) Atrium and Navicent in the North Carolina and Georgia region.

Moreover, declining reimbursement, rapidly increasing operating expenses and heightened competition will continue to fiscally challenge smaller local hospitals, and drive to them join larger health systems to provide for economies of scale, and ongoing sustainability of their community based missions.

This has happened already in many major metropolitan areas, but it will continue as smaller operators in “middle America” and rural areas will be forced to partner (“pick teams”) with larger, more capital-rich systems with strong administrative infrastructures.

Physician Services Frenzy

A continuing demand for outpatient physician services, as well as the increasing shift in patient volume to the outpatient setting, has many financial sponsors committing more dollars than ever to the physician services sector. PE firms recently entered several new physician specialties, such as orthopedics, urology, OB/GYN, gastroenterology, radiology, and eye care.

Further, strong activity still continues in other specialties that have already undergone heavy consolidation—such as ophthalmology, pain management, dermatology and dental. The “physician services craze” will continue even stronger in 2019, and possibly through 2020, as the appetite for this sector will continue to grow at a frenzied pace.

Long-Term Care Deals Continue to Trend Up

Deals in the long-term care (LTC) sector continue their upward trend, as an increasingly aging population is driving care to post-acute providers and creating more investment opportunities.

PE firms and publicly traded real estate investment trusts (REITs) accounted for some of the increased deal activity and deal values in 2018. Although relative newcomers to the LTC sector, PE firms and REITs have displayed a unique ability to access and deploy capital for LTC acquisitions.

Home Health and Hospice Deals to Reach Record Numbers in 2019

The shift to outpatient care settings was apparent in the record number of home health and hospice deals in 2018.

Home health and hospice providers are seeing higher volumes as more patients are receiving care in their homes, both due to personal preference, and care management initiatives. With the continuation of these driving factors in 2019, we can expect even greater deal activity in the home health and hospice sector.

Behavioral Health—A Still-Growing Market Segment

Behavioral health acquisitions saw a rapid increase in volume and value as compared to prior years, with more than 66 deals announced or closed in 2018.

Reimbursement tailwinds, increasing patient needs, and a fragmented marketplace has made behavioral health ripe for heightened deal volume in 2018, which likely will continue throughout 2019.

Deal volume will also likely increase due to the growing national focus on opioid and other substance abuse disorders, autism treatment, and the correlating need for more behavioral health providers, substance abuse facilities, and affordable options.

Health-Care Information Technology

Health information and technology (IT) companies have seen a high level of demand and aggressive valuations from PE and other strategic consolidators, particularly in Q4 of 2018.

Investors continue to seek IT solutions to enable them to better adapt to changing reimbursement policies, and deliver cost-effective, convenient, and quality patient care.

As we transition into 2019, health-care providers will continue to require a sophisticated blend of tools and capabilities across analytics, care delivery, and patient engagement to adapt to the value-based care model, and the heightened consumerism that is becoming more and more prevalent in the market.

Author Information

Gary W. Herschman is a member of Epstein Becker & Green in its Newark, N.J., office. Yulian Shtern is an associate of Epstein Becker & Green in its Newark, N.J., office. Robert Aprill is an analyst with Provident Healthcare Partners LLC, a leading middle market investment bank, in Boston. Hector M. Torres is a principal with ECG Management Consultants in Chicago. Aaron T. Newman is a senior manager with ECG Management Consultants in Chicago.

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