Most active sector as buyers rush to build scale and distressed owners look for exits
H2C Industry Insights • 2018 in Review
Healthcare M&A Transactions Database
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Healthcare M&A Shifts from Record Highs to Slower-but-Still-Active Pace, 2017-2018
posted on Jan. 28, 2019
Healthcare mergers and acquisitions (“M&A”) volume didn’t break records as it did in 2017, but M&A activity remained high—especially among hospitals and health systems, post-acute care companies, behavioral health, and healthcare information technology (“IT”) companies.
Data from Hammond Hanlon Camp’s (“H2C”) healthcare transaction database reveals strong depth in healthcare M&A activity in 2018, with 875 M&A transactions announced or closed in 2018, compared with 711 in 2017. These transactions included activity in all major healthcare services sectors: hospitals and health systems, healthcare IT, senior care, home health and hospice, behavioral health, physician practices, ambulatory surgery centers and alternate site, and laboratories.
The post-acute care sector led healthcare M&A activity in terms of volume, with a total of 244 transactions, down from 250 transactions in 2017. There was also strong volume in healthcare IT, with 116 transactions recorded, down from 170 in 2017. Hospitals and health systems recorded 90 announced transactions, down from 2017’s total of 134 announced deals.
“M&A activity in the hospital, behavioral health, and healthcare IT sectors in 2018 reflect a strong focus on advancing population health management capabilities and increasing scale to reduce costs,” says Bill Hanlon, Principal, H2C. “Meanwhile, M&A among senior care facilities and home health agencies demonstrates intense interest in gaining greater control over the post-acute episode.”
Other factors contributing to continued strong M&A activity include:
A focus on partnerships that enhance capabilities around:
Data analytics, including predictive analytics
Population health management
Meeting consumers’ expectations for care (e.g., access, experience)
The need to increase scale to improve quality of care and reduce costs, particularly under value-based payment models
The desire to expand control across the continuum of care, especially post-acute care
Keen interest among private equity firms in acquiring behavioral health services providers and physician practices
Healthcare M&A Volume Slows in 2018,
But Still Remains Historically High
Transactions reflect the desire to increase scale, gain greater control over the continuum of care, and enhance analytic capabilities.
LTC & Home Health
PPMs & ASCs
2018 Year in Review
H2C M&A data for 2018 reveals several key themes.
Larger hospital transactions dominated the 2018 M&A landscape. Notable transactions included agreements between LifePoint Health, Inc., and RCCH HealthCare Partners (which is owned by certain funds managed by affiliates of Apollo Global Management, LLC); Memorial Hermann Health System and Baylor Scott & White Health; and HCA Healthcare and Mission Health. These transactions are expected to close in 2019 pending approval.
Mega systems turned to divestures to decrease debt. The past year saw numerous divestitures by two large health systems. Community Health Systems (NYSE: CYH), one of the largest for-profit hospital chains in the United States, announced 18 hospital divestitures in 2018, for a total of $400 million in gross proceeds, compared with the 30 hospitals it sold in 2017. Through proceeds realized on the sale of its assets, CHS has reduced its net debt by approximately $1.8 billion since the end of 2016.
Meanwhile, Tenet Healthcare, another larger publicly traded hospital management company, announced the sale of four Chicago hospitals and a St. Louis hospital, along with its minority interest in multiple Baylor Scott & White facilities.
Prioritization of ambulatory investments took shape. Even as some large systems divested assets, some of these same systems, such as Tenet, also planned to increase investment in ambulatory services. Ambulatory investments were viewed as a critical strategic move among healthcare organizations—particularly large systems. Ascension publicly announced an “advanced strategic direction” and hinted at plans to scale back hospital operations in favor of expanding its outpatient footprint.
“We have witnessed large systems divest non-performing assets as well as begin to prioritize ambulatory investments over traditional bricks and mortar,” says Victoria Poindexter, Principal for H2C. “Historically, providers have benefitted from scale; however, at some point, the marginal benefit begins to diminish.”
Senior care bankruptcies prompted major moves in the senior care space. In 2018, ProMedica acquired the operations of HCR ManorCare as a part of a joint venture to purchase the real estate from Quality Care Properties with Toledo-based REIT Welltower. The move was viewed as a lifeline for a SNF management team that was highly skilled, but capital starved.
“We expect this sector to continue to be very active as both opportunistic and distressed sellers seek to take advantage of attractive pricing supported by demand from a growing group of well-capitalized buyers,” says Jay Miele, Managing Director for H2C.
Private equity investment in behavioral health and physician practices gained momentum. Behavioral health investments increased from 46 to 51 from 2017 to 2018, as private equity investment continues to fuel activity in this space. Substance use disorder facilities comprised about 40 percent of behavioral healthcare transactions in 2018, with the remainder taking place across autism, eating and intellectual disability disorders.
Private equity investment in physician practices such as anesthesia, dermatology, ophthalmology, GI, dentistry, and more has been a key catalyst for consolidation in some specialties. Dermatology and ophthalmology led private equity investment in physician practices, with continued trends toward consolidation in these specialties.
Two of the largest M&A transactions taking place in 2018 occurred in the physician staffing space, with Summit Partners and Optum acquiring physician staffing company Sound Inpatient Physician Holdings for $2.2 billion and private equity firm KKR acquiring Envision Healthcare Corp. for $9.9 billion in cash and assumed debt. These moves strengthen the investors’ ability to provide high-quality ambulatory and post-acute care.
Building analytic capabilities was a key focus for private equity investment. There were major moves by private equity investors to acquire healthcare software and data analytics companies, demonstrating the vital role analytics plays in population health management, identifying and addressing social determinants of health, and more:
Private equity firm Veritas Capital (“Veritas”) purchased Cotiviti Health for $4.9 billion, combining Cotiviti with Verscend Technologies Inc., a healthcare IT company.
Veritas also collaborated with Evergreen Coast Capital to purchase athenahealth for $5.7 billion, a deal announced in November 2018.
Swiss pharmaceutical giant Roche Pharmaceuticals acquired Flatiron Health for $1.9 billion, which boasts a cancer-centric electronic health records platform linked to 250 oncology practices and the big-data capabilities needed to support oncology research and development.
Amazon continued its move into healthcare. Amazon acquired online pharmacy PillPack in a deal rumored at $1 billion. PillPack, which helps consumers with multiple medications better manage their medications and markets its ability to fill claims quickly, is known for a highly personalized approach to prescription drug management.
Large standalone pharmacy benefit managers seek merger partners. The last standalone pharmacy benefit manager, Express Scripts, merged with Cigna in December 2018. Acquisitions of pharmacy benefit managers by health plans reflect a desire to monitor not only a member’s medical costs, but also the member’s prescription usage.
Investments in hospice and home health created powerhouse providers. Humana collaborated with private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe to acquire Curo Health Services (“Curo”) and Kindred Healthcare (“Kindred”) for $1.4 billion and $4.1 billion, respectively. By combining Curo with Kindred’s hospice care arm, the deal positions these investors to create the country’s largest hospice care operator. Meanwhile, the merger of Great Lakes Caring, National Home Health Care, and Jordan Health Services, owned by private equity firms Blue Wolf Capital Partners (“Blue Wolf”) and Kelso & Company (“Kelso”), created one of the largest providers of home health services in the United States, recently renamed Elara Caring.
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