posted on Jan. 28, 2020

 

 

Healthcare mergers and acquisitions (“M&A”) volume across all major sectors rose 8 percent in 2019, with 768 transactions announced or closed in 2019, compared with 705 in 2018, data from Hammond Hanlon Camp LLC (“H2C”) shows.

 

While healthcare M&A volume did not match 2017’s record year of transactions, when 875 transactions took place, hospital and health system transactions remained steady at 82 transactions, compared with 86 in 2018, H2C data shows. Q4 activity was especially strong, with 22 transactions, up from 20 in Q3.

 

Another interesting trend: a significant drop in for-profit hospital and health system divestitures. As H2C shared with Modern Healthcare recently, buyers are being more selective about which organizations they choose to acquire, both in the for-profit and not-for-profit space. Additionally, more hospitals and health systems are entering into informal partnerships or minority-stake partnerships.

 

2019 also brought increased M&A activity in sectors such as behavioral health (with a nearly 57 percent increase in volume), healthcare IT (a nearly 12 percent increase), and post-acute (a nearly 13 percent increase).

 

“In 2019, we continued to see deep interest in behavioral health acquisitions as providers sought to meet increased demand for services nationally,” said Victoria Poindexter, Principal, H2C. "2019 also was marked by intense interest in gaining greater control over post-acute episodes of care and a strong focus on healthcare IT partnerships to test drive innovations in care and bring in-house ideas to market.”

 

Recently, the Medicare Payment Advisory Commission (“MedPAC”) proposed tying payment to quality for long-term care hospitals, home health services, inpatient rehabilitation facilities, and skilled nursing facilities. In 2020 and beyond, this could further drive interest in acquiring post-acute facilities.

 

Other factors contributing to continued strong M&A activity include: 

 

A slight uptick in laboratory acquisitions in Q3 and Q4. Two factors driving this trend: smaller providers are struggling to keep up with the service offerings and efficiency of larger labs, while more hospitals are beginning to sell or outsource their outreach laboratories or look for partners to manage inpatient laboratory services.

 

Increased physician practice management (“PPM”) and ambulatory surgery center (“ASC”) transactions, characterized by small transactions. PPM transactions typically are being driven by population health management and an emphasis on proactive, not reactive, care. Meanwhile, ASCs continue to be an attractive sector for investment and consolidation, especially with the shift in care to outpatient settings and increased Medicare reimbursement rates. Both sectors build off each other due to the referral channels that generate activity in each space.

 

2019 Year in Review

 

H2C M&A data for 2019 reveals several key themes. 

 

Hospitals and health systems

 

Distressed hospital sales continued to make headlines last year. What made 2019 unique was the size of the distressed hospitals that were the focus of M&A, showing that smaller hospitals are not the only at-risk providers as the healthcare landscape continues to undergo change. In 2018, the average net patient revenue of a distressed hospital was approximately $150 million, while in 2019, the average net patient revenue of a distressed facility was approximately $440 million. Notable sales include Verity Health’s sale of St. Francis Medical Center, Seton Medical Center, and Seton Coastside; the sale of St. Christopher's Hospital for Children to Tower Health and Drexel University; and the sale of Jewish Hospital to University of Louisville Health.

 

There were also a number of high-profile transactions that ended in the early stages of discussions. These include Sanford Health’s planned merger with UnityPoint Health, which would have resulted in an $11 billion, 76-hospital system if it had been approved; Partners HealthCare’s plans to acquire Lifespan and Care New England in Rhode Island; and the previously planned merger of Baylor, Scott & White Health and Memorial Hermann, which the organizations called off in February 2019.

 

Other data points that stood out:

• During Q3, many of the hospital and health system transactions posted were tied to financially distressed hospitals and systems.

• In Q3, independent hospital sales dominated M&A activity in this sector, with 15 of 22 hospital transactions involving an independent hospital.

• Q4 saw an uptick in health system-to-health system transactions, with 13 of 22 transactions involving two systems.
   

“As the hospital sector continues to consolidate, buyers are preferring larger acquisitions,” said Mike Tierney, Director, H2C. “There is greater competition for systems with $500 million or more in revenue.”

 

Healthcare IT (“HCIT”)

 

HCIT transactions continued at a robust pace in 2019, with 133 transactions announced in 2019 versus 116 transactions announced in 2018, representing 12 percent year-over-year growth. After a three-year IPO drought, six digital health companies entered the public market in 2019—including Livongo, Health Catalyst, Phreesia, Change Healthcare, Peloton, and Progyny, with a combined IPO value of approximately $13 billion. Prior to this influx of IPOs, it had been approximately three years since the last HCIT IPO, when iRythm issued an IPO in October 2016. While the IPO market has picked up, M&A continues to dominate private equity exits in terms of deal count. In 2019, 134 HCIT companies were acquired, well above the three-year average from 2016-2018 of 114.

 

FY 2019 continued to see a high volume of M&A activity from well-established healthcare companies as well as less traditional buyers such as Amazon, Experian, Apple, and JP Morgan. Additionally, the trend of SaaS-based acquisitions continued through the end of 2019 and accounted for 74 total transactions, or just over 55 percent during this period.

 

Another trend H2C is seeing: an increase in direct investment in healthcare start-ups by health systems. “The rapid pace of direct private investment by health systems is a trend that demands further exploration by healthcare leaders,” said Nick Beale, Director, H2C. “It necessitates careful consideration not just of where to invest, but also the capabilities needed to manage investment.”

 

LTC and Home Health

 

Post-acute care activity was robust as investors sought to capitalize on new Centers for Medicare & Medicaid policies that provide Medicare Advantage plans with greater flexibility, providing another source for reimbursement. With 274 transactions announced in 2019, following 242 transactions in 2018, the sector continues to change, taking drastic steps away from the mom-and-pop entities that were common at the start of the decade.

 

Behavioral Health

 

Behavioral health needs continue to be underserved nationally, prompting strong investment from private equity firms, particularly in the areas of addiction treatment and autism services. H2C expects this momentum to continue into 2020.

 

PPMs & ASCs

 

PPM and ASC M&A activity continue to be characterized by small transactions (one or two facilities), but several established networks are beginning to gain size. With a push toward outpatient procedures and new CMS reimbursement rates, ASCs will continue to be an attractive sector for investment and consolidation.

 

Labs

 

Larger companies such as LabCorp, PathGroup, Quest, and Sonic continue to complete tuck-in acquisitions as smaller players struggle with a challenging reimbursement environment and the continued push toward a tech-enabled, more efficient operating model. The emphasis on enhanced capabilities in IT and analytics is needed to increase the value of laboratory data for hospitals, physicians, payers, and patients.

 

H2C maintains a proprietary database of transaction information by sector, with robust financial and valuation data, analyses of continuing and emerging trends, and more. For more information, contact us.