Merger and acquisition (M&A) activity remains robust in the healthcare industry. Of more than 450 U.S. healthcare executives surveyed in 2017, 38 percent believed M&A activity would influence their organizational growth plans for the coming year.1
Several market factors are driving this activity. As healthcare leaders look for new growth avenues in a competitive market, they should be aware of the current M&A landscape to gain a better idea of opportunities for their organizations to buy, sell, or reshape their patient care services in innovative ways.
The Current Healthcare M&A Landscape
Trends within the following areas have shaped healthcare sector M&A activity during the past few years.
The Affordable Care Act
Though its fate remains uncertain under the current White House administration, there is no doubt the Affordable Care Act (ACA) has played a major role in expanding access to healthcare for many individuals. Since the ACA was enacted in 2010, nearly 20 million people have signed up for individual health insurance plans, with more people continuing to sign up each year.2
The significant number of individuals newly covered by health insurance has created opportunities for existing health plans to attract new investors. Continued M&A activity in this space likely will be seen in the future, too, as payers feel the need to enter the market or better position themselves for what lies ahead.
There continues to be a shortage of nurses and primary care physicians in the U.S. healthcare system. It is predicted that by 2025, the U.S. will require approximately 52,000 additional primary care physicians nationally.3
This shortage of healthcare workers has created an emerging market for healthcare technologies that help fill the clinician gap. Examples of such technologies include telemedicine, robotics, wearable monitoring devices, and other e-health tools that assist with providing patient care, particularly in the areas of behavioral health, specialties such as cardiology and gastroenterology, and the management of patients with multiple chronic conditions.
The aging of the nation’s second-largest generation, the baby boomers, will continue to affect healthcare providers. Medicare enrollment has grown by approximately 3 percent annually due in large part to aging members of this population.4 In addition, many baby boomers suffer from chronic conditions such as hypertension, high cholesterol, diabetes, and obesity, setting the stage for rising healthcare costs and increased resources needed to care for these patients.5
Physician Practice Trends
Many physicians are seeking employment with larger practices and providers as the economic and administrative challenges of private practice become less desirable. Physicians increasingly are selling their businesses to minimize personal financial risk and lessen administrative burdens. Buyers benefit from acquiring physician practices and employing individual providers, as these purchases contribute to volume growth and reduction of overall fragmentation in healthcare delivery.
Seller Motivations in Today’s M&A Environment
Various factors in the current healthcare landscape are motivating sellers to engage in M&A transactions. Generally, sellers consider a transaction for these six reasons:
- Financial distress. Achieving healthy margins remains difficult for providers. Many face declining volumes, rising costs of pharmaceuticals and medical equipment, labor shortages, and increasing challenges contracting with payers, mainly due to narrow network plans, in which patients’ choice of providers is limited to a greater extent than by a typical HMO.
- Capital requirements. Capital expenditures for organizations, particularly for IT equipment that facilitates electronic health records (EHRs) and other patient care systems, remain a large burden for today’s providers – especially those that are already facing financial distress.
- Lack of transition plans for physicians or owners. The absence of succession planning within physician practices negatively affects volume and practice reputation and creates significant financial stress.
- Administrative burdens. For all providers to be effective, they need to commit substantial time and resources to addressing contracting, billing, workforce management, and data capture, among other administrative obligations.
- Regulatory changes. Regulatory requirements such as the ACA, the Bundled Payments for Care Improvement initiative, and the Medicare Access and CHIP Reauthorization Act of 2015 have placed increased burdens and risk on many providers. This has led some to sell or merge their businesses to avoid making significant financial investment in EHR systems, collecting lower reimbursement amounts and paying penalties, and working longer hours and seeing more patients to maintain compensation.
- Reimbursement outlook. Payers continue to reduce the cost of care, and the results are lower payments to providers. Government payers started the transition to achieving value versus volume through the creation of quality programs linked to reimbursement. More recently, we have seen the development of accountable care organizations, clinically integrated networks, and other alternative payment models that emphasize less testing, an overall reduction in cost of care, and sharing the cost savings with hospitals and physicians. Payers and employers are following the government lead and developing similar value-based programs and pursuing strategies for population health programs. In general, the trend of payers continuing to reduce total payments for health services has placed significant financial distress on some providers.
Identifying Risks and Opportunities
Healthcare executives continue to look for new ways to expand their businesses and minimize risk in a challenging financial environment. When contemplating an M&A transaction, organizations should take care to thoroughly research and understand seller motivations and perform due diligence in critical areas such as finance, tax, operations, and IT.
M&A transactions are complex and require careful planning. Organizations should work with in-house or third-party resources – or a combination of both – to develop and validate a business plan, identify risks and opportunities involved with a contemplated investment or acquisition, and align necessary capital resources.
1 “Healthcare Executives Expect M&A, New Segments to Drive 2017 Growth, Capital One Survey Finds,” Capital One, Jan. 10, 2017, https://www.capitalone.com/commercial/healthcare/news/capital-one-releases-healthcare-survey/
2 Nicholas Bakalar, “Nearly 20 Million Have Gained Health Insurance Since 2010,” The New York Times, May 22, 2017, https://www.nytimes.com/2017/05/22/health/obamacare-health-insurance-numbers-nchs.html
3 Stephen M. Petterson, Winston R. Liaw, Robert L. Phillips Jr., David L. Rabin, David S. Meyers, and Andrew W. Bazemore, “Projecting US Primary Care Physician Workforce Needs: 2010-2025,” Annals of Family Medicine, November/December 2012, http://www.annfammed.org/content/10/6/503.abstract
4 Juliette Cubanski and Tricia Neuman, “The Facts on Medicare Spending and Financing,” Kaiser Family Foundation, July 18, 2017, https://www.kff.org/medicare/issue-brief/the-facts-on-medicare-spending-and-financing/
5 Dana E. King, Eric Matheson, Svetlana Chirina, Anoop Shankar, and Jordan Broman-Fulks, “The Status of Baby Boomers’ Health in the United States: The Healthiest Generation?” JAMA Internal Medicine, March 11, 2013, https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/1568518