Health Care M&A Activity on the Rise

September 28, 2021

By Bert Orlov

In the health care market, a dramatic uptick in activity (acquisitions) by entrepreneurs and private equity (PE) firms in 2021 has already exceeded expectations.  And early data points to a long-term trend in provider acquisitions (e.g., hospitals, physician practices, home care, telehealth).  Here are some themes that were discussed at the Texas Society of CPAs 2021 Advanced Healthcare Conference Webcast:

While COVID-19 temporarily slowed PE activity in 2020, now, the pent-up demand exacerbated by the slowdown, plus the intrinsic movement toward exit strategies, shows the sector’s strong future.  Furthermore, the pandemic itself will likely drive volume due to financial distress. And investor interest is returning stronger than ever.

In addition, for elderly providers and entrepreneurs, the aftermath of COVID-19 stress will likely drive exit/monetization strategies, and the industry is seeing exactly this pattern in dramatic growth in acquisitions in the physician practice sector.

The underlying drivers of consolidation, and thus PE activity, have only grown stronger. Consolidation will accelerate across all segments of health care due to needs for market power, economies of scale, and strong management to address increasing demands in technology and care management. Value-based purchasing will continue to expand as the Centers for Medicare and Medicaid Services (CMS) designs and implements new payment models, most particularly its emphasis on direct contracting (via entities known as DCEs).

Furthermore, integration of new technologies such as telehealth will require a move from the COVID-19 ad hoc approach to strategic positioning of patient care and operations to integrate new tools. Finally, long simmering issues such as management of chronic disease and behavioral health care will create new markets and management demands.

In short, sellers and buyers both see opportunity. Sellers foresee a strong market, hence the need to rejuvenate the vitality of their provider assets to secure best prices. Careful thinking about transitions is critical.  Short-term challenges included post-pandemic EBITDA performance, selection of the best possible deal and ensuring that the deal meets the needs of partners—both younger and older--or the longer-term, young practitioners/entrepreneurs need to ensure there a clear strategy to create value and well-defined exit strategy.

A study of the past decade shows that large entities (by revenue or EBITDA) drive high purchase multiples, potentially prompting intra-sector mergers in advance of PE deals.  

The buyer side also anticipates a strong market, and strong interest will require attention to detail. Defining a truly value-added strategy to support a liquidity event in three-to-five years (the common target timeline) and selecting the right partners will prove critical.

To listen to the webcast, click here.

About Bert Orlov

Mr. Orlov is a Managing Director in the Health Care Consulting Group with experience as a management consultant specializing in strategy, transactions, operations and project management for physician groups, hospital systems, and not-for-profits.