Consolidating US healthcare: a paradigm shift in delivery

September 2021  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

September 2021 Issue

Among the many industries to have been heavily impacted by coronavirus (COVID-19) is healthcare, with the US system – which accounts for approximately 20 percent of US GDP – particularly distressed amid a pandemic-induced paradigm shift in the delivery of medical care.

Healthcare providers engulfed by COVID-19, many already financially weak, are likely to emerge even weaker post-pandemic, if they emerge at all. And although an infusion of trillions of dollars by the US government has been a lifeline for many, such emergency subsidies can only really be considered a temporary measure.

According to analysis by Deloitte, the US healthcare system is on the verge of rapid consolidation, driven by significant regulatory changes, technological innovations, financial pressures and market dynamics. Indeed, similar waves of consolidation have occurred in other industries, such as banking, airlines and retail, where market, regulatory and financial pressures led participants to seek new capabilities through M&A and other partnering arrangements.

Furthermore, Deloitte suggests that in the face of consolidation, healthcare providers should consider defining how they will survive and scope several strategies and potential paths: should they differentiate in a clinical or geographic niche? Are they going to acquire? Or should they seek other relationship types?

“COVID-19 essentially transformed the US healthcare system overnight,” says Chad Beste, a principal in the healthcare advisory practice at BDO. “The resulting challenges and changes introduced new risks and variables into healthcare executives’ thought processes that were not there before.

“Now, organisations that lasted through the pandemic are thinking to themselves, ‘perhaps we are not well-positioned to handle this risk on our own in the future; maybe the answer is consolidation’. The result is that smaller providers are seriously considering consolidating as a form of risk mitigation,” he adds.

So, as healthcare vendors increasingly contemplate consolidation, M&A practitioners face a range of issues, including due diligence and operational integration, restructuring options for distressed entities, technological changes and the scalability of telehealth – the latter a space which saw rapid consolidation in 2020 and 2021.

“For healthcare vendors, increasing consolidation means increased funding opportunities,” suggests Vin Phan, a partner and leader of the national healthcare transaction advisory services practice at BDO. “Private equity (PE) firms have raised significant amounts of money that must be invested on a timeline. Their interest in investing in healthcare will drive more consolidation which in turn will attract more funding.”

According to Bain & Company’s ‘US Healthcare Trends 2020: Insights from the Front Line’ survey report, strained finances and a sharp drop in procedures pushed organisations to entertain M&A offers. The report reveals that 70 percent of physicians in independent practices were amenable to acquisition – findings consistent across surgical specialties, primary care physicians and other office-based practices. Additionally, both surgeons and office-based physicians were willing to consider an acquisition.

“Physicians favour acquisition by organisations that would provide increased financial stability but still offer physician autonomy, namely by other physician practices,” says Michael Brookshire, a partner at Bain & Company. “Nearly 30 percent of survey respondents were open to acquisition by a health system, and nearly 20 percent said they would agree to a PE buyout.

“As acquisitions pool physicians in larger groups, provider organisations will need to be mindful of professional satisfaction,” he continues. “That is particularly important when management-led organisations acquire independent physician-led practices.”

Major deals

As 2021 unfolded and the US healthcare system found new ways to deliver high-quality care to patients, the strategic consolidation undertaken by healthcare providers has led to a raft of major M&A transactions – megadeals, initial public offerings (IPOs) and special purpose acquisition company (SPAC) purchases among them.

In its ‘Deals 2021 midyear outlook’, PwC characterises deal volumes in the US healthcare industry as “unprecedented” in 2021. Following a slump in early 2020 at the very beginning of the pandemic, healthcare deals rebounded with 352 transactions in Q4 2020 – a record for one quarter – and then topped by 426 deals in Q1 2021.

Additionally, the sector has seen six megadeals valued at more than $5bn, including Humana’s acquisition of the remaining 60 percent stake it did not own in Kindred at Home, and Walgreens Boots Alliances’ divestiture of its Alliance Healthcare business. Of the six megadeals, two were SPAC acquisitions. In comparison, 2019 and 2020 saw just one megadeal each.

PwC attributes the increase in deal activity to several factors, including capital availability, regulatory shifts, evolving competitive dynamics, promising technologies and commitments to patient-centricity.

“Pandemic progress means dealmakers are starting to refocus on pursuing competitive advantage,” contends Nick Donkar, US health services deals leader at PwC. “We see investors adding capabilities and rethinking ecosystems, with a laser focus on value and patient-centricity.

“PE and corporate capital is plentiful and driving demand for assets,” he continues. “Barring surprises, such as a major domestic worsening of the pandemic, we anticipate deal interest at similar levels through year’s end and beyond, despite a high-multiple environment.”

Also driving many of the largest M&A transactions of 2021 are organisations pursuing stock-for-stock mergers to gain scale. “Scale has always been important, and the pandemic has proven that you have to be large enough to survive,” says Brandee Diamond, a partner at Foley & Lardner LLP. “Scale and more access to capital markets have been a considerable benefit for larger companies. As the pandemic continues, corporates remain focused on accessing capital, strengthening positions and investing in scale.”

For the remainder of 2021 and beyond, several significant trends are likely to characterise US healthcare M&A, including more megadeals (the increase in megadeals in the second half of 2020 helped total US deal value bounce back strongly in 2021) by companies acquiring early-phase products and PE acquisitions, as well as new regulatory guidance related to value-based care and an influx of market participants – all of which creates a wealth of opportunities and challenges.

Digital transformation

As healthcare providers consolidate, many are turning their attention to investing in digital capabilities. This has become an increasingly important strategy given the number of digital natives, Amazon and Google among them, entering the digital healthcare fray with capabilities such as apps that allow users to access online appointment scheduling and electronic health records, as well as to pay bills.

According to BDO’s ‘2021 Healthcare Digital Transformation Survey’, digital transformation in healthcare was at cruising speed until COVID-19 arrived to hit the accelerator. Lockdowns and safety concerns pushed patients away from in-person visits and providers toward technologies that enabled remote patient care and monitoring.

Moreover, the future of healthcare appears to be digital, with 70 percent of healthcare organisations planning to increase spending in this area. More specifically, 75 percent reported investing in telemedicine to improve the patient experience in 2020 – up from 42 percent in 2019. As a result, the acquisition of telehealth companies has increased, a trend that is expected to continue in the years ahead.

“Consolidation can increase levels of scale, which in turn can facilitate digital transformation,” explains Mr Beste. “A great example of this is consolidation to enable telemedicine deployment. Two types of emerging technologies that healthcare has its eye on include data analytics and artificial intelligence (AI).

“Consolidation can lead to greater data analytics maturity, which is vital,” he continues. “Currently, only 24 percent of healthcare organisations use advanced analytics. AI has the potential to introduce long-term benefits in terms of clinical outcomes, as well as short-term benefits in revenue cycle optimisation. The bottom line is that, over the next few years, we are going to start seeing tech and clinical care merging in new, interesting ways.”

Federal initiatives

Against a backdrop of arguably the most complex healthcare system in the world and despite the innovation seen over the past 18 months, the reality is that US healthcare providers require extra support, particularly at a federal level, to remain competitive in an environment of changing payment incentives, increased demand for efficiency and cost-effectiveness and increased competition, among many other issues.

“Additional federal regulation is needed to support payment reform incentives, increased efficiency and greater competition,” believes Steven Shill, a partner and global healthcare leader at the BDO Center for Healthcare Excellence & Innovation. “Right now, we still live in a world dominated by fee-for-service, where you get a different cost-quality-access configuration than you do in a more value-based world.”

In the view of Mr Shill, if the US is to successfully transition to value-based care, it needs broader-based adoption of federally supported incentives, greater use of technology, an enhanced regulatory environment and continued capital investment in the healthcare sector.

In the long run

In the final months of 2021, as COVID-19 vaccinations lead to an improvement in business conditions, healthcare vendors are likely to spend more to accelerate growth and scale, alongside the increasing digitalisation of their businesses.

According to Bain & Company, large healthcare organisations, including hospital groups, expect to undertake more M&A transactions, with 50 percent of hospital administrators stating that their organisations were highly likely to make one or more acquisitions over the next two years to pursue greater scale.

Furthermore, administrators considering M&A were most interested in alternative care sites, including ambulatory surgery centres, urgent care clinics and pharmacy in-store clinics. The next most popular target, notes Bain & Company, is independent physician practices, followed by standalone hospitals. Additionally, home health businesses that provide care services in the home have continued to gain market share over the last few years, fuelled by lower costs and patient convenience, and investors are increasingly taking advantage of this trend.

“Providers have been consolidating over the last decade as organisations pursue economies of scale and expand vertically and horizontally,” says Mr Brookshire. “Post-COVID-19, we expect that larger healthcare groups and investors will accelerate their acquisitions of smaller hospitals, physician practices and alternative sites of care.”

“Great change is happening, even though it may not be obvious to the person on the street,” concludes Mr Shill. “What happens over the next few years may not be highly visible, but in the long run, the changes happening today are absolutely transformative to the future of the US healthcare system. COVID-19 has not only acted as a catalyst for change, but its existence has permanently changed the US healthcare business in ways we cannot yet imagine.”

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Fraser Tennant