Mergers and acquisitions in healthcare have been occurring at a steady clip in recent years, and given several industry and demographic trends, that seems poised to continue, as organizations seek to consolidate to achieve scale and operational efficiencies.
It remains an active space in part because purchase price multiples -- a measure of how costly a company or deal is to acquire -- continue to be very attractive to sellers, and there continues to be an environment if low interest rates and a wealth of available investment dollars.
According to Mike Mauldin, head of the healthcare group at Regions Bank, uncertainty over this year's presidential election is the only factor likely to slow down M&A activity. Otherwise, from large corporations all the way to the smaller middle markets, executives are continuing to try to grow their platforms.
It comes down to the basic challenge of providers figuring out how to do more with less, as they cut costs, learn to become more efficient and keep up with payers as they merge with pharmacies to gain more retail access to members.
Recent deals highlight the extent to which this is true. Centene recently finalized its acquisition of WellCare, and CVS, which merged with Aetna late in 2018, recently announced the expansion of 600 HealthHubs this year and more for 2021.
On the acute care side, entities like Healthcare Trust of America continue to grow, and growth is also being seen in the pharmaceutical sector.
"We continue to have demographic tailwinds that are going to be with us for another decade," said Mauldin. "When you factor in the aging of America, the growth of active over-70 groups, that pushed large enrollment gains in terms of government-funded healthcare. On the senior side, the challenge is that we have more beneficiaries of Medicare, and demographically fewer people contributing to the system. That ratio continues to get tougher. That means you've got to pay more for services, and you've got fewer dollars to do it."
A POSITIVE OUTLOOK
Part of the allure of pursuing a merger or acquisition is the ability to scale services, as well as acquire more leverage from a purchasing standpoint, and M&A activity will likely have its intended effect in those areas. Where the picture becomes a little more uncertain is in the realm of cross-sector deals, such as the CVS/Aetna merger. Mauldin said it's too soon to tell whether such deals will yield the expected benefits.
But the uncertainty hasn't made prospective dealmakers any more timid when it comes to pursuing consolidation, which will likely continue across many of healthcare's myriad subsectors.
"Just broadly, private equity has a lot of dollars available, working to be creative and put money to work at reasonable multiples," said Mauldin. "The middle market is going to continue to benefit from that. The places that have been struggling have been on the outsourced physician services side. Envision, MedMax -- they're working to find their footing, and dealing with legislative issues around surprise billing, soI don't expect that area to be as robust as it has been."
One area that will prove challenging is the rural market, with population trends contributing to a potentially tough landscape.
"It goes back to the demographics,"said Mauldin. "If our rural communities are shrinking, that demographic makes it harder in rural areas, and they have to work harder. And it makes it harder for smaller providers like physician offices. More than half of physicians are employed now, their affiliations with health systems continue to grow, and that trend is difficult to reverse at this time."
The deals that have worked best have unearthed some best practices when it comes to pursuing deals, and a big predictor of success is whether the merging organizations are a snug fit culturally. When two organizations are not a good cultural fit is when struggles occur. The key is not just to merge but to truly integrate -- driving people toward common processes that allow the organizations to accomplish their strategic objectives.
The most successful deals also tend to have purchasers with a healthy amount of capital. Capital banks are still active lenders, and the institutional market continues to be very strong; because of that, interest rates remain historically low.
Ultimately, the biggest cause for uncertainty is that pesky election in November.
"From an industry perspective, you've got one end of the spectrum that's less favorable toward government intervention in healthcare, and the other end of the spectrum that is still talking about Medicare for All," said Mauldin. "I don't think the industry expects the political environment to be such that Medicare for All is a realistic option in the short run. Having said that, however, I do think people will certainly be watching to see how things trend in that direction. If they do, people will be trying to figure out what the reimbursement impact would be.
"Certain insurers would benefit from that," he said. "Commercial carriers might be less well-positioned. Beyond that,it's very sector-specific. Physicians, ACOs, nursing -- how will those sectors be impacted? That uncertainty around those individual sectors I think is what makes people nervous a little bit."