The flow of mergers and acquisitions in healthcare continues to see big-dollar transactions, with some estimates placing the worth of last year's deal volume at about $171 billion. In terms of private equity deal flow, there were 580 deals last year valued at about $88 billion.
TImothy McCrystal, a partner at Ropes and Gray, said that anecdotally it's been a very busy market, and there are a number of market influences that are continuing to drive it.
For one, there's an expectation in the marketplace that reimbursement structures are changing with respect to value-based care. One way for healthcare organizations to accept the financial risk associated with that is to achieve scale -- the better to engage in population health management in the evolving market.
Ropes and Gray partner Deborah Gersh sees another factor that's contributing to the M&A and private equity picture.
"Despite the fact that the (Affordable Care Act) has gone through a change in administration, there's still a fair amount of effects," she said. "There's momentum in the market with the expansion of Medicaid coverage in some states, and to some degree uncertainty around what's going to happen next. I think there's a view that expansion, horizontal and vertical, continues to occur on the theory that scale will be necessary to compete long-term."
The data shows that while healthcare M&A activity peaked at $171 billion in 2018, the sheer volume of deals actually dropped somewhat. According to Gersh, there are reasons for that.
"As people get bolder, they're willing to put more money out on the deals," she said. "That's a component. The other piece of that is private equity is very active in the healthcare space. We're seeing a lot of transaction over the last year, and a lot of that has been more significant transactions -- more mega-transactions that are literally in the billions of dollars. It's on their radar. They're likely more comfortable with these transactions."
As far as the broader impact to healthcare, McCrystal said there's been an uptick in the number of significant regional players in the industry.
"Generally you've got more and more regional players emerging in the practice world, management platform companies that allow for the consolidation of physician practices, leveraging a sophisticated management platform that creates efficiencies. Larger organizations are developing all over the country in various specialties. I think you'll see, in regions, payers emerging that will be well-positioned to engage in population health management."
"We've always talked about how healthcare is local, regional and national, but knowing your area well plays an important role in population health management," said Gersh. "IT becomes increasingly risk-taking, up- and downside. It can also be more helpful and more manageable."
There are two important questions provider should be asking themselves: What have we done to prepare ourselves? And do we truly understand the risk profile?
As the current trend continues, McCrystal and Gersh expect larger systems will be able to take more risks and be more aggressive, although the best strategies will naturally be unique to each individual organization.
A provider of any size that wants to survive, said McCrystal, has to have a business plan that incorporates either active participation in value-based care, or a pathway to eventually becoming a participant. Some of that is already underway with changes to payment and reimbursement structure -- MIPS is a good example -- and it's already being imposed to some degree. It needs to be a part of the business philosophy of today's healthcare organizations.
In terms of future outlook, Gersh expects to see continuing consolidation.
"If the debt financing market dried up for some reason, or if there was some economic event, that would impact transaction activity," she said. "But assuming no dramatic shift, I think you'll see continued activity in the market toward consolidation."
Independent rural providers in particular can either align themselves with other independents or the bigger players if it makes sense from a business perspective, said McCrystal, There's been plenty of venture capital activity in the market, which he expects to continue.
Vertical integration is also picking up, much more so than it has in the past, he said. He described major deals by Aetna and CVS as "pure vertical integration plays," and differs from typical horizontal integration in that it enables an organization to expand the scope of what it does in the marketplace. The rest of the year will likely continue this trend.
"In the less traditional types of medicines, we're also seeing an expansion of the focus on social determinants of health," said Gersh. "Mental health and similar types of areas are getting more interest because it can be a significant spend. I think we'll see that things on the fringes of healthcare -- oncology, mental health, drug addiction treatment -- will continue to grow and expand."