Hospital Merger and Acquisition Grew as Physicians Took a Step Back

January 28, 2020 - Hospital merger and acquisition activity experienced major growth as physician medical groups slowed their activity in 2019, according to a recent report from PricewaterhouseCoopers’ (PwC) Health Research Institute.

The report released last week found that there were 1,221 deals announced in the US healthcare sector in 2019, a slight decrease from 1,239 deals the previous year. Deal value was also slightly down in 2019, with the total value of health sector deals reaching $91.2 billion, a 26.6 percent decrease compared to 2018.

2019 also saw fewer mega-deals, with just one such deal announced compared to an average of three per year. However, the 2019 megadeal between Centene and WellCare was the third-largest since at least 2014. The deal was valued at $17.4 billion.

Researchers also pointed out that total deal value in 2019 actually increased by 77 percent when megadeals in both 2018 and 2019 were excluded from the analysis. In that case, the fourth quarter of 2019 represented the largest quarter in terms of deal value in at least five years.

2019 was also the second consecutive year that health services saw more than 1,200 deals in a year, and the year ended strongly, with the tenth quarter in a row to see over 250 deals.

In particular, healthcare merger and acquisition activity was strong for hospitals in 2019. The report found that hospital merger and acquisition deal volume grew 19 percent from 2018 to 2019, while deal value increased by 31 percent during the period.

Researchers also reported that the hospitals were the only ones to see volumes grow on a year-over-year basis in each of the last three quarters of 2019.

Additionally, deal volume and value great for manage care plans (bolstered by this year’s single mega-deal) and long-term care facilities. The labs, MRI, and dialysis sub-sector also saw deal value grow by 503 percent despite volume remaining stable in 2019.

On the other side, the report showed that four sub-sectors experienced declines in deal value. Notably, the value of merger and acquisition deals among physician medical groups fell by 49 percent from 2018 to 2019. Deal volume also fell for physician medical groups, with the sub-sector seeing a 14 percent decline during the period.

Researchers pointed out that physician medical group deals took a hit due to an “unusually high” value in 2018, which was driven by a mega-deal involving KKR & CO LP and Envision Healthcare Corporation. When researchers excluded this deal, value of physician medical group transactions increased by 166 percent in 2019.

Other sub-sectors experiencing significant declines in healthcare merger and acquisition activity in 2019 included:

• Behavioral care, which experienced a 19 percent decline in deal volume and an 82 percent decline in deal value
• Rehabilitation, which saw a 28 percent decline in deal volume
• Home health and hospice, which had a 55 percent decrease in deal value
• Other services, which saw a 72 percent drop in deal value

While certain sub-sectors performed better than others in 2019, researchers do not anticipate overall interest in healthcare mergers and acquisitions to decline in 2020.

“2020’s uncertainties – ACA’s future, macroeconomics, the election – don’t suggest less future deal interest. Rather, given available capital, companies are likely to see deals as a resilience strategy,” Nick Donkar, US Health Services Deals Leader at PwC, stated in the report.

Hospitals, physician practices, and other healthcare providers will be looking to mergers and acquisitions in 2020 to manage interest in new technologies, consumerism, and competition threats, the report added. With this in mind, researchers anticipate “continued interest in cross-industry and vertical integration-focused deals.”

Horizontal integration within sub-sectors will also see continued interest “due to its potential to strengthen competitive positioning, mitigate volume pressure and enhance population health efforts,” researchers stated.