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Ash Shehata of KPMG talked to Chief Healthcare Executive about why he expects to see more deals in the health sector in the months ahead.
The healthcare sector witnessed a steep drop in merger and acquisition activity in the first quarter of 2022, a new KPMG report shows.
There was a 34% drop in deal volume in the healthcare field, compared to the first quarter of 2021, according to the KPMG report released Tuesday morning. And there was a 50% drop of private equity among private equity buyers in the first quarter.
The COVID-19 pandemic played a role, with cases and hospitalizations rising to new highs in January. Inflation, supply chain issues, and the Russian invasion of Ukraine also have combined to make investors a bit more cautious.
Still, KPMG is projecting an uptick in dealmaking in healthcare as the year progresses, although merger activity may occur more deliberately and with caution.
Ash Shehata, KPMG’s national sector leader for healthcare and life sciences, told Chief Healthcare Executive there will be opportunities for mergers involving healthcare providers, including hospitals.
Despite the challenges of the pandemic, larger for-profit hospital systems remain strong financially, even if profitability has declined, KPMG notes. However, some hospitals aren’t faring as well financially.
“The strong will remain stronger,” Shehata said. “Those that struggle will likely be targets for acquisition."
Some analysts expect hospitals, particularly smaller providers, to face more difficulties. Some hospitals may need to find partners to help keep the doors open.
However, Shehata cautioned that hospitals need to make the right deal.
“When you bring organizations that are challenged together, it doesn’t always mean a winning combination,” Shehata said. “It has to be the right partner.”
A good combination could involve a hospital with a network of practices combining with an academic healthcare system.
While some larger systems are showing strong profits, hospital margins have declined over the past two years. Overall, operating margins in the sector are negative, the KPMG report noted.
With hospitals paying more for staffing and supplies, the KPMG report said, “We expect a rise in hospital consolidation, restructuring, closures, and bankruptcies after a slow start in 2022.”
The report said some of the industry restructuring could be “painful,” adding, “some communities may end up with fewer care options.” KPMG said with growing consolidations, hospitals and healthcare systems will become stronger and less vulnerable to difficult financial challenges.
Other analysts have projected some hospitals may not be able to survive. Diane Swonk, chief economist and managing director at Grant Thornton, said at the HIMSS 2022 Global Health Conference last month that the industry is on the cusp of seeing a wave of closures. “We’re about to see a lot of hospitals close,” Swonk said.
Hundreds of rural hospitals are at immediate risk of closure due to financial losses, according to a report from the Center for Healthcare Quality and Payment Reform.
There have been a few noteworthy mergers so far in 2022. City of Hope completed its acquisition of Cancer Treatment Centers of America in February. Earlier this month, Intermountain Healthcare concluded its merger of SCL Health.
Health systems may also aim to expand their services by acquiring providers who can help in specific areas, including ambulatory surgical centers.
Investors have strong interest in behavioral health, which was the only healthcare subsector that saw an uptick in deal activity in the first quarter of 2022, according to the KPMG report.
Telehealth continues to draw a great deal of interest, according to the report. And behavioral health can grow with telehealth, Shehata said.
“In behavioral health, we're seeing the tech platform as a great way to expand capabilities,” he said.
Shehata added, “I do think you’re going to see more health plans enter strategic acquisitions of telehealth and make it part of the benefit plan.”
In the first quarter of 2022, Cigna’s Evernorth acquired MDLive, a telehealth provider.
In February, Amazon and Teladoc teamed up and announced a partnership. Teladoc’s virtual health services can be accessed through Amazon Alexa on Echo products.
President Biden’s administration has directed regulators to look closely at proposed mergers in the healthcare sector. He issued an executive order to promote competition and guard against higher costs and lower wages and has directed federal agencies to look closely at hospital consolidations, among others.
The government is giving a closer look at hospital mergers, even examining areas such as social impact, environmental sustainability and health equity, Shehata said. Some may wait to close deals until after the congressional mid-term elections in November, when Republicans could regain control of Congress.
“I think the real action will be after November,” Shehata said.
Investors are likely to continue to show interest in the post-acute care field. The growth of Medicare Advantage plans offer opportunities for post-acute care agencies, including home health agencies and hospice organizations. Medicare Advantage plans are likely to cover over 50% of Medicare-eligible beneficiaries nationwide by 2025, according to a recent report by Trella Health.
“Overall, the program continues to be very popular,” Shehata said.
KPMG also projects that some larger hospital systems will focus on areas where they have the most growth potential and pull out of markets where they aren’t the top players.
“Some large health systems will continue to exit slow-growth markets and build their presence where the prospects look more promising,” the report stated. “Smaller hospitals and health systems that can’t stay ahead of rising costs will look to partner with, or be acquired by, larger institutions.”