2022 turned out to be a record year in the healthcare M&A market, so it was inevitable that 2023 began more slowly, especially given the many persistent headwinds (e.g., rising costs of labor and borrowing, ongoing inflation, and fears of a recession more generally). Deal volume and multiples are down across the various sectors. However, as interest rates settle and sellers become accustomed to the “new normal” in terms of pricing, and as we move through the recession—which commentators expect will be short and shallow—we anticipate the market will hold steady and buyers will ultimately look to deploy their accumulating capital during what could be a busy rest of 2023.
In the meantime, deals are still getting done, and there are reasons to be optimistic.
Physician Practice Management
A few “mega” deals stole physician practice headlines during Q1. In February, CVS Health announced plans to acquire Oak Street Health (which is focused on primary care for older adults and seniors) for a reported $10.6 billion, and at the very end of March, CVS completed its acquisition of Signify Health (NYSE: SGFY) (which is focused on home-based, primary care) for $8 billion, significantly expanding its value-based primary care network. CVS first moved to acquire Signify in 2022 after outbidding UnitedHealth Group (NYSE: UNH), Amazon (Nasdaq: AMZN), and Option Care Health (Nasdaq: OPCH). Not to be outdone, after announcing the deal in July of last year and following a Federal Trade Commission (FTC) investigation, Amazon completed its acquisition of 1Life Healthcare (Nasdaq: ONEM), commonly known as One Medical. One Medical’s mission was to transform healthcare—including the manner in which people find, choose, afford and engage with healthcare providers—and Amazon’s backing will no doubt accelerate that objective. Collectively these deals have the potential to disrupt the patient experience and the healthcare industry more broadly.
While Q1 investment in physician practices may have otherwise fallen off from its robust numbers from Q1 2022—according to data captured by Irving Levin Associates, 67 deals were announced in January 2023, down from a reported 79 deals in January 2022—the sector remains one of the hottest for deal activity within the healthcare industry. Naturally, private equity (PE) firms continue to set the pace in the form of add-on acquisitions while new players are entering the market in certain specialties.
Investment in dental practices got off to a particularly hot start, with between 15 and 20 transactions reported in January alone. Notably, MB2 (backed by Charlesbank Capital Partners), a leading dental services organization (DSO) with affiliated practices across 30 states, has announced 16 partnerships since the start of 2023. In January, MB2 partnered with Oceanside, New York-based Smile by Design and Delano, California-based Paul Mallouk DDS, among others. More recently, MB2 added McIntosh Orthodontics and its two Florida locations to its ever-growing portfolio. In February, Dental Care Alliance (backed by Harvest Partners), a platform featuring over 400 allied practices across 22 states, partnered with Old Bridge, New Jersey-based KidZdent, a pediatric dental practice.
Continuing their momentum from last year, several Thurston Group-backed DSOs have similarly engaged in significant activity. Its northwest platform, Gen4 Dental Partners, spent January adding several dental practices in Utah, while its southeast platform, SGA Dental Partners, after adding 55 total locations across seven states in 2022, expects to exceed this growth rate in 2023. Notably, SGA leadership is focusing on specialty dental services, including periodontics, as it heads into Q2.
Investment in gastroenterology also remained active. In January, Nashville, Tennessee-based One GI (backed by Webster Equity Partners) partnered with Virginia-based Gastroenterology Associates, PC, and its 17 providers, and Gastro Health (backed by OMERS Private Equity) partnered with Washington-based Gastroenterology Associates and its ten physicians. Gastro Health now has a presence in seven states, encompassing over 390 affiliated physicians and 150 locations. Finally, GI Alliance (now supported by a non-control investment by Apollo Global Management) announced a partnership with Connecticut GI (CTGI), Connecticut’s largest GI practice, in late January. CTGI boasts 82 physicians and 400 total team members across 25 locations. To date, nearly 800 independent physicians across every region of the United States are now partnered with GI Alliance. While most PE focused on add-ons, at the very end of the quarter, Kohlberg & Company announced the acquisition of Atlanta, Georgia-based United Digestive (UD), one of the largest gastroenterology platforms in the United States, from Frazier Healthcare Partners. UD supports over 200 providers across 80 locations in the Southeast.
Ophthalmology portfolio companies continued the expansion of their footprints via add-on acquisitions. In January, St. Louis, Missouri-based EyeCare Partners (backed by Partners Group) partnered with Retinal Associates of Oklahoma, further expanding its network in the region, and Panorama Eyecare (backed by NewSpring Healthcare), one of the largest ophthalmology management services organizations (MSOs) in the Rocky Mountain region, announced its partnership with Haas Vision Center in Colorado Springs, Colorado. Sunvera Group (backed by Ridgemont Equity Partners) was also quite active, announcing two new expansions in Q1: a partnership with Pennsylvania-based Zimm Cataract & Laser Center and its affiliated ambulatory surgical center (ASC), Premier Surgical Center, in January; and a partnership with Southgate, Michigan-based Castleman Eye Center the following month.
There were several interesting developments in the still highly-fragmented specialty of orthopedics in Q1. In February, United Musculoskeletal Partners (backed by Welsh, Carson, Anderson & Stowe) announced the acquisition of Texas-based All-Star Orthopaedics and OrthoTexas Physicians & Surgeons, and Ortho Alliance (backed by Revelstoke Capital Partners) announced the acquisition of South Bend Orthopedics and its three Indiana locations. Ortho Alliance followed up in March by acquiring Ohio-based Precision Orthopedic Specialties along with its ten physicians, 50 employees, and affiliated ASC. Ortho Alliance’s network now exceeds 170 physicians. Additionally, the same month, Spire Orthopedic Partners (backed by Kohlberg & Company) announced a new partnership with Poughkeepsie, New York-based Orthopedic Associates of Dutchess County and its affiliated ASC, The Surgery Center at Orthopedic Associates. Orthopedics will likely continue seeing increased interest from PE firms due to the specialty’s wide range of ancillary services (including outpatient care) and corresponding revenue streams, despite the reduction in this year’s Medicare Physician Fee Schedule.
In fact, a new player has entered the market. In February, three orthopedic groups from across the United States—Durham, North Carolina-based EmergeOrtho; Indianapolis, Indiana-based OrthoIndy; and Seattle, Washington-based Proliance Surgeons—launched PELTO Health Partners, a pseudo-MSO platform. PELTO, which stands for “Physician Empowered Leadership of Transformational Organizations,” currently manages over 400 physicians and has marketed itself as an alternative to the traditional PE-sponsored MSO—formed from physician practices offering physicians the ability to maintain “100% equity as they grow.” Few details related to how PELTO actually structures and funds its partnerships are publicly available, but PELTO is another strong indicator of the growing interest in the specialty. Outside the MSO context, in January, two of the three largest Illinois orthopedic practices, Midwest Orthopaedics at Rush and Rockford Orthopedic Associates, Ltd. d/b/a OrthoIllinois, joined forces and became independent divisions of a new entity, OrthoMidwest.
We noted in our 2022 year-end report that cardiology has been drawing increased interest from investors. Based on early returns, it appears investment interest will continue trending upward in 2023. This growth trajectory is due in large part to the mounting demand for cardiology services alongside the rising age of the population and obesity levels in the United States and the transition of those services from hospitals to outpatient settings. While much of the M&A activity in the physician practice space this year may be add-on acquisitions, we expect to see new cardiology platforms forming. In January, PE firm Viper Equity Partners announced the opening of a new investment division that will exclusively focus on the cardiology space. In addition to demographic factors, Viper cited the 2019 changes to the ASC rules for Medicare and Medicaid, which created lower costs of care and, as a result more savings for patients in outpatient settings such as ASCs, as drivers for the increased interest in cardiology. That same month, LifeFlow Partners, a physician-owned and -led PE firm, announced two new partnerships with Denver, Colorado-based Colorado Cardiovascular Surgical Associates and Oregon-based Oregon Vascular Specialist. Although investment in cardiology is picking up, steep competition among potential investors is likely to drive up multiples. According to Tim Attebery, CEO of Cardiovascular Associates of America, “there are maybe 350 independent cardiology groups of any significant size in the U.S.” Due to the relatively small number of targets, PE firms are seeing EBITDA multiples between 8 and 12 with platform practices going as high as 15.
As 2023 marches on, recent challenges to the popular “friendly PC” model utilized by PE firms in states with prohibitions on the corporate practice of medicine——such as American Academy of Emergency Medicine Physician Group’s lawsuit against Envision Healthcare, filed in the Northern District of California—coupled with the current financial climate may continue to temper deal activity in the physician practice sector. However, we expect PE firms will continue pursuing smaller add-ons and entering new specialty areas like cardiology.
Ambulatory Surgery Centers
Continuing the trend from 2022, Q1 ASC deal activity was largely connected with physician practice transactions (as detailed above). While stand-alone ASC deal volume was low in Q1, a few developments are worth noting.
First, Nashville, Tennessee-based Surgery Partners (Nasdaq: SGRY), one of the largest operators of ASCs in the country, noted in its March 1 earnings call that it is eyeing $250 million of spending on potential targets for 2023. Eric Evans, CEO of Surgery Partners, explained the renewed efforts saying, “With an increase in the share of orthopedic and cardiac procedures moving into lower cost, high quality, short-stay surgical facilities, we are considering all options to capture our fair share, including sourcing and managing a robust M&A pipeline…” On the heels of the earnings call, Surgery Partners and Growth Orthopedics (backed by Trivest Partners) announced a strategic partnership at Lakeway Ambulatory Surgery Center in Lakeway, Texas, on March 15. Currently, Surgery Partners has $820 million in liquidity to continue its expansion efforts.
Second, United Surgical Partners International (USPI), the ambulatory subsidiary of Tenet Healthcare Corporation (NYSE: THC), announced its intention to deepen its partnership with Washington-based Providence. Partners since 2004, USPI and Providence currently operate seven ASC joint ventures across the northwest. The partners expect to announce several new ASCs through 2024.
Finally, despite the continued shift of healthcare services to outpatient settings, there have been several announced ASC closures in Q1, including Phoenix, Arizona-based Banner Health’s ASC in Loveland, Colorado and Texas-based Hill Country Memorial Surgery Center (each of which were tentatively scheduled to close on March 31), and Cabell Huntington Hospital’s outpatient surgery center in West Virginia (set to close on April 28). Banner Health cited decreased patient volumes and financial performance from the COVID-19 pandemic as the primary reason for the closure.
Although PE firms investing in physician practices with affiliated surgery centers will continue to drive much of the activity in the ASC sector, we also expect chains like Surgery Partners and USPI to continue to consolidate and expand their footprint.
Activity in the hospital sector cooled slightly in Q1 after a high volume of deal activity in the last quarter of 2022. However, as of 2022, independent hospitals continue consolidating with larger health systems.
M&A activity in the sector was off to a strong start in January, with LCMC Health finalizing its purchase of three Louisiana hospitals from HCA Healthcare (NYSE: HCA) for $150 million and Butler Health System finalizing a merger with Excela Health System, creating a five-hospital system in Pennsylvania that will serve roughly 750,000 patients. A joint venture between the University of Chicago Medicine and AdventHealth similarly closed in January, resulting in UChicago Medicine gaining a controlling interest in four of AdventHealth’s hospitals in Illinois. John Muir Health, which held a 49% stake in the 123-bed San Ramon Regional Medical Center in San Ramon, California, also entered into a definitive agreement with Tenet to buy the remaining 51% for approximately $142.5 million. Rounding out January, Washington-based MultiCare Health System completed the acquisition of Yakima Valley Memorial Hospital, bringing its total to 12 acute care hospitals, and Missouri-based SoutheastHEALTH signed a letter of intent to merge with and ultimately serve as a regional hub for the Mercy health system, a 42-hospital system based in St. Louis, Missouri.
In February, Florida-based Flagler Health+ announced plans to combine with UF Health, the University of Florida’s academic health center. OhioHealth and Select Medical’s (NYSE: SEM) joint venture entity, OHRH, LLC, which owns and operates OhioHealth Rehabilitation Hospital, a 74-bed rehabilitation facility in Columbus, entered into an agreement to acquire the operating assets of Reunion Rehabilitation Hospital with the goal of growing its inpatient rehabilitation service line. Upon closing of the transaction, the hospital will be renamed OhioHealth Rehabilitation Hospital – Dublin.
Chicago-based CommonSpirit Health, the second-largest nonprofit hospital chain in the United States, also announced it would acquire Steward Health Care System’s sites of care in Utah, a deal which will include the acquisition of five hospitals. Additionally, Montana-based Logan Health, a six-hospital system, entered into a letter of intent with Billings Clinic, Montana’s largest independent health system, to explore uniting the two organizations into one integrated, independent, Montana-based health system. By merging, the two systems aim to improve healthcare access, service and quality in Montana and northern Wyoming.
In March, Community Health Systems (NYSE: CYH) signed a definitive agreement to sell two hospitals to Novant Health for approximately $320 million. The transaction is expected to close later this year. Additionally, UPMC completed the acquisition of Sports Surgery Clinic, an independent hospital specializing in orthopedic surgery in Dublin, Ireland. With the addition of the Sports Surgery Center, UPMC now has four hospitals in Ireland.
As hospitals and health systems continue to face economic hurdles, including rising labor costs, we expect hospital mergers and acquisitions, especially transactions between smaller community or regional hospitals and their larger system counterparts and joint ventures with behavioral health and other specialty operators, will continue to occur out of economic necessity. Meanwhile, we expect continued scrutiny from the FTC will continue to have a chilling effect on “mega” deals among hospitals and healthcare systems. For example, such scrutiny from the FTC led the State University of New York Upstate Medical University and Crouse Health System to abandon their proposed merger in Q1. The FTC claimed the deal would leave Syracuse with just two hospital systems and give the combined entity a 67% share of commercially insured inpatient services in Onondaga County.
At-Home & Hospice Care
The tide may rise for M&A in the hospice and home health sector in 2023. Though hospice M&A activity fluctuated last year, volumes are predicted to rebound. As the baby boomer generation continues to age, the demand for hospice and home health services increases, making these services a compelling investment opportunity.
In February 2023, UnitedHealth’s subsidiary, Optum, Inc., closed its $5.4 billion deal to acquire LHC Group, Inc. (Nasdaq: LHCG). Optum first announced its agreement to purchase the home health and hospice provider in the spring of 2022. LHC Group provides hospice, home health, home- and community-based services, and facility-based care to seniors in 37 states and the District of Columbia. The closing had been delayed by regulators, including the FTC, who closely examined the transaction’s terms and process. UnitedHealth has been positioning Optum as a cornerstone of its growing home-based care infrastructure and value-based service delivery, and the transaction further emphasizes the rising importance of the home setting to payers, as well as providers.
In March, Kosciusko Home Care & Hospice (KHCH) merged with Stillwater Hospice following rising financial pressures caused primarily by high staffing costs. KHCH and Stillwater are both Indiana-based. The merger will allow the two nonprofit hospice providers to continue offering access to end-of-life care in Kosciusko County, Indiana. Additionally, Legacy Hospice (backed by Prairie Capital) acquired Safe Harbor Hospice, which serves 13 counties in southeastern Missouri, for an undisclosed sum.
Several new deals were also announced in Q1. In January, Eden Health announced plans to acquire Washington-based Community Home Health & Hospice’s outpatient programs. Eden Health is a subsidiary of Washington-based EmpRes Healthcare, which provides management and consulting services to rehabilitation and post-acute care centers, assisted and independent living communities and home health, home care, palliative care and hospice agencies in nine western states. The deal will expand Eden Health’s home health and hospice footprint in Washington, one of eight states in its service region. Additionally, in February, the hospice, palliative care and personal care provider Gentiva (backed by Clayton, Dubilier & Rice) agreed to acquire Heartland Hospice and other assets from the nonprofit health system ProMedica. Bloomberg reports that Heartland Hospice is valued at $710 million. Both of these deals are expected to close in Q2.
Digital Health & Health Information Technology
The COVID-19 pandemic gave rise to an increase in the adoption of healthcare technology and the use of digital health, reshaping how healthcare is obtained and delivered. However, the adoption and usage of healthcare technology, particularly with respect to telehealth technology, seems to be slowing. This may be due, in part, to the impending expiration of the federal Public Health Emergency (PHE) for COVID-19, which may result in the reduction or revocation of certain telehealth waivers oft-relied upon during the pandemic, and increased government scrutiny of telehealth, which seeks to curb rapid, unchecked growth of telehealth technology.
While there were few M&A deals to highlight in Q1, there were significant capital raises from digital health startups whose investors are trying to gain a foothold in an already crowded space. For example, Monogram Health—a value-based specialty provider of in-home, evidence-based care and benefit management services for patients living with polychronic conditions—announced $375 million in new funding, Paradigm—a clinical trials data and patient-matching platform —announced $203 million in new funding, and Vytalize Health—an ACO-like platform that seeks to relieve providers of many of the administrative responsibilities otherwise associated with participation in ACOs—announced $100 million in new funding. ShiftKey and ShiftMed, two companies offering mobile apps focused on connecting healthcare workers and facilities with open shifts, received $300 million and $200 million, respectively, in new funding. These companies and their mobile apps will no doubt help address some of the healthcare industry’s staffing shortages. Unfortunately, this level of funding may slow in Q2 in the wake of the collapse of Silicon Valley Bank (SVB), which had been a major lender to startups over the last 40 years, including many digital health startups.
While some analysts have predicted behavioral health M&A will likely be down in 2023 compared to recent years, deal activity in the sector in Q1 has remained strong. As demand in the space far outweighs supply, we expect activity will likely remain steady throughout the rest of the year.
Investments were off to a strong start in January. Arc Health (backed by Thurston Group) acquired two mental healthcare provider groups: the Lilac Center, with locations in Kansas and Missouri, and the Colorado Center for Clinical Excellence in Denver. Later in Q1, Arc Health completed its acquisition of Chicago, Illinois-based behavioral health provider Wellington Counseling Group. These acquisitions follow the company’s recent expansions into four new states in three months. Lifepoint Health (backed by Apollo Global Management) acquired Cornerstone Behavioral Health El Dorado, with plans to add nearly 50 beds to the 54-bed facility in Tucson, Arizona. In Tampa, Florida, BayCare Health System, the largest behavioral health provider in West Central Florida, acquired Northside Behavioral Health Center after managing the facility for nearly a decade. Finally, to assist behavioral health providers in developing a stronger revenue cycle, behavioral healthcare consulting and revenue cycle management firm, SimiTree, acquired Afia, a behavioral health data analytics and consulting company, and GreenpointMed, a medical billing and healthcare credentialing provider.
In February, Lifepoint Health also acquired a majority ownership interest in the behavioral health network Springstone. The deal adds 18 behavioral health hospitals and 35 outpatient locations across nine states to Lifepoint’s existing behavioral health network. Universal Health Services (NYSE: UHS) also announced two new joint ventures: one to develop a behavioral health hospital in Pennsylvania and another to develop a psychiatric hospital in Michigan. UHS is joining forces with Lehigh Valley Network and Trinity Health on the $61 million Pennsylvania hospital and the $46 million Michigan hospital, respectively. Lifepoint also announced that it has entered into a joint venture partnership with Centra to build and operate a new 72-bed inpatient behavioral health hospital in Lynchburg, Virginia, which will provide inpatient services for adults struggling with mental health illnesses.
Additionally, four nonprofit mental health organizations in Kentucky—LifeSkills, Inc., Four Rivers Behavioral Health, Pennyroyal Center, and Communicare, Inc.—announced they are consolidating to form one of the largest community mental health organizations in the state. In Oregon, insurer CareOregon purchased the Red Lion Inn & Suites with plans to transform the hotel into behavioral health housing for healthcare workers and health plan patients with behavioral health needs. Finally, Tennessee-based Acadia Healthcare (Nasdaq: ACHC) announced a partnership with Pennsylvania-based Geisinger Health System and the Sisters of Saints Cyril and Methodius congregation to build an inpatient behavioral hospital in Pennsylvania. The partnership, which is pending approval of the final land purchase, is one of two joint venture behavioral health hospitals Acadia and Geisinger are building.
Elsewhere, MedArrive, a mobile-integrated care solution, partnered with maternity telehealth company, Ouma Health, to bring in-home maternal behavioral healthcare to vulnerable Medicaid members across the country, particularly in rural and poorer urban areas.
The managed care sector remains strong, but transactions were limited in Q1.
On January 23, Centene Corporation (NYSE: CNC) announced it had completed the previously announced divestiture of Magellan Specialty Health—a specialty benefit management organization underneath Magellan Health—to Evolent Health for approximately $660 million in cash and stock and the potential for additional consideration post-closing based on achieving certain performance metrics. Centene had acquired Magellan Specialty Health only a year before as a part of its acquisition of Magellan Health.
On March 20, the U.S. Department of Justice (DOJ) dropped its appeal challenging UnitedHealth’s acquisition of data analytics company Change Healthcare. Initially, DOJ argued the deal would allow UnitedHealth to drive up healthcare costs based on its increased access to competitors’ data, in opposition to the current administration’s position on antitrust issues. This is a reassuring sign for managed care companies seeking to engage in similar, cross-sector transactions as the year progresses.
Across the pond, UnitedHealth is engaged in a bid to purchase EMIS, a United Kingdom-based health records software supplier. The potential acquisition is raising concerns within the British government, similar to the concerns put forth by DOJ, regarding whether it could substantially reduce competition and drive up costs for National Health Service beneficiaries. UnitedHealth has issued a statement declaring it intends to work with the British government to obtain all necessary clearances to close the acquisition.
Pharmacy & Life Sciences
In the pharmacy and life sciences sector, Elevance Health (NYSE: ELV) acquired BioPlus, a specialty pharmacy subsidiary of CarePathRx, giving Elevance a specialty pharmacy presence in all 50 states. BioPlus now operates as part of CarelonRx, Elevance Health’s pharmacy benefit manager. BioPlus provides an expansive suite of specialty pharmacy services for patients with complex and chronic conditions, including cancer, autoimmune diseases, and multiple sclerosis. Elevance Health expects that this transaction will allow its CarelonRx brand to engage in a broad range of services and offer increasingly sophisticated healthcare solutions to patients.
There were few other transactions of note in the sector during Q1.
The healthcare M&A market may not have come out of the 2023 gate as robustly as it did in 2021 and 2022, but there are definitely signs of activity and opportunities for buyers to allocate their resources strategically. PE investors will no doubt continue to thoughtfully expand via roll-ups and investments in emerging specialties, while hospitals and other healthcare facilities will seek out smaller community providers and ancillary service lines to bolster their bottom lines.