Healthcare Trends & Transactions Q1 2024

Firm Publication

While healthcare mergers and acquisitions activity in the physician practice management (PPM) and hospital sectors appears to have slightly ticked up in Q1 compared to the last quarter of 2023, reports are that M&A activity across the industry as a whole was down compared to the last quarter of 2023 and also down year-over-year. Going forward, commentators appear generally aligned in projecting that 2024 will yield deal volumes across industry sectors similar to those in 2023.

This may not come as much of a surprise to investors, as the many financial challenges of 2023 have yet to abate—in particular, predictions (hopes?) of rate cuts have not yet come to fruition, making larger transactions an expensive proposition. Additionally, the Biden administration and state and federal regulators have signaled they will continue to look at private equity’s (PE) impact on healthcare, which is likely to have a chilling effect on PE activity, especially in the PPM sector. But with the presidential election in full swing and investors anxiously awaiting to deploy dry powder, the climate could change quickly.

Physician Practice Management

Despite significant economic and regulatory challenges, the PPM sector has proven difficult to keep down. According to LevinPro, in the first quarter of 2024, the PPM sector was the most popular for healthcare investors, with 127 deals announced. While that is a decrease from the 143 deals in Q1 2023, it is an increase from the 116 announced in Q4 2023. PE investors continued to dominate volume in the PPM market, accounting for 68 of the announced deals as of April 2.

Regulatory Developments

While antitrust regulators have expressed growing concern with healthcare transactions, previously, only large-scale acquisitions that exceeded the financial threshold for the Hart-Scott-Rodino Act seemed to be the focus. However, as noted in our year-end report for 2023, a number of states have taken steps to limit PE activity, primarily through reporting requirements related to management services organizations (MSOs) contracting or transacting with professional entities. Most of these laws have not explicitly called out PE investment, but in Q1, we are seeing some states take things to the next level, including proposing outright bans on PE investment in healthcare services.

State Transparency Law Updates

As highlighted in our 2023 reports, many state legislatures and regulatory agencies (13 by our count, as of January 1, 2024) had moved to regulate smaller acquisitions by requiring pre-closing notification of “material change” transactions. Pennsylvania recently joined the fray by proposing Senate Bill 584, which would require certain provider organizations and healthcare facilities to notify the state attorney general’s office 90 days before entering into “material change transactions.” Additionally, January saw Washington re-introduce SB 5241, which could expand the scope of entities and the types of transactions subject to notice requirements. Notably, the bill would require 120 days prior notice to the Washington Attorney General and expands the types of transactions covered by the statute (e.g., the acquisition of a physician practice or MSO by a PE investor that has invested in other entities providing healthcare services). While some states have long had statutes requiring pre-closing notification of certain healthcare transactions (e.g., Hawaii in 1977 and Colorado in 2008), the older iterations largely only applied to those involving hospitals. However, the amount and scope of these pre-closing notification requirements are growing and really accelerated in 2023—likely in direct response to the flourishing PPM market, which has seen heavy consolidation over the last several years. PPM investors should pay particular attention to states such as New York, Minnesota, Illinois, Indiana, Massachusetts and Oregon, which currently have pre-closing notification requirements in place directly affecting the MSO/“friendly PC” model.

Beginning July 1, a new, recently passed Indiana statute will require 90 days prior notice to the Indiana Attorney General before certain healthcare entities (defined to include physician and dental practices, administrators, and PE partnerships) may enter into a merger or acquisition in Indiana with another healthcare entity with a value of at least $10 million. While approval from the Attorney General is not required, the AG may analyze any antitrust concerns in writing and demand additional information.

The final version of California’s new pre-closing notification rules (Section 97431 of Title 22 of the California Code of Regulations), which went into effect April 1, significantly narrowed the scope of entities covered by removing explicit references to MSOs. Previous iterations of the regulation directly targeted MSO transactions. However, investors should remain aware as the regulation is still broad enough to include certain types of MSOs (e.g., MSOs working on behalf of a payor). Regardless, while some PPM investors looking to expand their California footprint may be out of the fire with respect to that regulation, they may find themselves in the frying pan with another recently proposed bill, discussed below.

Private Equity in the Cross-Hairs

Some states are moving beyond pre-closing notification requirements and proposing direct limitations on PE investment in healthcare. As of April 1, California, Oregon, Minnesota, and Connecticut have introduced potential legislation that could outright ban PE firms from acquiring healthcare providers or, at the very least, place heavy limitations on their ability to invest.

California

Proposed in February, AB-3129 goes far beyond California’s previous attempts to reign in PPM consolidation–both in scope and effect. If passed, the legislation would:

  1. Require “private equity groups” and hedge funds to provide 90 days pre-closing notice to and obtain consent from the Attorney General prior to a change of control or an acquisition of a healthcare facility or provider group.
  2. Prohibit PE firms or hedge funds involved in any manner with a physician practice from controlling or directing that practice (including entering into certain contracts on behalf of the practice).
  3. Prohibit a physician practice from entering into any arrangements with an entity controlled by a PE group or hedge fund (e.g., MSOs) in which that PE group or hedge fund manages any of the affairs of the physician practice in exchange for a fee to be charged to the practice.
  4. Prohibit non-competes, non-disparagements, and other restrictive covenants in management contracts and/or contracts for the purchase of assets between physician practices and PE groups or their affiliates.

As currently drafted, the bill leaves much to be desired in terms of definitions and clarity–particularly with respect to the California Attorney General’s review and consent standards. The Attorney General must determine whether the transaction “may have a substantial likelihood of anticompetitive effects” or “may create a significant effect on the access or availability of health care services to the affected community.” Among other considerations, the Attorney General will consider the “public interest” when deciding whether a transaction can move forward. These broad and unclear directives would give the Attorney General the power to deny or impose conditions on most investments by PE or hedge funds in healthcare facilities and providers without any clear criteria. Even the definition of “private equity group” seems to capture more than intended. As used in the bill, “private equity group” is defined as “an investor or group of investors who engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.” Some argue the definition could pull in medical equipment financing companies that have always supplied capital to medical practices. If the bill passes, the law will go into effect on January 1, 2025.

Oregon

Meanwhile, in Oregon, while HB 4130 ran out of steam in the last legislative session, the proposal sent red flags for many PPM investors. Unlike some of the other proposals, which generally only included broad language without much substance, Oregon’s proposal showed how much some legislatures are paying attention to PPM structures by targeting several of the important levers that PE firms typically deploy in MSO structures.

Subject to certain exceptions, the bill broadly would have prevented professional entities from relinquishing control over their “assets, business operations, clinical practices or decisions or the clinical practices or decisions of a physician…” The bill outlined examples of relinquishing “control,” including, among other things:

  1. Selling, issuing or restricting the transfer of shares of the professional entity.
  2. Entering into noncompetition, nondisclosure or non-disparagement agreements.
  3. Delegating out decision-making over certain employment matters (e.g., hiring, firing, compensation, etc.).

Essentially, the bill attempted to limit or outright prohibit many of the devices PE firms and other PPM investors typically rely on to ensure long-term relationships with their managed practices. The bill would also have prohibited the owners, directors, and officers of professional entities from owning shares or serving as directors or officers of—or even becoming employees or independent contractors of—affiliated MSOs. While the crisis was temporarily averted, Oregon investors should continue to monitor a potential resurgence over the coming sessions.

Minnesota

Minnesota’s HF 4206 remains under consideration in the state legislature and would prohibit “private equity companies” or real estate investment trusts (REITs) from acquiring or increasing either of the following:

  1. Any direct or indirect ownership interest the PE company or REIT has in a provider.
  2. Any operational or financial control the PE company or REIT has over a provider.

“Private equity company” is defined by the bill as a publicly or non-publicly traded entity that collects capital investments from individuals or entities. If they pass, the prohibitions would be effective August 1, 2024.

Connecticut

Finally, in the northeastern part of the country, Connecticut legislators introduced HB 5319 on March 25, which would require the Connecticut Office of Health Strategies to develop a plan concerning PE ownership of Connecticut-licensed healthcare facilities, including both of the following:

  1. Assessing whether a certificate of need should be required for a PE firm’s acquisition of a “health care facility” or whether other restrictions should be implemented).
  2. Recommending requirements for the disclosure of information by a healthcare facility that has PE ownership.

The plan must be submitted by January 1, 2025.

While the bill does not appear to directly affect PPM transactions as physician practices are not directly included in the definition of “health care facilities,” investors should watch closely going into 2025 for any changes in the scope of the bill and/or similar bills targeting PPM transactions, now that it is apparent the state legislature has PE firms squarely in its cross-hairs.

Benefits of PE Investment

While PE’s investment in healthcare does have some well-publicized failures, many critics fail to recognize why providers are continuing to choose to partner with PE-backed platforms. As regulatory and economic barriers continue to impede medical practices, PE investors—through their MSOs—are well-equipped and able to provide critical administrative, financial, and clinical support services, and by doing so, allow their physician partners to focus on delivering quality healthcare. PE investors often also provide the resources and know-how for their physician partners to make the shift to value-based reimbursement models, an important but daunting task many physician partners would likely be unable to accomplish on their own.

Notable Dealmakers

Despite mounting challenges, as noted earlier, PPM deals did tick up from Q4 2023.

The dental market continued to set the pace in terms of deal volume in Q1 2024. In January alone, 23 of the 50 total PPM acquisitions reported by LevinPro were in the dental specialty. MB2 Dental Solutions (backed by Charlesbank Capital Partners) continued its rapid pace by announcing 20 deals across the country in Q1. Two highlights include their expansion into West Virginia and Vermont. In February, MB2 announced its new partnership with Dr. Daniel K. Monday & Stephen P. Graziani P.L.L.C. and its two West Virginia locations. MB2 also entered Vermont by partnering with Montshire Endodontics on April 5. MB2 now includes over 700 practices and more than 1,400 providers across 41 states.

LevinPro only reported eight primary care transactions in Q1; however, there have been several notable updates–particularly with respect to retail investors.

In the primary care space, Florida-based Palm Medical Centers (backed by MBF Healthcare Partners) was busy. After entering the Texas market in June 2023, Palm Medical has added four locations since January. On February 5, it opened practices in Fort Worth and Keller. On February 26, Palm acquired two primary care practices in Dallas and Duncanville. Palm Medical has been very intentional about its steady growth in Texas. It hopes to marry this expansion with its existing specialties (cardiology, dentistry, optometry, etc.).

In March, the newly formed Arches Medical Partners acquired 11 internal medicine practices in Rhode Island from Walgreens-owned VillageMD. Walgreens (Nasdaq: WBA) has recently begun downsizing its provider platform after reporting a steep quarterly loss. Walgreens has invested nearly $6 billion in VillageMD since 2020. However, the investment has not proven to be as profitable as anticipated. In Walgreens’ latest earnings call, CEO Tim Wentworth told Walgreens investors that Village MD plans to close 160 clinics across the country. Including the Arches acquisition, VillageMD has now exited 140 locations and has exited or already notified patients that it is exiting city markets of Chicago, Boston, and Las Vegas and broader markets in Florida, Indiana, and Rhode Island.

In line with VillageMD’s downsizing, CVS Health (NYSE: CVS) closed 25 of its MinuteClinic locations across Los Angeles to ensure patient and consumer demands align with its healthcare delivery strategy.

One of the leading stories in 2024 has been Optum’s (a subsidiary of UnitedHealth Group (NYSE: UNH)) proposed acquisition of Stewardship Health, the physician arm of struggling Dallas-based Steward Health Care, and its more than 1,700 physicians across nine states. Optum currently partners with over 90,000 physicians across the country (adding 20,000 in 2023 alone) and is looking to expand further. However, after its announcement in March, the deal has sparked intense backlash from prominent lawmakers such as Senators Elizabeth Warren and Edward Markey, among others. In a March 26 statement, Senator Warren cited that “Optum, a UnitedHealth Group subsidiary, is already the largest employer of physicians in the country—controlling over ten percent of American doctors—which means this deal raises significant antitrust concerns…” Further compounding scrutiny is that many pundits and politicians have blamed Steward’s financial failings on its for-profit ownership and PE roots. For Steward’s part, the sale is primarily motivated by the 33-hospital system’s plan to address its poor financial performance, which has landed it in significant debt. As a snapshot, the system was $50 million short on year-end rent to Medical Properties Trust and went from being purchased for $895 million in 2010 to losing more than $800 million from 2017 to 2020.

With PE investments in healthcare beginning to mature, many anticipated that Optum and large retail chains like Walgreens and CVS, along with Amazon (Nasdaq: AMZN), would serve as potential buyers. While recent developments and cuts by Walgreens and CVS should not necessarily alarm potential sellers, it may be worth keeping an eye on these retail chains going forward–especially given the intense scrutiny that other large chains like Optum have received.

Clinical Research Organizations

In 2023, investors took an increased interest in clinical research organizations, likely due to the projected growth rate of the clinical trial market. In our 2023 year-end report, we relayed data from Harris Williams, estimating that the clinical trial market will grow annually at a rate of 6.8% through 2025. The growing appeal of these organizations may also be due to the fact that, as commentators such as Provident Healthcare Partners have noted, unlike investments in pharmaceutical companies themselves, the success of investments in clinical research companies does not depend on whether a drug makes it to market. In the first quarter of 2024, several PE firms have indeed allocated funds to clinical research organizations.

Centricity Research (now majority-owned by Trinity Hunt Partners) announced its acquisition of North Carolina-based Lucas Research in mid-December and followed that announcement by naming its new CEO and CFO in early January in order to—according to the press release—support the next phase of growth.

In February, at least two PE-backed clinical trial platforms acquired clinical trial sites: KKR’s platform, Headlands Research, described as an established clinical trial site dedicated to research in mental illness and disorders of the central nervous system, added Maryland-based Pharmasite Research to its growing, multinational network of clinical trial sites, and AHP announced the creation of its new platform, Prolerity Clinical Research, and its first acquisition of Tandem Clinical Research, which has 11 research sites across Louisiana, Florida, New Jersey and New York.

That same month, QHP Capital acquired Principal IRB, an institutional review board (IRB) focused on full-scale IRB services and bringing IRB and clinical operations experience to support today’s clinical trials. QHP quickly re-named the company Univo IRB, likely with a view toward establishing the company as a new platform through which it may acquire and consolidate other IRB and clinical trial support providers. Also in February, there were at least a couple of examples of investments in companies involved in recruiting patients for clinical trials and/or facilitating patient access to clinical trials. On February 1, Greenphire (backed by Thoma Bravo) announced its acquisition of Clincierge, a provider of concierge travel and logistics support for patients participating in clinical trials, and on February 8, Spectrum Science (backed by Knox Lane) announced its acquisition of Continuum Clinical, a global clinical trial recruitment and engagement solutions provider. The recent activities of these platforms suggest that clinical research-adjacent service providers may also be in the mix of PE targets within the clinical research sector.

We expect investment in clinical research organizations and companies engaged in supporting clinical trials will accelerate throughout the year, particularly given the present fragmented nature of the sector.

Ambulatory Surgery Centers

More favorable reimbursement rates and a migration of previously hospital-based services to outpatient settings continue to make the ambulatory surgery center (ASC) sector a prime candidate for investment from both PE and health systems.

North Carolina-based Compass Surgical Partners (backed by TPG) has seen significant activity in 2024. In January, TPG made a new investment in Compass, which has developed or managed more than 250 ASCs across 35 states. This was quickly followed up in February when Compass partnered with Florida-based Baptist Health to open a new ASC on the Baptist Medical Center Beaches’ campus. The facility will focus on orthopedic, neuro, plastic, and general surgery. The Baptist-Compass partnership is set to open a second ASC later this year. February also saw Compass partner with the Advanced Joint and Spend Institute Orlando to open a new ASC in Orlando, Florida. The same day, Compass announced a joint venture with Maryland-based Bon Secours to build a cardiovascular surgery center in Virginia. The facility will involve a projected $14 million investment, with Bon Secours owning 51% and Compass owning 49% of the facility.

On the health system side, Idaho-based Saltzer Health announced plans in January to sell or shut down existing operations, including its Ten Mile surgery center, due to financial challenges, and temporarily shuttered operations on March 29. However, days later, Saint Alphonsus, also based in Idaho, completed its acquisition of the ASC and two of Saltzer Health’s urgent care centers and re-opened the facilities’ doors under the Saint Alphonsus banner.

In late March, UCLA Health acquired West Hills Hospital and Medical Center (which includes a freestanding ASC) from HCA Healthcare (NYSE: HCA). UCLA Health intends for the center to continue to operate and plans to retain the staff previously employed by HCA.

Pending standard licensing and third-party approval, Midland, Michigan-based MyMichigan Health intends to acquire four Ascension facilities in Michigan. Included in the acquisition is St. Mary’s Town Center, an ASC which also operates a wound care center, emergency department and short stay facility. MyMichigan Health is also set to acquire Ascension’s Michigan locations in Saginaw, Tawas and Standish, which includes one ASC.

Health systems are clearly taking a renewed interest in outpatient care. They recognize that payors, patients and providers look favorably at ASCs, which tend to present lower costs and higher quality sites for care. Additionally, health systems also see other advantages in expanding their outpatient footprint, including increasing market share, recruiting top-line, quality physicians, and attracting new business. As time goes on and reimbursement rates continue to increase for ASCs, more and more hospitals and health systems will no doubt want to capitalize on that success for themselves.

Hospitals

Hospital and health system mergers and acquisitions significantly increased in Q1 2024. According to a report by Cain Brothers, a total of 18 hospital and health system transactions were announced in Q1, up from just 12 transactions in the first quarter of 2023. Target revenue was also substantially higher this quarter, with the revenue for the targets in the 18 transactions announced totaling $10 billion, compared to $3.4 billion in the first quarter of 2023. Hospital M&A activity this past quarter highlights the increasing momentum of hospital and health system transactions.

As seen throughout 2023, regional mergers of health systems continued this past quarter. For example, Northwell Health and Nuvance Health entered into an agreement to combine the systems, which together will include 28 hospitals across New York and Connecticut. In Missouri, St. Louis-based BJC HealthCare and Kansas City-based Saint Luke’s Health System finalized their merger transaction, consolidating $10 billion in revenue, and Mercy and SoutheastHealth completed their merger, with SoutheastHealth’s two hospitals, a behavioral health hospital and 48 clinics joining Mercy. Meanwhile, in New Jersey, CarePoint Health and Hudson Regional Hospital signed a letter of intent to combine into a four-hospital system under a new management company called Hudson Health System, and Atlantic Health System and Saint Peter’s Healthcare System signed a letter of intent to establish a strategic partnership, with plans to bring Saint Peter’s into Atlantic Health’s care network to expand care access.

This quarter also included the acquisition of several single hospitals by larger systems. For example, following approval in bankruptcy, Mercy Iowa City became part of University of Iowa Health Care as of January 31. In February, Medical City Healthcare in Dallas, a subsidiary of HCA, completed its acquisition of Trinity Regional Hospital Sachse, which had filed for bankruptcy in 2023, from Sunland Medical Foundation. Mercy also announced plans to acquire Ascension Via Christi Hospital in Pittsburg, Kansas. Evangelical Community Hospital, an independent community hospital, similarly announced it signed a definitive agreement to join WellSpan Health, citing that the current model is not sustainable.

Q1 also saw several deals involving rural hospitals. Michigan-based Hills & Dales Healthcare and UnitedHealthcare Partners merged to create a three-hospital system known as Aspire Rural Health System, covering parts of Michigan. Rural hospital Huntsville Hospital Health System also announced plans to acquire Dekalb Regional Medical Center, serving Alabama.

Academic medical centers (AMC) also continued to be active acquirers in Q1. These transactions are driven by several factors, including the investment in community health by allowing community hospitals to provide more local care. These strategic investments also allow AMCs to expand their clinical, teaching, and research capabilities. For example, early in January, University of Missouri Health Care completed its acquisition of Capital Region Medical Center. The two health systems, which had been partners for the last 25 years, will be unified under the one brand, “MU Health Care.” Similarly, The University of Pennsylvania Health System announced a letter of intent to acquire Doylestown Health. Should the transaction be completed, Penn Medicine would become a seven-hospital system and would lay the foundation for new clinical programs and expanded services in Philadelphia. UC Irvine Health entered into a definitive agreement to acquire Tenet Healthcare Corporation’s (NYSE: THC) Pacific Coast Network – which includes four hospitals in Southern California, their associated surgery centers, and outpatient locations – for $975 million. The University of Minnesota announced their signing of a letter of intent with Fairview Health Services to purchase the four academic health facilities that makeup M Health Fairview University of Minnesota Medical Center – the East and West Bank campuses, M Health Fairview Masonic Children’s Hospital, and the M Health Fairview Clinics and Surgery Center. The University of Minnesota aims to complete the full purchase of these facilities by the end of 2027. Finally, in March, UCLA Health completed its acquisition of West Hills Hospital and Medical Center, a 260-bed hospital, from HCA.

National health systems were also active early in 2024, with several acquisitions as well as a significant amount of strategic divestitures. While HCA has been actively acquiring and increasing the number of hospitals they operate over the last several years, other big systems, including Tenet and Community Health Systems (NYSE: CYH), have significantly trimmed the number of hospitals they operate over the same time period. Following HCA’s announced plan in October 2023 to expand its emergency and high-acuity service lines and grow its healthcare services market share, HCA has been particularly active in the Texas market. For example, in Q1, in addition to the acquisition of bankrupt Trinity Regional Hospital Sachse for $41 million, discussed above, HCA’s subsidiary, Surgery Ventures, acquired majority stakes in two ambulatory surgery centers in Texas. Meanwhile, this past quarter, Tenet completed the sale of several hospitals. On February 1, Tenet announced it completed its $2.4 billion sale of three South Carolina hospitals to Novant Health. The same day, Tenet also announced plans to sell four California-based hospitals to UCI Health for $975 million. Later in February, Tenet announced plans to sell two more California hospitals to Adventist Health for $550 million. According to Tenet’s CEO, these hospital sales will significantly improve Tenet’s leverage position. CHS likewise announced in a February earnings call that it is evaluating sales that could yield more than $1 billion. CHS currently has plans to sell two of its North Carolina hospitals to Novant Health, but the Federal Trade Commission (FTC) sued to block the $320 million acquisition in January.

As noted, this past quarter’s uptick in hospital M&A activity highlights the increasing momentum of hospital and health system transactions, which we expect to continue throughout the rest of the year. Buyers continue to make strategic investments to grow and expand services. Meanwhile, for sellers, financial challenges continue to be a key driver of M&A activity.

Home Health, Hospice Care & Personal Care Services

Home healthcare acquisitions are anticipated to increase in 2024 as pent-up buyer demand comes to the surface. According to a report by PitchBook, out of 51 potential home health acquirers interviewed, 77% indicated they plan to acquire more than they did in 2023. In particular, according to the interviews, buyers are interested in experienced home health operators who have been resilient in the industry and have strong patient outcomes and net promoter scores.

Of particular interest in this space, the Department of Justice (DOJ) is considering a lawsuit to block UnitedHealth Group’s takeover of Amedisys (Nasdaq: AMED). If the deal continues, it will be worth approximately $3.3 billion. This follows news of the DOJ’s antitrust investigation into UnitedHealth Group with respect to the relationship between its insurance business and Optum. These actions illustrate the heightened concern from regulators about vertical consolidation, especially in the context of insurers and health plans acquiring providers.

There is no further word on two significant potential transactions: Enhabit (NYSE: EHAB), one of the largest home health companies, and privately-held Help at Home, one of the largest personal care services companies. Enhabit, with a nudge from activist shareholders, had previously announced in 2023 a strategic review of its alternatives, recently commenting that it was in the “later stages” of that process.

Similarly, several news sources have indicated that Help at Home owners Centerbridge and Vistria had instituted a sales process that could yield $3 billion.

Although deal volume in the hospice space was significantly down in 2023, there is cautious optimism for hospice deals in 2024, given a number of key investors are well-positioned for acquisitions this year. Optum, for example, was active in the home health and hospice space in 2023, acquiring LHC Group and planning the acquisition of Amedisys, giving it increased buying power.

One potential hurdle to hospice deal activity is the expansion of the 36-month rule to hospice providers, which we reported on in our 2023 year-end report and which prohibits the transfer of a home health or hospice agency’s Medicare provider agreement and Medicare billing privileges to a new majority owner within 36 months of initial Medicare enrollment or recent change of ownership. The Centers for Medicare & Medicaid Services (CMS) adopted this rule in the 2024 home health final rule, and it went into effect for hospices on January 1.

For personal care services, the proposed Medicaid Access Rule that has caused industry uncertainty is believed to be near final publication in the coming days, which may lead to better long-term clarity on the operating environment.

Digital Health & Health Information Technology

While there were many interesting deals in the digital health space, in Q1, the healthcare technology company that grabbed the most headlines was Change Healthcare. As industry stakeholders well know, on February 21, Change Healthcare, a subsidiary of UnitedHealth Group and one of the largest clearinghouses for insurance billing and payments in the country, was the target of a massive ransomware attack. The attack brought the processing of claims for hundreds of thousands of providers to a screeching halt, causing providers, health systems, and payors alike to suffer innumerable losses. For perspective, Change Health processes an estimated 15 billion healthcare transactions each year and is involved in one in every three patient records. A survey conducted by the American Medical Association found that four in five physicians lost revenue as a result of the attack.

In light of the scope of the attack, both the federal government and commercial payors have responded swiftly to try to mitigate damages. In March, CMS announced it would allow Part A providers to apply for accelerated payments and Part B suppliers to apply for advance payments in the event they experience claims disruptions as a result of the February cyberattack. In addition, as of April 3, UnitedHealth Group has advanced nearly $4.7 billion to providers in need. Centene (NYSE: CNC) also announced a provider advance program that has a 90-day term with zero interest that requires only that impacted providers complete a two-page agreement.

Providers have not been the only parties suffering as a result of this cyberattack. The Minnesota Attorney General issued warnings about scam calls apparently targeting patients affected by the Change Healthcare ransomware attack. The Department of Health and Human Services (HHS) recently stated that, although there were no related breach incidents affecting HHS networks, it was experiencing notable operational impacts. As of now, the situation is ongoing, and Change Healthcare is seeking to consolidate dozens of class action lawsuits related to cyberattacks in the Middle District of Tennessee. In early April news of a potential second attack have also hit the wire. The industry will surely feel the ripple effects of these attacks through the remainder of the year.

Meanwhile, the digital health and health information technology space remained active. While deal value in the sector was the lowest it has been in over five years, the volume of deals remained high during this past quarter. For example, in January, MedRisk, a leader in managed physical rehabilitation in workers’ compensation, announced its acquisition of Medata, one of the leading providers of cost management and clinical solutions in the United States.

In February, DarioHealth acquired Twill for $10 million cash and 10 million shares of common stock, allowing the digital health company to expand its digital offerings to those living with a wide spectrum of chronic conditions. Aptar Digital Health, a subsidiary of AptarGroup (NYSE: ATR), acquired Healint, a Singapore-based digital health company known for its use in expediting clinical trials through its use of proprietary artificial intelligence (AI) and clinically validated data collection. And, Apollo Intelligence, a health data and insights platform and portfolio company of Frazier Healthcare Partners, acquired GlocalMind, a technology-driven healthcare market research services and panel sourcing company.

In March, Syllable, a healthcare AI and process automation firm, acquired Actium Health for an undisclosed sum, giving it access to Actium’s AI-driven patient care outreach platform; Linus Health, a digital health company that helps enable the early detection of Alzheimer’s and other dementias, acquired Aural Analytics, a leader in clinical-grade speech analytics. eMed telehealth company also completed its acquisition of Science 37 (Nasdaq: SNCE) in a $38 million going-private transaction. Science 37 specializes in decentralized clinical trials and cited eMed’s ability to enhance Science 37’s access to unique patients and accelerate its study enrollment timeline as reasons for doing the deal.

On the fund-raising front, health tech startups raised over $2.7 billion last quarter, which marked the lowest Q1 capital raise in five years. AI-focused firms received an outsized share of this funding, raking in $1.1 billion across 45 deals, according to an analysis by Rock Health. Of note, DecisionRx, a healthcare technology company focused on helping physicians make better prescription decisions, secured $100 million as a credit facility from investment firm Carlyle, the PE behemoth with nearly $400 billion in assets under management, which gives Carlyle the option to acquire 25% of DecisionRx’s outstanding equity.

In other digital health news, the Affordable Connectivity Program funds are slated to expire this month, potentially having a drastic impact on patient access to telehealth and other digital solutions. The Program passed as part of the 2021 Bipartisan Infrastructure Law (officially named the Infrastructure Investment and Jobs Act of 2021) was appropriated $14.2 billion in funds used to help over 23 million American households obtain discounted broadband internet. Survey data has shown that a majority of Program beneficiaries have used their benefits to schedule or attend remote-based healthcare appointments, which is especially critical for individuals in rural areas where there are often shortages of primary care providers and difficulties traveling to the ones that do practice in such areas. Research shows the Program’s demise may negatively impact health equity in the country and move us further away from addressing the healthcare “digital divide.” Moreover, research by the Federal Communications Commission shows that areas with below-average access to broadband internet also have lower access to maternal or obstetric care. These areas also suffer from higher levels of maternal mortality. Given that a fourth of recipients are African American and a fourth are Latino, the expiration of the Program funds, some say, may also have racial equity implications. The expiration of the Program funds, then, will no doubt have an impact on the ability of certain patient populations to access telehealth services and, in turn, the demand for such services from providers who are able to provide care remotely.

Behavioral Health

Despite behavioral health M&A activity being slow in 2023—a mere 31 deals were completed in Q4—behavioral health remains an attractive sector for investors. With the behavioral health market expected to hit $107 billion by 2032 and the increasing demand for behavioral healthcare, we expect investors will increasingly turn their attention to the sector.

In Q1 2024, PE continued to be active in the behavioral health sector. For example, Beacon Behavioral Health Partners (backed by Latticework Capital) added nine new behavioral health clinics to its practice in February. In 2024, Beacon expects to double its growth from 2023. PE firm HCAP Partners also acquired three behavioral health organizations, each to combine under the PAX Health umbrella. These behavioral health organizations included Behavioral Medicine Associates, Workers Compensation Psychological Network, and Reservoir Health, with their merger to create one of the largest behavioral health organizations in the northeastern United States. ARC Health (backed by Thurston Group) announced its acquisition of New Jersey-based-Mindsoother Therapy Center, and Acentra Health (backed by The Carlyle Group) acquired EAP Consultants, a leader in workplace mental health and well-being programs.

Other notable deals this quarter included the Atlanta, Georgia-based mental health platform Hightop Health’s acquisition of Roots Behavioral Health and Acadia Healthcare’s acquisition of Turning Point Centers, a substance use and mental health treatment provider in Utah. Acadia followed that acquisition by buying three new comprehensive treatment centers in North Carolina, giving Acadia a total of 10 comprehensive treatment centers in North Carolina.

Managed Care

The managed care sector was fairly active this first quarter. In January, Cigna Group (NYSE: CI) announced that it would sell its Medicare Advantage (MA), Medigap and Part D business lines to Health Care Service Corp. for $3.3 billion. As of this writing, according to the Wall Street Journal, Cigna has 600,000 MA members, 450,000 members enrolled in supplement plans, and 2.5 million in Medicare Part D drug plans. The deal is expected to close in the first quarter of 2025. Centene completed its divestiture of Circle Health, a hospital company based out of the United Kingdom, in an effort to tighten up its managed care business. Additionally, Medline Industries completed its acquisition of United Medco, a supplemental benefits administrator focusing on serving the Medicare Advantage, Managed Medicaid and commercial insurance markets, and Bright Health Group closed on the sale of its California Medicare Advantage business to Molina Healthcare.

In February, Point32Health announced the acquisition of Health New England, a health plan owned by Baystate Health with about 180,000 members.

During this past quarter, there were a number of regulatory changes that may affect deal-making, both negatively and positively, in the managed care sector in the near term. In January, for instance, California received federal approval to reinstate its tax on managed care organizations, a tax which is estimated to generate $19.4 billion in revenue over three years. In March, CMS announced a new Medicare Shared Savings Program (MSSP) Model aimed at improving primary care delivery. CMS expects that this program will increase primary care funding relative to the historical expenditures of accountable care organizations (ACO). Under this new model, each participant will receive an advanced payment of $250,000 designed to cover the administrative costs associated with forming the ACO. Such an amount will not be risk-adjusted and not vary with the number of assigned beneficiaries. Secondly, participating ACOs will receive monthly prospective, population-based primary care payments (PPCPs) that will include a base rate calculated based on certain ACO characteristics and the ACO’s assigned beneficiary population and case mix. To qualify for this model, participants must participate in the MSSP, qualify as a low-revenue ACO under the MSSP, and satisfy any other eligibility requirements, which will be outlined in the model’s forthcoming Request for Applications. The program is set to begin on January 1, 2025, and extend for five years. For more information on the new MSSP Model, please refer to the firm publication outlining the program.

Pharma Services, Pharmacy & Pharmacy Benefit Managers

Deal activity in the pharmacy services and pharmacy space is off to a strong start in 2024, with several acquisitions and new service lines. On January 4, Elevance Health (NYSE: ELV) announced that it entered into an agreement to acquire Paragon Healthcare, Inc., a Texas-based company that offers infusion services to patients through ambulatory infusion centers, home infusion pharmacies, and other specialty pharmacy services. On March 7, CHS became the first hospital system to partner with and buy medicines from Mark Cuban Cost Plus Drug Company. Cost Plus Drugs also struck a deal with Albertsons, the country’s second-largest supermarket chain, to join the discount drug program. With this deal, the Cost Plus Drugs network now includes 1,728 pharmacies in 34 states. On March 18, Kroger Co. (NYSE: KR) announced it entered into a definitive agreement for the sale of its specialty pharmacy business to CarelonRx, a subsidiary of Elevance Health that includes its pharmacy benefit management services. Meanwhile, in an effort to centralize pharmacy services and save money, Detroit-based Henry Ford Health plans to open a first-of-its-kind central pharmacy. The purpose of this centralized pharmacy is to automate manual pharmacy operations to give team members more time to focus on patients. Similarly, Baptist Health System in Louisville, Kentucky is constructing its own central pharmacy, which is anticipated to open in June.

Several partnerships were also announced in Q1 to offer greater, more convenient services for pharmacies and patients. CVS Pharmacy, a CVS subsidiary, partnered with Grubhub to deliver health and wellness products to consumers from more than 6,000 CVS retail locations nationwide. Rite Aid also has a partnership with Grubhub. Pharma companies similarly appear to be looking to offer convenient solutions for consumers—Eli Lilly (NYSE: LLY) has partnered with Amazon Pharmacy to deliver certain medications to patients’ homes through the “LillyDirect” platform. This service launched in January.

Several large pharma deals dominated the M&A market in Q1. On February 12, Gilead Sciences acquired liver disease drugmaker CymaBay Therapeutics for $4.3 billion. On March 19, AstraZeneca, a pharmaceutical company, announced plans to acquire Fusion Pharmaceuticals, a biotech company, for $2.4 billion. This acquisition would expand AstraZeneca’s cancer treatment pipeline. On March 25, Novo Nordisk, manufacturer of Wegovy and Ozempic, announced plans to acquire Cardior Pharmaceuticals for $1.11 billion—adding to Novo Nordisk’s strategy to build a portfolio with therapies to combat cardiovascular disease.

Conclusion

Coming out of 2023, the general tagline for 2024 appears to be “expect more of the same.” Deal-making is also likely to be negatively impacted by the FTC’s final rule promulgated on April 23, which generally prohibits employers from using non-competes, assuming the rule withstands the inevitable wave of court challenges. And yet, in the face of lingering economic headwinds and potential regulatory roadblocks, each industry sector is evolving in fascinating ways: PE firms allocating more dollars to clinical research organizations, outpatient procedures continuing to shift from hospitals to ASCs, increased funding in healthcare AI, and providers and investors alike navigating and understanding the benefits of a new MSSP. All of these changes amidst the backdrop of a looming presidential election will surely make for an interesting year!

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While healthcare mergers and acquisitions activity in the physician practice management (PPM) and hospital sectors appears to have slightly ticked up in Q1 compared to the last quarter of 2023, reports are that M&A activity across the industry as a whole was down compared to the last quarter of 2023 and also down year-over-year. Going forward, commentators appear generally aligned in projecting that 2024 will yield deal volumes across industry sectors similar to those in 2023.

This may not come as much of a surprise to investors, as the many financial challenges of 2023 have yet to abate—in particular, predictions (hopes?) of rate cuts have not yet come to fruition, making larger transactions an expensive proposition. Additionally, the Biden administration and state and federal regulators have signaled they will continue to look at private equity’s (PE) impact on healthcare, which is likely to have a chilling effect on PE activity, especially in the PPM sector. But with the presidential election in full swing and investors anxiously awaiting to deploy dry powder, the climate could change quickly.

Physician Practice Management

Despite significant economic and regulatory challenges, the PPM sector has proven difficult to keep down. According to LevinPro, in the first quarter of 2024, the PPM sector was the most popular for healthcare investors, with 127 deals announced. While that is a decrease from the 143 deals in Q1 2023, it is an increase from the 116 announced in Q4 2023. PE investors continued to dominate volume in the PPM market, accounting for 68 of the announced deals as of April 2.

Regulatory Developments

While antitrust regulators have expressed growing concern with healthcare transactions, previously, only large-scale acquisitions that exceeded the financial threshold for the Hart-Scott-Rodino Act seemed to be the focus. However, as noted in our year-end report for 2023, a number of states have taken steps to limit PE activity, primarily through reporting requirements related to management services organizations (MSOs) contracting or transacting with professional entities. Most of these laws have not explicitly called out PE investment, but in Q1, we are seeing some states take things to the next level, including proposing outright bans on PE investment in healthcare services.

State Transparency Law Updates

As highlighted in our 2023 reports, many state legislatures and regulatory agencies (13 by our count, as of January 1, 2024) had moved to regulate smaller acquisitions by requiring pre-closing notification of “material change” transactions. Pennsylvania recently joined the fray by proposing Senate Bill 584, which would require certain provider organizations and healthcare facilities to notify the state attorney general’s office 90 days before entering into “material change transactions.” Additionally, January saw Washington re-introduce SB 5241, which could expand the scope of entities and the types of transactions subject to notice requirements. Notably, the bill would require 120 days prior notice to the Washington Attorney General and expands the types of transactions covered by the statute (e.g., the acquisition of a physician practice or MSO by a PE investor that has invested in other entities providing healthcare services). While some states have long had statutes requiring pre-closing notification of certain healthcare transactions (e.g., Hawaii in 1977 and Colorado in 2008), the older iterations largely only applied to those involving hospitals. However, the amount and scope of these pre-closing notification requirements are growing and really accelerated in 2023—likely in direct response to the flourishing PPM market, which has seen heavy consolidation over the last several years. PPM investors should pay particular attention to states such as New York, Minnesota, Illinois, Indiana, Massachusetts and Oregon, which currently have pre-closing notification requirements in place directly affecting the MSO/“friendly PC” model.

Beginning July 1, a new, recently passed Indiana statute will require 90 days prior notice to the Indiana Attorney General before certain healthcare entities (defined to include physician and dental practices, administrators, and PE partnerships) may enter into a merger or acquisition in Indiana with another healthcare entity with a value of at least $10 million. While approval from the Attorney General is not required, the AG may analyze any antitrust concerns in writing and demand additional information.

The final version of California’s new pre-closing notification rules (Section 97431 of Title 22 of the California Code of Regulations), which went into effect April 1, significantly narrowed the scope of entities covered by removing explicit references to MSOs. Previous iterations of the regulation directly targeted MSO transactions. However, investors should remain aware as the regulation is still broad enough to include certain types of MSOs (e.g., MSOs working on behalf of a payor). Regardless, while some PPM investors looking to expand their California footprint may be out of the fire with respect to that regulation, they may find themselves in the frying pan with another recently proposed bill, discussed below.

Private Equity in the Cross-Hairs

Some states are moving beyond pre-closing notification requirements and proposing direct limitations on PE investment in healthcare. As of April 1, California, Oregon, Minnesota, and Connecticut have introduced potential legislation that could outright ban PE firms from acquiring healthcare providers or, at the very least, place heavy limitations on their ability to invest.

California

Proposed in February, AB-3129 goes far beyond California’s previous attempts to reign in PPM consolidation–both in scope and effect. If passed, the legislation would:

  1. Require “private equity groups” and hedge funds to provide 90 days pre-closing notice to and obtain consent from the Attorney General prior to a change of control or an acquisition of a healthcare facility or provider group.
  2. Prohibit PE firms or hedge funds involved in any manner with a physician practice from controlling or directing that practice (including entering into certain contracts on behalf of the practice).
  3. Prohibit a physician practice from entering into any arrangements with an entity controlled by a PE group or hedge fund (e.g., MSOs) in which that PE group or hedge fund manages any of the affairs of the physician practice in exchange for a fee to be charged to the practice.
  4. Prohibit non-competes, non-disparagements, and other restrictive covenants in management contracts and/or contracts for the purchase of assets between physician practices and PE groups or their affiliates.

As currently drafted, the bill leaves much to be desired in terms of definitions and clarity–particularly with respect to the California Attorney General’s review and consent standards. The Attorney General must determine whether the transaction “may have a substantial likelihood of anticompetitive effects” or “may create a significant effect on the access or availability of health care services to the affected community.” Among other considerations, the Attorney General will consider the “public interest” when deciding whether a transaction can move forward. These broad and unclear directives would give the Attorney General the power to deny or impose conditions on most investments by PE or hedge funds in healthcare facilities and providers without any clear criteria. Even the definition of “private equity group” seems to capture more than intended. As used in the bill, “private equity group” is defined as “an investor or group of investors who engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.” Some argue the definition could pull in medical equipment financing companies that have always supplied capital to medical practices. If the bill passes, the law will go into effect on January 1, 2025.

Oregon

Meanwhile, in Oregon, while HB 4130 ran out of steam in the last legislative session, the proposal sent red flags for many PPM investors. Unlike some of the other proposals, which generally only included broad language without much substance, Oregon’s proposal showed how much some legislatures are paying attention to PPM structures by targeting several of the important levers that PE firms typically deploy in MSO structures.

Subject to certain exceptions, the bill broadly would have prevented professional entities from relinquishing control over their “assets, business operations, clinical practices or decisions or the clinical practices or decisions of a physician…” The bill outlined examples of relinquishing “control,” including, among other things:

  1. Selling, issuing or restricting the transfer of shares of the professional entity.
  2. Entering into noncompetition, nondisclosure or non-disparagement agreements.
  3. Delegating out decision-making over certain employment matters (e.g., hiring, firing, compensation, etc.).

Essentially, the bill attempted to limit or outright prohibit many of the devices PE firms and other PPM investors typically rely on to ensure long-term relationships with their managed practices. The bill would also have prohibited the owners, directors, and officers of professional entities from owning shares or serving as directors or officers of—or even becoming employees or independent contractors of—affiliated MSOs. While the crisis was temporarily averted, Oregon investors should continue to monitor a potential resurgence over the coming sessions.

Minnesota

Minnesota’s HF 4206 remains under consideration in the state legislature and would prohibit “private equity companies” or real estate investment trusts (REITs) from acquiring or increasing either of the following:

  1. Any direct or indirect ownership interest the PE company or REIT has in a provider.
  2. Any operational or financial control the PE company or REIT has over a provider.

“Private equity company” is defined by the bill as a publicly or non-publicly traded entity that collects capital investments from individuals or entities. If they pass, the prohibitions would be effective August 1, 2024.

Connecticut

Finally, in the northeastern part of the country, Connecticut legislators introduced HB 5319 on March 25, which would require the Connecticut Office of Health Strategies to develop a plan concerning PE ownership of Connecticut-licensed healthcare facilities, including both of the following:

  1. Assessing whether a certificate of need should be required for a PE firm’s acquisition of a “health care facility” or whether other restrictions should be implemented).
  2. Recommending requirements for the disclosure of information by a healthcare facility that has PE ownership.

The plan must be submitted by January 1, 2025.

While the bill does not appear to directly affect PPM transactions as physician practices are not directly included in the definition of “health care facilities,” investors should watch closely going into 2025 for any changes in the scope of the bill and/or similar bills targeting PPM transactions, now that it is apparent the state legislature has PE firms squarely in its cross-hairs.

Benefits of PE Investment

While PE’s investment in healthcare does have some well-publicized failures, many critics fail to recognize why providers are continuing to choose to partner with PE-backed platforms. As regulatory and economic barriers continue to impede medical practices, PE investors—through their MSOs—are well-equipped and able to provide critical administrative, financial, and clinical support services, and by doing so, allow their physician partners to focus on delivering quality healthcare. PE investors often also provide the resources and know-how for their physician partners to make the shift to value-based reimbursement models, an important but daunting task many physician partners would likely be unable to accomplish on their own.

Notable Dealmakers

Despite mounting challenges, as noted earlier, PPM deals did tick up from Q4 2023.

The dental market continued to set the pace in terms of deal volume in Q1 2024. In January alone, 23 of the 50 total PPM acquisitions reported by LevinPro were in the dental specialty. MB2 Dental Solutions (backed by Charlesbank Capital Partners) continued its rapid pace by announcing 20 deals across the country in Q1. Two highlights include their expansion into West Virginia and Vermont. In February, MB2 announced its new partnership with Dr. Daniel K. Monday & Stephen P. Graziani P.L.L.C. and its two West Virginia locations. MB2 also entered Vermont by partnering with Montshire Endodontics on April 5. MB2 now includes over 700 practices and more than 1,400 providers across 41 states.

LevinPro only reported eight primary care transactions in Q1; however, there have been several notable updates–particularly with respect to retail investors.

In the primary care space, Florida-based Palm Medical Centers (backed by MBF Healthcare Partners) was busy. After entering the Texas market in June 2023, Palm Medical has added four locations since January. On February 5, it opened practices in Fort Worth and Keller. On February 26, Palm acquired two primary care practices in Dallas and Duncanville. Palm Medical has been very intentional about its steady growth in Texas. It hopes to marry this expansion with its existing specialties (cardiology, dentistry, optometry, etc.).

In March, the newly formed Arches Medical Partners acquired 11 internal medicine practices in Rhode Island from Walgreens-owned VillageMD. Walgreens (Nasdaq: WBA) has recently begun downsizing its provider platform after reporting a steep quarterly loss. Walgreens has invested nearly $6 billion in VillageMD since 2020. However, the investment has not proven to be as profitable as anticipated. In Walgreens’ latest earnings call, CEO Tim Wentworth told Walgreens investors that Village MD plans to close 160 clinics across the country. Including the Arches acquisition, VillageMD has now exited 140 locations and has exited or already notified patients that it is exiting city markets of Chicago, Boston, and Las Vegas and broader markets in Florida, Indiana, and Rhode Island.

In line with VillageMD’s downsizing, CVS Health (NYSE: CVS) closed 25 of its MinuteClinic locations across Los Angeles to ensure patient and consumer demands align with its healthcare delivery strategy.

One of the leading stories in 2024 has been Optum’s (a subsidiary of UnitedHealth Group (NYSE: UNH)) proposed acquisition of Stewardship Health, the physician arm of struggling Dallas-based Steward Health Care, and its more than 1,700 physicians across nine states. Optum currently partners with over 90,000 physicians across the country (adding 20,000 in 2023 alone) and is looking to expand further. However, after its announcement in March, the deal has sparked intense backlash from prominent lawmakers such as Senators Elizabeth Warren and Edward Markey, among others. In a March 26 statement, Senator Warren cited that “Optum, a UnitedHealth Group subsidiary, is already the largest employer of physicians in the country—controlling over ten percent of American doctors—which means this deal raises significant antitrust concerns…” Further compounding scrutiny is that many pundits and politicians have blamed Steward’s financial failings on its for-profit ownership and PE roots. For Steward’s part, the sale is primarily motivated by the 33-hospital system’s plan to address its poor financial performance, which has landed it in significant debt. As a snapshot, the system was $50 million short on year-end rent to Medical Properties Trust and went from being purchased for $895 million in 2010 to losing more than $800 million from 2017 to 2020.

With PE investments in healthcare beginning to mature, many anticipated that Optum and large retail chains like Walgreens and CVS, along with Amazon (Nasdaq: AMZN), would serve as potential buyers. While recent developments and cuts by Walgreens and CVS should not necessarily alarm potential sellers, it may be worth keeping an eye on these retail chains going forward–especially given the intense scrutiny that other large chains like Optum have received.

Clinical Research Organizations

In 2023, investors took an increased interest in clinical research organizations, likely due to the projected growth rate of the clinical trial market. In our 2023 year-end report, we relayed data from Harris Williams, estimating that the clinical trial market will grow annually at a rate of 6.8% through 2025. The growing appeal of these organizations may also be due to the fact that, as commentators such as Provident Healthcare Partners have noted, unlike investments in pharmaceutical companies themselves, the success of investments in clinical research companies does not depend on whether a drug makes it to market. In the first quarter of 2024, several PE firms have indeed allocated funds to clinical research organizations.

Centricity Research (now majority-owned by Trinity Hunt Partners) announced its acquisition of North Carolina-based Lucas Research in mid-December and followed that announcement by naming its new CEO and CFO in early January in order to—according to the press release—support the next phase of growth.

In February, at least two PE-backed clinical trial platforms acquired clinical trial sites: KKR’s platform, Headlands Research, described as an established clinical trial site dedicated to research in mental illness and disorders of the central nervous system, added Maryland-based Pharmasite Research to its growing, multinational network of clinical trial sites, and AHP announced the creation of its new platform, Prolerity Clinical Research, and its first acquisition of Tandem Clinical Research, which has 11 research sites across Louisiana, Florida, New Jersey and New York.

That same month, QHP Capital acquired Principal IRB, an institutional review board (IRB) focused on full-scale IRB services and bringing IRB and clinical operations experience to support today’s clinical trials. QHP quickly re-named the company Univo IRB, likely with a view toward establishing the company as a new platform through which it may acquire and consolidate other IRB and clinical trial support providers. Also in February, there were at least a couple of examples of investments in companies involved in recruiting patients for clinical trials and/or facilitating patient access to clinical trials. On February 1, Greenphire (backed by Thoma Bravo) announced its acquisition of Clincierge, a provider of concierge travel and logistics support for patients participating in clinical trials, and on February 8, Spectrum Science (backed by Knox Lane) announced its acquisition of Continuum Clinical, a global clinical trial recruitment and engagement solutions provider. The recent activities of these platforms suggest that clinical research-adjacent service providers may also be in the mix of PE targets within the clinical research sector.

We expect investment in clinical research organizations and companies engaged in supporting clinical trials will accelerate throughout the year, particularly given the present fragmented nature of the sector.

Ambulatory Surgery Centers

More favorable reimbursement rates and a migration of previously hospital-based services to outpatient settings continue to make the ambulatory surgery center (ASC) sector a prime candidate for investment from both PE and health systems.

North Carolina-based Compass Surgical Partners (backed by TPG) has seen significant activity in 2024. In January, TPG made a new investment in Compass, which has developed or managed more than 250 ASCs across 35 states. This was quickly followed up in February when Compass partnered with Florida-based Baptist Health to open a new ASC on the Baptist Medical Center Beaches’ campus. The facility will focus on orthopedic, neuro, plastic, and general surgery. The Baptist-Compass partnership is set to open a second ASC later this year. February also saw Compass partner with the Advanced Joint and Spend Institute Orlando to open a new ASC in Orlando, Florida. The same day, Compass announced a joint venture with Maryland-based Bon Secours to build a cardiovascular surgery center in Virginia. The facility will involve a projected $14 million investment, with Bon Secours owning 51% and Compass owning 49% of the facility.

On the health system side, Idaho-based Saltzer Health announced plans in January to sell or shut down existing operations, including its Ten Mile surgery center, due to financial challenges, and temporarily shuttered operations on March 29. However, days later, Saint Alphonsus, also based in Idaho, completed its acquisition of the ASC and two of Saltzer Health’s urgent care centers and re-opened the facilities’ doors under the Saint Alphonsus banner.

In late March, UCLA Health acquired West Hills Hospital and Medical Center (which includes a freestanding ASC) from HCA Healthcare (NYSE: HCA). UCLA Health intends for the center to continue to operate and plans to retain the staff previously employed by HCA.

Pending standard licensing and third-party approval, Midland, Michigan-based MyMichigan Health intends to acquire four Ascension facilities in Michigan. Included in the acquisition is St. Mary’s Town Center, an ASC which also operates a wound care center, emergency department and short stay facility. MyMichigan Health is also set to acquire Ascension’s Michigan locations in Saginaw, Tawas and Standish, which includes one ASC.

Health systems are clearly taking a renewed interest in outpatient care. They recognize that payors, patients and providers look favorably at ASCs, which tend to present lower costs and higher quality sites for care. Additionally, health systems also see other advantages in expanding their outpatient footprint, including increasing market share, recruiting top-line, quality physicians, and attracting new business. As time goes on and reimbursement rates continue to increase for ASCs, more and more hospitals and health systems will no doubt want to capitalize on that success for themselves.

Hospitals

Hospital and health system mergers and acquisitions significantly increased in Q1 2024. According to a report by Cain Brothers, a total of 18 hospital and health system transactions were announced in Q1, up from just 12 transactions in the first quarter of 2023. Target revenue was also substantially higher this quarter, with the revenue for the targets in the 18 transactions announced totaling $10 billion, compared to $3.4 billion in the first quarter of 2023. Hospital M&A activity this past quarter highlights the increasing momentum of hospital and health system transactions.

As seen throughout 2023, regional mergers of health systems continued this past quarter. For example, Northwell Health and Nuvance Health entered into an agreement to combine the systems, which together will include 28 hospitals across New York and Connecticut. In Missouri, St. Louis-based BJC HealthCare and Kansas City-based Saint Luke’s Health System finalized their merger transaction, consolidating $10 billion in revenue, and Mercy and SoutheastHealth completed their merger, with SoutheastHealth’s two hospitals, a behavioral health hospital and 48 clinics joining Mercy. Meanwhile, in New Jersey, CarePoint Health and Hudson Regional Hospital signed a letter of intent to combine into a four-hospital system under a new management company called Hudson Health System, and Atlantic Health System and Saint Peter’s Healthcare System signed a letter of intent to establish a strategic partnership, with plans to bring Saint Peter’s into Atlantic Health’s care network to expand care access.

This quarter also included the acquisition of several single hospitals by larger systems. For example, following approval in bankruptcy, Mercy Iowa City became part of University of Iowa Health Care as of January 31. In February, Medical City Healthcare in Dallas, a subsidiary of HCA, completed its acquisition of Trinity Regional Hospital Sachse, which had filed for bankruptcy in 2023, from Sunland Medical Foundation. Mercy also announced plans to acquire Ascension Via Christi Hospital in Pittsburg, Kansas. Evangelical Community Hospital, an independent community hospital, similarly announced it signed a definitive agreement to join WellSpan Health, citing that the current model is not sustainable.

Q1 also saw several deals involving rural hospitals. Michigan-based Hills & Dales Healthcare and UnitedHealthcare Partners merged to create a three-hospital system known as Aspire Rural Health System, covering parts of Michigan. Rural hospital Huntsville Hospital Health System also announced plans to acquire Dekalb Regional Medical Center, serving Alabama.

Academic medical centers (AMC) also continued to be active acquirers in Q1. These transactions are driven by several factors, including the investment in community health by allowing community hospitals to provide more local care. These strategic investments also allow AMCs to expand their clinical, teaching, and research capabilities. For example, early in January, University of Missouri Health Care completed its acquisition of Capital Region Medical Center. The two health systems, which had been partners for the last 25 years, will be unified under the one brand, “MU Health Care.” Similarly, The University of Pennsylvania Health System announced a letter of intent to acquire Doylestown Health. Should the transaction be completed, Penn Medicine would become a seven-hospital system and would lay the foundation for new clinical programs and expanded services in Philadelphia. UC Irvine Health entered into a definitive agreement to acquire Tenet Healthcare Corporation’s (NYSE: THC) Pacific Coast Network – which includes four hospitals in Southern California, their associated surgery centers, and outpatient locations – for $975 million. The University of Minnesota announced their signing of a letter of intent with Fairview Health Services to purchase the four academic health facilities that makeup M Health Fairview University of Minnesota Medical Center – the East and West Bank campuses, M Health Fairview Masonic Children’s Hospital, and the M Health Fairview Clinics and Surgery Center. The University of Minnesota aims to complete the full purchase of these facilities by the end of 2027. Finally, in March, UCLA Health completed its acquisition of West Hills Hospital and Medical Center, a 260-bed hospital, from HCA.

National health systems were also active early in 2024, with several acquisitions as well as a significant amount of strategic divestitures. While HCA has been actively acquiring and increasing the number of hospitals they operate over the last several years, other big systems, including Tenet and Community Health Systems (NYSE: CYH), have significantly trimmed the number of hospitals they operate over the same time period. Following HCA’s announced plan in October 2023 to expand its emergency and high-acuity service lines and grow its healthcare services market share, HCA has been particularly active in the Texas market. For example, in Q1, in addition to the acquisition of bankrupt Trinity Regional Hospital Sachse for $41 million, discussed above, HCA’s subsidiary, Surgery Ventures, acquired majority stakes in two ambulatory surgery centers in Texas. Meanwhile, this past quarter, Tenet completed the sale of several hospitals. On February 1, Tenet announced it completed its $2.4 billion sale of three South Carolina hospitals to Novant Health. The same day, Tenet also announced plans to sell four California-based hospitals to UCI Health for $975 million. Later in February, Tenet announced plans to sell two more California hospitals to Adventist Health for $550 million. According to Tenet’s CEO, these hospital sales will significantly improve Tenet’s leverage position. CHS likewise announced in a February earnings call that it is evaluating sales that could yield more than $1 billion. CHS currently has plans to sell two of its North Carolina hospitals to Novant Health, but the Federal Trade Commission (FTC) sued to block the $320 million acquisition in January.

As noted, this past quarter’s uptick in hospital M&A activity highlights the increasing momentum of hospital and health system transactions, which we expect to continue throughout the rest of the year. Buyers continue to make strategic investments to grow and expand services. Meanwhile, for sellers, financial challenges continue to be a key driver of M&A activity.

Home Health, Hospice Care & Personal Care Services

Home healthcare acquisitions are anticipated to increase in 2024 as pent-up buyer demand comes to the surface. According to a report by PitchBook, out of 51 potential home health acquirers interviewed, 77% indicated they plan to acquire more than they did in 2023. In particular, according to the interviews, buyers are interested in experienced home health operators who have been resilient in the industry and have strong patient outcomes and net promoter scores.

Of particular interest in this space, the Department of Justice (DOJ) is considering a lawsuit to block UnitedHealth Group’s takeover of Amedisys (Nasdaq: AMED). If the deal continues, it will be worth approximately $3.3 billion. This follows news of the DOJ’s antitrust investigation into UnitedHealth Group with respect to the relationship between its insurance business and Optum. These actions illustrate the heightened concern from regulators about vertical consolidation, especially in the context of insurers and health plans acquiring providers.

There is no further word on two significant potential transactions: Enhabit (NYSE: EHAB), one of the largest home health companies, and privately-held Help at Home, one of the largest personal care services companies. Enhabit, with a nudge from activist shareholders, had previously announced in 2023 a strategic review of its alternatives, recently commenting that it was in the “later stages” of that process.

Similarly, several news sources have indicated that Help at Home owners Centerbridge and Vistria had instituted a sales process that could yield $3 billion.

Although deal volume in the hospice space was significantly down in 2023, there is cautious optimism for hospice deals in 2024, given a number of key investors are well-positioned for acquisitions this year. Optum, for example, was active in the home health and hospice space in 2023, acquiring LHC Group and planning the acquisition of Amedisys, giving it increased buying power.

One potential hurdle to hospice deal activity is the expansion of the 36-month rule to hospice providers, which we reported on in our 2023 year-end report and which prohibits the transfer of a home health or hospice agency’s Medicare provider agreement and Medicare billing privileges to a new majority owner within 36 months of initial Medicare enrollment or recent change of ownership. The Centers for Medicare & Medicaid Services (CMS) adopted this rule in the 2024 home health final rule, and it went into effect for hospices on January 1.

For personal care services, the proposed Medicaid Access Rule that has caused industry uncertainty is believed to be near final publication in the coming days, which may lead to better long-term clarity on the operating environment.

Digital Health & Health Information Technology

While there were many interesting deals in the digital health space, in Q1, the healthcare technology company that grabbed the most headlines was Change Healthcare. As industry stakeholders well know, on February 21, Change Healthcare, a subsidiary of UnitedHealth Group and one of the largest clearinghouses for insurance billing and payments in the country, was the target of a massive ransomware attack. The attack brought the processing of claims for hundreds of thousands of providers to a screeching halt, causing providers, health systems, and payors alike to suffer innumerable losses. For perspective, Change Health processes an estimated 15 billion healthcare transactions each year and is involved in one in every three patient records. A survey conducted by the American Medical Association found that four in five physicians lost revenue as a result of the attack.

In light of the scope of the attack, both the federal government and commercial payors have responded swiftly to try to mitigate damages. In March, CMS announced it would allow Part A providers to apply for accelerated payments and Part B suppliers to apply for advance payments in the event they experience claims disruptions as a result of the February cyberattack. In addition, as of April 3, UnitedHealth Group has advanced nearly $4.7 billion to providers in need. Centene (NYSE: CNC) also announced a provider advance program that has a 90-day term with zero interest that requires only that impacted providers complete a two-page agreement.

Providers have not been the only parties suffering as a result of this cyberattack. The Minnesota Attorney General issued warnings about scam calls apparently targeting patients affected by the Change Healthcare ransomware attack. The Department of Health and Human Services (HHS) recently stated that, although there were no related breach incidents affecting HHS networks, it was experiencing notable operational impacts. As of now, the situation is ongoing, and Change Healthcare is seeking to consolidate dozens of class action lawsuits related to cyberattacks in the Middle District of Tennessee. In early April news of a potential second attack have also hit the wire. The industry will surely feel the ripple effects of these attacks through the remainder of the year.

Meanwhile, the digital health and health information technology space remained active. While deal value in the sector was the lowest it has been in over five years, the volume of deals remained high during this past quarter. For example, in January, MedRisk, a leader in managed physical rehabilitation in workers’ compensation, announced its acquisition of Medata, one of the leading providers of cost management and clinical solutions in the United States.

In February, DarioHealth acquired Twill for $10 million cash and 10 million shares of common stock, allowing the digital health company to expand its digital offerings to those living with a wide spectrum of chronic conditions. Aptar Digital Health, a subsidiary of AptarGroup (NYSE: ATR), acquired Healint, a Singapore-based digital health company known for its use in expediting clinical trials through its use of proprietary artificial intelligence (AI) and clinically validated data collection. And, Apollo Intelligence, a health data and insights platform and portfolio company of Frazier Healthcare Partners, acquired GlocalMind, a technology-driven healthcare market research services and panel sourcing company.

In March, Syllable, a healthcare AI and process automation firm, acquired Actium Health for an undisclosed sum, giving it access to Actium’s AI-driven patient care outreach platform; Linus Health, a digital health company that helps enable the early detection of Alzheimer’s and other dementias, acquired Aural Analytics, a leader in clinical-grade speech analytics. eMed telehealth company also completed its acquisition of Science 37 (Nasdaq: SNCE) in a $38 million going-private transaction. Science 37 specializes in decentralized clinical trials and cited eMed’s ability to enhance Science 37’s access to unique patients and accelerate its study enrollment timeline as reasons for doing the deal.

On the fund-raising front, health tech startups raised over $2.7 billion last quarter, which marked the lowest Q1 capital raise in five years. AI-focused firms received an outsized share of this funding, raking in $1.1 billion across 45 deals, according to an analysis by Rock Health. Of note, DecisionRx, a healthcare technology company focused on helping physicians make better prescription decisions, secured $100 million as a credit facility from investment firm Carlyle, the PE behemoth with nearly $400 billion in assets under management, which gives Carlyle the option to acquire 25% of DecisionRx’s outstanding equity.

In other digital health news, the Affordable Connectivity Program funds are slated to expire this month, potentially having a drastic impact on patient access to telehealth and other digital solutions. The Program passed as part of the 2021 Bipartisan Infrastructure Law (officially named the Infrastructure Investment and Jobs Act of 2021) was appropriated $14.2 billion in funds used to help over 23 million American households obtain discounted broadband internet. Survey data has shown that a majority of Program beneficiaries have used their benefits to schedule or attend remote-based healthcare appointments, which is especially critical for individuals in rural areas where there are often shortages of primary care providers and difficulties traveling to the ones that do practice in such areas. Research shows the Program’s demise may negatively impact health equity in the country and move us further away from addressing the healthcare “digital divide.” Moreover, research by the Federal Communications Commission shows that areas with below-average access to broadband internet also have lower access to maternal or obstetric care. These areas also suffer from higher levels of maternal mortality. Given that a fourth of recipients are African American and a fourth are Latino, the expiration of the Program funds, some say, may also have racial equity implications. The expiration of the Program funds, then, will no doubt have an impact on the ability of certain patient populations to access telehealth services and, in turn, the demand for such services from providers who are able to provide care remotely.

Behavioral Health

Despite behavioral health M&A activity being slow in 2023—a mere 31 deals were completed in Q4—behavioral health remains an attractive sector for investors. With the behavioral health market expected to hit $107 billion by 2032 and the increasing demand for behavioral healthcare, we expect investors will increasingly turn their attention to the sector.

In Q1 2024, PE continued to be active in the behavioral health sector. For example, Beacon Behavioral Health Partners (backed by Latticework Capital) added nine new behavioral health clinics to its practice in February. In 2024, Beacon expects to double its growth from 2023. PE firm HCAP Partners also acquired three behavioral health organizations, each to combine under the PAX Health umbrella. These behavioral health organizations included Behavioral Medicine Associates, Workers Compensation Psychological Network, and Reservoir Health, with their merger to create one of the largest behavioral health organizations in the northeastern United States. ARC Health (backed by Thurston Group) announced its acquisition of New Jersey-based-Mindsoother Therapy Center, and Acentra Health (backed by The Carlyle Group) acquired EAP Consultants, a leader in workplace mental health and well-being programs.

Other notable deals this quarter included the Atlanta, Georgia-based mental health platform Hightop Health’s acquisition of Roots Behavioral Health and Acadia Healthcare’s acquisition of Turning Point Centers, a substance use and mental health treatment provider in Utah. Acadia followed that acquisition by buying three new comprehensive treatment centers in North Carolina, giving Acadia a total of 10 comprehensive treatment centers in North Carolina.

Managed Care

The managed care sector was fairly active this first quarter. In January, Cigna Group (NYSE: CI) announced that it would sell its Medicare Advantage (MA), Medigap and Part D business lines to Health Care Service Corp. for $3.3 billion. As of this writing, according to the Wall Street Journal, Cigna has 600,000 MA members, 450,000 members enrolled in supplement plans, and 2.5 million in Medicare Part D drug plans. The deal is expected to close in the first quarter of 2025. Centene completed its divestiture of Circle Health, a hospital company based out of the United Kingdom, in an effort to tighten up its managed care business. Additionally, Medline Industries completed its acquisition of United Medco, a supplemental benefits administrator focusing on serving the Medicare Advantage, Managed Medicaid and commercial insurance markets, and Bright Health Group closed on the sale of its California Medicare Advantage business to Molina Healthcare.

In February, Point32Health announced the acquisition of Health New England, a health plan owned by Baystate Health with about 180,000 members.

During this past quarter, there were a number of regulatory changes that may affect deal-making, both negatively and positively, in the managed care sector in the near term. In January, for instance, California received federal approval to reinstate its tax on managed care organizations, a tax which is estimated to generate $19.4 billion in revenue over three years. In March, CMS announced a new Medicare Shared Savings Program (MSSP) Model aimed at improving primary care delivery. CMS expects that this program will increase primary care funding relative to the historical expenditures of accountable care organizations (ACO). Under this new model, each participant will receive an advanced payment of $250,000 designed to cover the administrative costs associated with forming the ACO. Such an amount will not be risk-adjusted and not vary with the number of assigned beneficiaries. Secondly, participating ACOs will receive monthly prospective, population-based primary care payments (PPCPs) that will include a base rate calculated based on certain ACO characteristics and the ACO’s assigned beneficiary population and case mix. To qualify for this model, participants must participate in the MSSP, qualify as a low-revenue ACO under the MSSP, and satisfy any other eligibility requirements, which will be outlined in the model’s forthcoming Request for Applications. The program is set to begin on January 1, 2025, and extend for five years. For more information on the new MSSP Model, please refer to the firm publication outlining the program.

Pharma Services, Pharmacy & Pharmacy Benefit Managers

Deal activity in the pharmacy services and pharmacy space is off to a strong start in 2024, with several acquisitions and new service lines. On January 4, Elevance Health (NYSE: ELV) announced that it entered into an agreement to acquire Paragon Healthcare, Inc., a Texas-based company that offers infusion services to patients through ambulatory infusion centers, home infusion pharmacies, and other specialty pharmacy services. On March 7, CHS became the first hospital system to partner with and buy medicines from Mark Cuban Cost Plus Drug Company. Cost Plus Drugs also struck a deal with Albertsons, the country’s second-largest supermarket chain, to join the discount drug program. With this deal, the Cost Plus Drugs network now includes 1,728 pharmacies in 34 states. On March 18, Kroger Co. (NYSE: KR) announced it entered into a definitive agreement for the sale of its specialty pharmacy business to CarelonRx, a subsidiary of Elevance Health that includes its pharmacy benefit management services. Meanwhile, in an effort to centralize pharmacy services and save money, Detroit-based Henry Ford Health plans to open a first-of-its-kind central pharmacy. The purpose of this centralized pharmacy is to automate manual pharmacy operations to give team members more time to focus on patients. Similarly, Baptist Health System in Louisville, Kentucky is constructing its own central pharmacy, which is anticipated to open in June.

Several partnerships were also announced in Q1 to offer greater, more convenient services for pharmacies and patients. CVS Pharmacy, a CVS subsidiary, partnered with Grubhub to deliver health and wellness products to consumers from more than 6,000 CVS retail locations nationwide. Rite Aid also has a partnership with Grubhub. Pharma companies similarly appear to be looking to offer convenient solutions for consumers—Eli Lilly (NYSE: LLY) has partnered with Amazon Pharmacy to deliver certain medications to patients’ homes through the “LillyDirect” platform. This service launched in January.

Several large pharma deals dominated the M&A market in Q1. On February 12, Gilead Sciences acquired liver disease drugmaker CymaBay Therapeutics for $4.3 billion. On March 19, AstraZeneca, a pharmaceutical company, announced plans to acquire Fusion Pharmaceuticals, a biotech company, for $2.4 billion. This acquisition would expand AstraZeneca’s cancer treatment pipeline. On March 25, Novo Nordisk, manufacturer of Wegovy and Ozempic, announced plans to acquire Cardior Pharmaceuticals for $1.11 billion—adding to Novo Nordisk’s strategy to build a portfolio with therapies to combat cardiovascular disease.

Conclusion

Coming out of 2023, the general tagline for 2024 appears to be “expect more of the same.” Deal-making is also likely to be negatively impacted by the FTC’s final rule promulgated on April 23, which generally prohibits employers from using non-competes, assuming the rule withstands the inevitable wave of court challenges. And yet, in the face of lingering economic headwinds and potential regulatory roadblocks, each industry sector is evolving in fascinating ways: PE firms allocating more dollars to clinical research organizations, outpatient procedures continuing to shift from hospitals to ASCs, increased funding in healthcare AI, and providers and investors alike navigating and understanding the benefits of a new MSSP. All of these changes amidst the backdrop of a looming presidential election will surely make for an interesting year!

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