The healthcare M&A market appears to be steadying. Although deal activity through the year appears slightly below the high-water marks for the corresponding period of 2022, deal activity is generally up from the first quarter of 2023, and reported volumes are nearly twice the levels seen in 2018 and 2020. Moreover, and perhaps more interesting than the volume of the transactions and the transactions themselves, are the emerging trends across various sectors that are driving—and impacting—deal activity.
Physician Practice Management
Although still lagging behind the historic paces set in 2021 and 2022, the physician practice management (PPM) sector has proven to be resilient in the face of increasing regulatory challenges and generally unfavorable macroeconomic conditions. Private equity (PE) remains at the forefront. Through June, the overall PE market has seen the valuation average take a nearly 50% dip compared to the first half of 2022 ($65.9 million relative to 2022’s $132 million), but PE deal volume has remained steady—only dropping 4% compared to last year. As of June 27, LevinPro reported there have been 282 PPM acquisitions in 2023.
The relative stability in the healthcare sector—particularly in the PPM sector—can largely be attributed to excess capital in the hands of potential investors and increasing financial pressure on physicians. According to PwC’s 2023 PE midyear outlook, U.S. PE firms are sitting on $1.1 trillion worth of dry powder that allows them to avoid high-cost debt and creatively invest in smaller add-ons, including minority investments and all equity deals.
As for physicians, more and more are growing disillusioned by the complex regulatory environment in which they operate. According to a report from the American Hospital Association, a reported 94% of physicians find operating their practices to be financially and administratively difficult, and 90% of medical students claim to be ill-equipped to run the business and operational side of a practice. To make matters worse, physicians face decreasing reimbursement rates and increasing administrative costs from payors. Indeed, Medicare physician reimbursement rates took a 4.4% cut this year—continuing a trend that has seen reimbursement cut effectively 26% since 2001. Additionally, commercial payors are increasingly requiring prior authorizations, which a recent Medical Group Management Association survey found drove up practice costs by forcing additional administrative staff hires to process the authorizations. Partnering with PE-backed management service organizations (MSOs), health systems, or companies like Humana (NYSE: HUM), UnitedHealth Group’s (NYSE: UNH) subsidiary Optum, Inc. or Walmart Inc. (NYSE: WMT) can ease the administrative burden on physicians.
Finally, specialists are beginning to feel the competition from health systems and new market entrants (e.g., Optum, Walmart and even Amazon), who are now some of the largest primary care physician employers in the country. Independent practices are unable to keep up with these massive competitors who have access to capital, equipment, payor contracts, and, most critically, robust practice management experience. To stay in the game, many see PE investment as a favorable alternative. However, PE firms must continue to stay abreast of the changing regulatory landscape.
Pre-Closing Notice Requirements
The “friendly PC” model, a favorite business structure in the PPM sector where states have a corporate practice of medicine (CPOM) prohibition, has seen significant pushback from states in 2023. Complaints to regulators have increased in recent years, and it seems that policymakers have responded in kind by proposing and passing new pre-closing notice requirements meant to capture PE activity. While the American Academy of Emergency Medicine (AAEM) Physician Group’s lawsuit against Envision Healthcare (where AAEM is seeking an injunction against Envision’s staffing model in California) dominated CPOM discussions in the early stages of 2023, these recent legislative developments are forcing PPM investors to re-strategize.
New York, which has historically taken an aggressive stance against CPOM, has passed the most explicitly targeted regulation to date. Taking effect on or about August 1, 2023, Senate Bill A3007 adds a new Article 45-A to the Public Health Law, which requires parties to notify the Department of Health at least 30 days prior to the closing of a “material transaction.” Subject to certain carve-outs, a “material transaction” is defined broadly to include mergers, stock acquisitions, asset acquisitions, and changes of control involving one or more healthcare entities where the transaction results in an increase of gross in-state revenue by more than $25 million. In addition to the typical entities usually included in the “health care entity” definition, however, are MSOs (or similar entities that provide all or substantially all of the administrative services under contract with a physician practice). State officials highlighted the increasing number of physician practices that are managed by investor-backed entities and the overall lack of regulation of physician practices when compared to hospitals, home care agencies, hospice providers, and other healthcare entities. Although the Department of Health has yet to finalize its forms, the bill requires the submission of copies of “the definitive agreements governing the terms of the material transaction, including pre- and post-closing conditions;” plans to reduce or eliminate services or participation in plan networks; and a description of the anticipated impact of the deal on cost, quality, access, health equity, and competition in the market. During the 30-day notice period, the Department of Health is obligated to post on its website a summary of the deal and its impact and will include instructions for public comment. Moving forward, investors can expect increased scrutiny—especially considering that the public will have greater access to information.
Even though other states have passed similar legislation, they are not as intrusive as New York’s statute. Minnesota’s HF402 (signed into law by Minnesota’s Governor on May 26, 2023) applies to transactions where the healthcare entity involved has or is anticipated to have an average revenue of at least $80 million per year. Notice must be provided to the Minnesota Attorney General 60 days prior to the completion date of the transaction. Notably, “health care entities” includes any “entity that owns or exercises control (which includes certain contractual management functions) over” a healthcare provider or group practice. In addition to the disclosure of each party’s leadership teams and tentative plans for the entities involved, the purchase price, definitive agreements, and any “collateral agreements related to the principal transaction, including leases, management contracts, and service contracts” must be submitted to the Minnesota Attorney General’s office.
Illinois HB2222 (which will be effective on January 1, 2024) will require provider organizations (which includes healthcare management companies representing 20 or more providers in contracting with third parties) to provide notice of a covered transaction to the Illinois Attorney General no later than 30 days prior to closing. “Covered Transactions” include contracting affiliations between two or more healthcare facilities or provider organizations not previously under common ownership.
The federal government is also taking action against PE investment in healthcare. For the first time in 45 years, the Federal Trade Commission (FTC) and Department of Justice (DOJ) have proposed a number of critical changes to the Hart-Scott-Rodino (HSR) Act notification form and filing process. For deals exceeding the HSR threshold (for 2023, $111.4 million), the proposal would require parties to submit dramatically more information and documentation than the current form—which the FTC predicts will increase the average time spent filing the form from 37 hours to 144 hours. Although not specific to healthcare, some of these directly target PE activity—with the FTC directly mentioning “roll-up strategies” in their comments. Noteworthy PE requirements include the disclosure of the entity structure involved in PE investments and the listing of prior acquisitions in the last ten years. Furthermore, not only will parties need to disclose transaction agreements (e.g., purchase agreements, LOIs, etc.), but also drafts that are provided to an officer, director or supervisory deal team lead(s). Currently, the proposal is in its comment period, which will conclude on August 28, 2023.
With these developments in mind, even early drafts would need to be prepared with the assumption that they will be disclosed to the FTC. Additionally, even for deals that are not laden with competition issues, the increased requirements would be both costly and time-consuming. Parties considering a transaction would need to ensure their houses are in order before engaging. We also can expect transactions subject to HSR filings to feature longer periods between signing and closing to provide greater flexibility for the FTC’s review.
Amidst this regulatory and economic backdrop, deal trends continue to emerge in the PPM sector. Cardiology continues to see increased investment and consolidation. The growing interest is likely attributed to the Centers for Medicare & Medicaid Services (CMS) expanding its list of CPT codes for ambulatory surgery centers (ASCs), coupled with a population that is increasingly getting older and suffering from obesity. Cardiovascular Associates of America (CVA), a Webster Equity Partners-backed practice management company, has been particularly active in Q2. In February, CEO Tim Attebury stated, “Our goal is to get a thousand physicians in our practice over the next three or four years.” Since then, CVA has made significant progress toward its goal. In late April, CVA acquired Novocardia (formerly backed by Deerfield Management), a Massachusetts-based management company, and its two Florida practices, First Coast Heart and Vascular Center (27 providers) and My Cardiologists (39 providers). In May, CVA acquired The Cardiac and Vascular Institute and its 26 physicians, also based in Florida. CVA continued its expansion in June by acquiring New Jersey-based Shore Heart Group, with seven locations and 23 physicians and Florida-based Bay Area Cardiology and Vascular Associates (21 providers, including 15 physicians). As the number of unconsolidated specialties begins to diminish, expect investors to follow CVA’s example and divert more funds to cardiology moving forward.
Of the aforementioned 282 PPM deals reported by LevinPro, 88 occurred in the dental specialty. MB2 (backed by Charlesbank Capital Partners), a leading dental services organization (DSO) with affiliated practices across 30 states, continues to lead the charge in 2023. On May 11, LevinPro reported the acquisition of Bethlehem Town Family Dental, Chvatal Orthodontics, and Brennan Dentistry. Since then, MB2 has entered seven more partnerships across the country.
Ambulatory Surgery Centers
Deal activity in the ASC sector remains robust—in large part thanks to PE investment in physician practices (as described above). However, some of the larger chains appear to be slowing down consolidation. According to Becker’s ASC Review, the five largest ASC chains are United Surgical Partners International (475+), SCA Health (320), AmSurg (256), HCA Healthcare (NYSE: HCA) (150+), and Surgery Partners (127). Although each has publicly declared its intent to continue expansion, the appetite for potential sellers is shifting. In fact, aside from a few Surgery Partners developments, many of these big players stayed quiet in Q2.
When interviewed by Becker’s, Alfonso del Granado, CEO of Covenant High Plains Surgery Center in Lubbock, Texas, attributed the activity slow-down to a shift in what makes the chains desirable. While acknowledging some of the advantages that chains can offer, del Granado pushed back on some of the appeal. Del Granado cited alternative financing options and better internal management as key reasons why independent ASCs—particularly large ones, i.e., those most attractive to potential investors—are turning away from deals. Indeed, large ASCs, he argues, are generally able to procure favorable financing terms to fund expansions without the help of investment. del Granado also noted many large ASCs already have a robust management structure—making management services a less compelling argument for chains. However, there were a few notable deals in the sector.
Kansas City-based ValueHealth announced a partnership with Florida-based NCH Healthcare System to develop a new 12,000-square-foot ASC in Naples, Florida. A June press release noted that the center will provide general surgery, urology and robotic options.
Surgery Partners announced a collaboration agreement with Salt Lake City-based Intermountain Health. The agreement will see Surgery Partners take over the management of Intermountain’s existing ASCs across Utah and Idaho. Additionally, Surgery Partners and OhioHealth formed a new joint venture to grow ASCs across Ohio.
In May, Compass Surgical Partners, backed by Health Velocity Capital, announced a partnership with Cincinnati-based Bon Secours Mercy Health, one of the largest Catholic health systems in the U.S., to expand its ASC footprint. In June, Compass partnered with several physicians to open the Joint Replacement Center of Louisiana. The 8,580-square-foot facility is the only ASC in Southwest Louisiana.
M&A activity in the hospital and health system sector continued apace in the second quarter of 2023, with much of this activity driven by several key market trends.
The largest hospital and health system transactions in Q2 involved several mid-sized and large health systems merging with each other. Many of these combinations included cross-regional partnerships. California-based Kaiser Foundation Hospitals—through its new nonprofit organization, which is focused on value-based care, Risant Health—agreed to acquire Pennsylvania-based Geisinger Health. Geisinger will be the first health system to join Risant Health. Meanwhile, New Mexico-based Presbyterian Healthcare Services also announced the possibility of a merger with Iowa-based UnityPoint Health, which could result in an approximately $11 billion cross-regional health system.
Q2 also saw several health system mergers within the same geographic market. Missouri-based BJC HealthCare and St. Luke’s Health System entered into a letter of intent to form a $10 billion academic health system. Similarly, two Wisconsin health systems—Froedtert Health and ThedaCare—signed a letter of intent to merge into a single system. The University of Michigan Health acquired Sparrow Health System (located in Lansing, Michigan) to become a $7 billion health system. Going forward, Sparrow will operate under the U-M banner as University of Michigan Health-Sparrow.
Continuing the trend from Q1, independent hospitals continue to consolidate with larger health systems. For example, American Healthcare Systems acquired two hospitals in Q2: Illinois-based Vista Medical Center East in a deal that closed July 1, as well as Texas-based Wilson N. Jones Regional Medical Center. Christus Health also acquired Gerald Champion Regional Medical Center, effective July 1. Parkview Health System announced its intent to acquire Ohio-based Community Hospitals and Wellness Centers, a 10-hospital system. In California, Adventist Health acquired the Bakersfield Heart Hospital.
To ensure continued viability in a post-pandemic environment, we expect to see some hospitals and health systems continue to pursue regional and intra-state partnerships, and other smaller hospitals continue to pursue strategic opportunities to partner with larger operators.
Home Health & Hospice Care
M&A activity in the home health and hospice sector increased by 20% from Q1 in Q2 of 2023—a positive development, but still 14% slower in terms of deal activity compared with Q2 of 2022. The most active subsector was home health, with 12 deals closed or announced.
PE firms represented 33% of buyers in the home health and hospice sector during Q2, which left space for other buyers ranging from existing operators to health insurance companies. For example, Pennant Group (Nasdaq: PNTG) was the most active buyer in Q2. Its acquisition of Benefit Home Healthcare and Benefit By Your Side in Colorado and Bluebird Home Health, Bluebird Hospice, and Bluebird Home Care in Idaho helped Pennant Group expand its current operations. Additionally, Addus Homecare Corporation (Nasdaq: ADUS) acquired Tennessee Quality Care for $106 million. Meanwhile, following its divestiture of a majority stake in its hospital and personal care service lines in 2022, Humana’s CenterWell Home Health (formerly known as Kindred at Home) doubled down on its home health focus, acquiring Florida-based Trilogy Home Health (backed by Kinderhook Industries).
Despite the bump in activity from Q1, we anticipate the home health space will slow through the remainder of the year if CMS implements its proposed 2.2% pay cut to home health payments, which would take effect in 2024. This proposed rule is open for comment until August 29, 2023. A final rule is expected sometime in Q4.
With respect to hospice, in January, a coalition comprised of the National Association for Home Care & Hospice (NAHC), the National Hospice and Palliative Care Organization (NHPCO), LeadingAge, and the National Partnership for Healthcare and Hospice Innovation (NPHI) made 34 recommendations to CMS and Congress for strengthening oversight of the hospice sector, including a requirement that all physicians who order or certify hospice services for Medicare beneficiaries be enrolled in Medicare or validly opt-out. This prompted CMS to propose new rules in June addressing these oversight concerns. These rules, part of a larger effort by CMS to address hospice fraud, waste, and abuse, would be a condition for payment in 2024.
CMS has proposed another rule in an effort to curb license flipping. Lately, several hospice owners have been selling their businesses soon after securing a license. This practice has been termed “license flipping.” This issue first arose in California but has spread to Arizona, Nevada, and Texas. For example, between 2018 and 2022, Arizona had 239 new Medicare-certified hospices, representing 52% of all providers in the state. In that time frame, Nevada saw 56 newly certified hospices, and 369 emerged in Texas. As a result, CMS has called for a 36-month ownership requirement before a hospice can sell. The rule forbids any change in majority ownership during the 36 months after initial Medicare certification, including acquisitions, stock transactions or mergers. If finalized, this would mirror the current regulation for home health providers and, together with the oversight rules referenced above, are likely to slow the amount of deal activity in the hospice subsector.
Digital Health & Health Information Technology
The COVID-19 pandemic gave rise to an increase in the adoption of healthcare technology and the use of digital health, reshaping how healthcare is obtained and delivered. Prior to the COVID-19 pandemic, Medicare generally did not cover services rendered via telehealth. However, during the COVID-19 Public Health Emergency (PHE), providers were allowed to bill for telehealth services and remote patient monitoring and in certain instances, waive or reduce cost-sharing amounts related to such services without penalty under the federal Anti-Kickback Statute or the Civil Monetary Penalty or exclusion laws. Many feared the expiration of the PHE on May 11, 2023, would cause providers to revert back to pre-pandemic operations and cease or slow their utilization of telehealth technologies. However, the Consolidated Appropriations Act (CAA) of 2023 extended telehealth-friendly policies—i.e., reimbursement of telehealth services regardless of where the patient is located; reimbursement of audio-only telehealth visits; reimbursement of telehealth services provided by physical therapists, occupational therapists, speech-language pathologists and audiologists (in addition to physicians and advanced practice providers);, and first dollar coverage for patients with high deductible health plans—through December 31, 2024. Thus, the CAA, coupled with the evolution of state telehealth practice laws and regulations, should enable providers to continue routine virtual care practice through the end of 2024.
In addition to telehealth, other forms of digital health, like cyber security and artificial intelligence (AI), have become essential to healthcare. Developments in AI (including Chat GPT) and data science-based solutions are growing as AI can provide visibility into bottlenecks, optimize resource utilization, and enhance patient-provider engagement and experience with decision support, automation and navigation. Generative AI is particularly promising in areas such as personalized healthcare, clinical and drug recovery, and population health, where large datasets are needed to drive the next best course of action. Indeed, we are already seeing hospitals and health systems allocating investment to this emerging technology. For example, several hospitals recently announced partnerships with AI companies to increase efficiencies. Northwell Health and Nebraska Medicine each partnered with the AI platform Laudio to automate administrative tasks. Lovelace Hospital partnered with an AI-powered chronic care management provider, CareHarmony, to implement an AI program that sorts through patient notes. In June, Wisconsin-based Gundersen Health System also participated in a $54 million Series D funding round for healthcare AI company Flywheel. We anticipate more and more provider-AI partnerships in the months and years to come.
M&A activity in the behavioral health space slowed in Q2, with many behavioral health facilities announcing closures due to rising costs and ongoing staff shortages. For example, in April, Michigan-based Chelsea Hospital announced it was closing its adult inpatient behavioral health unit. Wisconsin-based Froedtert Health also closed its behavioral health unit at its Menomonee Falls hospital. Similarly, Comprehensive Healthcare announced it is closing two of its Washington behavioral health centers.
Despite the challenges facing the behavioral health sector, there are a number of trends that could drive deal activity in the future. Of the few deals that occurred in Q2, several involved telehealth and virtual care. CHE Behavioral Health Services announced a partnership with NextGen Healthcare, a medical software and services company that offers telehealth visits (among other services). Several digital behavioral health companies also completed rounds of funding in Q2. For example, Cigna (NYSE: CI) co-led a $52 million Series C funding round for a behavioral health company, Octave, that offers virtual care. Uwill, which according to its press release, is the leading mental health and wellness solution for colleges and students, also completed a $30 million Series A funding round. This trend is unsurprising, given the rising demand for telehealth and virtual care services in the behavioral health space.
Another trend driving M&A activity in the behavioral health sector is the focus on mental health as opposed to substance and use disorder, intellectual and developmental disabilities and other areas of behavioral health. For example, in Q2, Oregon-based Legacy Health partnered with Southeast Kansas Mental Health Center to expand mental health services. According to the Braff Group, the focus on mental health is a trend that has clearly taken shape over the past five years, with far more deals completed in the mental health sector. In accordance with this trend and given the rising demand for mental health services, we expect investment in the mental health sector to continue and intensify.
Other notable deals in Q2 included Urbana, Illinois-based Carle Health’s acquisition of UnityPoint, a three-hospital system that provides behavioral health services.
In the wake of DOJ dropping its appeal challenging UnitedHealth’s acquisition of data analytics company Change Healthcare, which resulted in the closing of the acquisition and which we predicted would open the door for further cross-sector transactions, UnitedHealth—one of the country’s largest health insurance and managed care providers—announced plans to acquire national home health and hospice provider Amedisys, Inc. (Nasdaq: AMED) through its Optum platform. The transaction is expected to close in early 2024;Optum secured the home health and hospice provider after outbidding competitor Option Care Health in a deal valued at $3.7 billion. According to HealthCare Appraisers, by combining Amedisys with LHC Group, Optum has captured nearly 10% of the home health market share. And, as LevinPro theorizes, by controlling home health, hospice and other healthcare verticals, Optum and others may be moving the country in the direction of what, in effect, will be a single-payer system.
In addition to the above cross-sector transaction, on June 30, Bright Health Group, Inc. (NYSE: BHG), which had shuttered its insurance plans across all states but California and faced a looming bankruptcy, announced it entered into a definitive agreement with Molina Healthcare, Inc., to sell its California Medicare Advantage business, Brand New Day and Central Health Plan, for a total purchase consideration of $600 million. If it successfully closes the transaction, Bright Health will have fully divested itself of its insurance business, avoided bankruptcy, and be able to focus on its NeueHealth consumer care delivery business, which provides care through 180 owned and affiliated clinics in California, Florida, Illinois, Ohio, Missouri, and Kansas.
Moving forward, there are reasons for stakeholders to be optimistic about the managed care sector. First, the CAA ended the Medicaid continuous enrollment provision—introduced in the First Coronavirus Response Act and requiring states to provide continuous coverage for Medicaid enrollees in order to receive enhanced federal funding—on March 31. Although commentators estimate the unwind could cause between 8 million and 24 million low-income persons to lose Medicaid coverage and distress Medicaid-reliant providers in the near-term, managed care organizations and payors may capitalize on member growth in exchange and employer-based plans. Second, following its February Advance Notice and in response to concerns expressed by payors, providers and beneficiaries alike, on March 31, CMS announced its planned changes to the risk-adjustment model (which impacts the base rate CMS attributes to a Medicare Advantage organization) would be phased in over a period of three years rather than all at once. CMS says this will result in Medicare Advantage plans seeing an average payment increase of 3.32% between 2023 and 2024, up from 1.03% in the advance notice.
Pharmacy & Life Sciences
After its $8 billion acquisition of Signify Health and $10.6 billion acquisition of Oak Street Health, CVS Health Corp. (NYSE: CVS) announced in May it would pause pursuing any major acquisitions and instead work on integrating its recent purchases. Given the uncertain economic environment, we are seeing other pharmacy companies similarly focus on cleaning up internal operations and building up capital in anticipation of the next phase of growth.
However, there were at least a couple of interesting deals in the pharmacy & life sciences sector during Q2. On June 16, Merck (NYSE: MRK) announced it completed its acquisition of Prometheus Biosciences for $10.8 billion, securing what are reportedly promising experimental treatments for ulcerative colitis and Crohn’s disease and, in the words of Merck Chairman and CEO Robert David, “accelerat[ing] [Merck’s] growing presence in immunology.” Earlier the same month, TPG (Nasdaq: TPG) and AmerisourceBergen Corporation (NYSE: ABC) announced the completion of their previously announced acquisition of OneOncology, a network of leading oncology practices, from PE firm General Atlantic for $2.1 billion. TPG acquired a majority interest and AmerisourceBergen acquired a minority interest with the expectation the company will continue delivering high-quality and efficient cancer care. According to PwC, immunology and oncology are two key therapeutic areas that have seen significant scientific breakthroughs in recent periods and have drawn interest from big pharma and biotech and also have drawn interest from “cross-border” buyers. These two deals are very much representative of these trends.
In the last few months, we also have seen increased activity by mental health pharmacies. In March, PE firm WindRose Health Investors formed a new behavioral-focused pharmacy platform, Altruix, and, in June, after creating its own platform, ArtesRx, PE firm Flexpoint Ford acquired an interest in Parkview Health Services, which provides pharmacy services to patients who are treated in group homes, mental health clinics, addiction services provider offices and other care settings. We anticipate the emergence of more platforms in this space through the remainder of the year and into 2024.
Following an initial slow-down in the first half of this year, we expect deal activity to continue to tick up through Q3 and the remainder of this year. And in the meantime, we will continue to evaluate and monitor the trends that no doubt are shaping healthcare transactions and the state of the healthcare M&A market as a whole.