The 42nd annual J.P. Morgan Healthcare Conference started with clear skies and overall optimism from investors. But with Jamie Dimon’s prediction of a recession in 2024 on Tuesday morning, the climate shifted to an on-again, off-again rain. Will this dampen investors’ outlook in 2024? This is what we heard:

Workouts on the Rise

With some large players having gone through restructurings and Chapter 11 processes in 2023, it appears there are a number of companies in the queue to follow suit in early 2024. Restructuring experts reported a full plate and multiple workouts and takeovers by lenders anticipated for Q1 of this year.

Level Setting on PPMs

On the heels of a more than five-year frenzy in the physician practice management (PPM) space, the interest in traditional PPM platform transactions seems to have leveled out, if not peaked. That said, a high level of interest remains in organizations that have a consumer retail component and those that have unique ancillary services and value-based reimbursement levers that can be pulled. One investor referred to the next wave of interest as “PPM Plus” – investments will generally need to be a practice plus an addition such as an ambulatory surgery center (ASC), an interesting technology, or something else that is a value add. People are also talking about the need to rework the PPM model, structuring it to allow physicians to take on more risk for the financial performance of the practice, not just through rollover equity in the management service organization (MSO). In addition, we saw a high level of interest in areas such as women’s health, fertility, oncology, value-based primary care and medspa services.

Value-Based Care

There were continued discussions around value-based care models generally and leveraging them as a means to grow existing assets. The ability to take on and manage risk with the implementation of data analytics and other technology solutions is paramount. Investors are showing interest in Medicaid delivery system reform and finding opportunities to implement value-based payment approaches.

Behavioral Health

The interest in behavioral health continues and investors are thinking about it through a wider lens. In addition to traditional residential and outpatient treatment models, there appears to be continued and growing interest in companies employing telehealth and technology solutions to meet patients where they are, and perhaps even at an earlier stage of progression. Other areas of interest under the behavioral health umbrella include outpatient psychiatry, applied behavior analysis/autism, and behavioral health pharmacies.

Payor and Provider Technology Solutions

Portfolio diversification with companies at least one step removed from care delivery and direct exposure to reimbursement risk was another common theme this year. Technology solutions selling to payors and providers were at the top of the list, including revenue cycle management, prior authorization and care management solutions. There is continued interest in technology and software solutions utilizing artificial intelligence (AI).

Pharma Services

Pharma services were noted with interest in almost every meeting, including drug discovery and development assistance, contract drug manufacturing, drug manufacturer hubs, and prescription life cycle solutions. Pharma consulting and outsourced marketing and sales also garnered interest. In addition, clinical research organizations and site management organizations were high on the list. There is consensus that pharma-driven organizations will be of top interest to investors looking to deploy dry powder in 2024. This sector benefits from a focus away from direct reimbursement and the ongoing explosion of drug targets, clinical research trials and robust pharma demand.

Infusion Therapy

With the bourgeoning pipeline of infusible drugs and payor and patient interest in a shift to care outside of hospital outpatient centers to alternative sites of care, investors are looking toward infusion companies. The early January announcement that Elevance Health has entered into an agreement to acquire Paragon Healthcare, Inc., an infusion company with ambulatory infusion centers and home infusion offerings, seems to have given a boost of confidence to investors looking at this space. Infusion companies include home infusion pharmacies, infusion practice management for physician practices, ambulatory infusion centers, and pharmacies providing infusion within or adjacent to the pharmacy space, and many have multiple infusion offerings.

Hospice and Home Care

Investors remain interested in the hospice and home care sectors, notwithstanding the pullback in hospice seen in 2023. Hospice valuations are not expected to remain at the sky-high level from several years ago, so investors will be monitoring the gap between buyer and seller expectations. Home health interest remains robust, with particular discussion around vertical integration. The market took note of the two sizeable United/Optum moves in this space over the last two years and appears to expect more vertical integration to follow. Payors appear to be focused on skilled home health, without a strong interest in hospice. Increased exposure to Medicaid was a repeated theme across meetings and this appears to have investors interested in Medicaid- reimbursed personal care services opportunities. There was a general consensus that the overhang from the 80% wage proposal on home care would resolve favorably for providers, whether in the shorter or longer term, making this an interesting time to explore the sector. Others expressed interest in opportunities, including pediatric plays, where the proposed rule would not apply.

Reinforcing Growth for Health Systems

Health systems expect some continued headwinds for 2024. That said, they are also looking for opportunities to grow into complementary lines of business or maximize the value of existing ancillary operations in their existing service areas, including seeking strategic partners to not only survive but thrive. A subset of health systems continues to actively invest in earlier-stage opportunities with companies serving addressable health system needs.

2024 Anticipated Deal Flow

In terms of overall deal flow for 2024, the key takeaway seems to be a level of cautious optimism, with predictions ranging from a slight uptick in deal activity to a 20% increase for 2024. If interest rates stabilize, yield curves suggest lower future rates, and valuation expectation gaps begin to close, investors are sure to make opportunistic acquisitions not only with add-ons but with new platforms as well. One investor predicted the deal environment to be a “gradual build” throughout the year, with some notable sponsor-to-sponsor exits as we round out 2024.

Private equity investors are being deliberate, and there is a willingness to pay the right multiple for a good asset. Several investors indicated that private equity has increased pressure to sell assets and return funds to limited partners to assist with stalled fund-raising processes. This, along with pressure to put capital to work, should help infuse the deal ecosystem in 2024. Whether sooner or later remains a bit of a mystery, but everyone is looking for the catalyst deal that will push the balloon into the jet stream to follow the speed of the wind, whereas 2023 felt more akin to pushing the balloon against the jet stream. As it relates to the public market, several IPOs are coming to market soon and will give more clarity on the appetite of public markets to take on assets as a viable exit strategy. The market will need those companies to go public and perform well early.

And that’s a wrap! With JPM 2024 in the books, we look forward to working with our clients as they navigate the healthcare M&A landscape in the year ahead.