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A Look at M&A Potential in the Healthcare Sector

Richard Martin, The M&A Guy | April 25, 2017

A Look at M&A Potential in the Healthcare Sector 

As healthcare continues to be a hot topic and in the wake of the AHCA failing to pass, we are interested in how dealmakers grapple with the level of uncertainty around key policies and regulations in the US healthcare industry.

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On an anecdotal basis, many targets are still getting assessed as they would in the past, simply through a more protracted and rigorous processes. Looking at completed deal volume – even on the broader M&A front – it’s clear that the closing rate of transactions and consequent deal flow has been impacted, as activity has been sliding.

That said, I believe certain segments will still enjoy plenty of interest, especially on a geographic basis. Many key regulations are implemented state-by-state, and thus can provide a sort of geographically focused building of platforms in fragmented arenas such as behavioral health. Especially if companies can provide clear pathways toward lowering costs of providing services or products, they will be hunted avidly by PE buyers.

Much of the interest by PE firms in the past has been focused on rolling up smaller care providers within niche segments such as behavioral healthcare. The degree of fragmentation is so extensive within segments of the industry that the level of supply has yet to diminish despite PE’s inroads. As a tried-and-true strategy, platform building remains consistently popular. The only new developments within this arena I’d expect would be potential shifts of focus to additional niches as they emerge.

That said, many industry-specific developments, such as the growing emphasis on population health management and “consumerizing” treatments are still perceived as a very important area of opportunity to investors. Those businesses that enable population health management more effectively will be the most sought after by investors. Areas of interest could range from telemedicine-based products and revamps of back-end processes to render check-ins, post-care check- ups and billing more convenient, to renovation of the often-daunting web portals of care and product providers to enable greater transparency and fluidity of ease.

Another significant area of opportunity has been created due to the 2017 implementation of the Medicare Access and CHIP Reauthorization Act (MACRA) from 2015. The implementation will impact new reporting and documentation requirements to document patient outcomes on the industry in general, requiring a significant increase in time and focus spent on reporting and filing requirements. Accuracy will matter – and these filings can significantly impact reimbursement rates in future years as those rates are predicated on the documentation filed this year.

Many businesses have already begun preparations to fully prepare for additional compliance and quality-based efforts. However, others, particularly smaller providers, may well fall behind due to a variety of factors. Larger networks will likely move to address lower-performing centers or performers by either divesting or reallocating resources; consolidation will be encouraged as well among some. Greater emphasis will be placed on reducing the overall cost in terms of time and dollars spent complying with new requirements, leading to investment in product suites that expedite documentation. The current inefficiency in this area creates opportunity.

As M&A within the healthcare sector inevitably slows by tally of completed transactions, those still seeking to win regulatory approval more swiftly will only be further motivated to sell non-core units, which could prove a boon to PE investors. Corporate divestitures could represent a worthwhile opportunity for PE buyers, especially for those with ancillary services in their portfolios. It’s a fact that many larger PE firms have steadily grown their own capabilities in IT and sales channels that compare favorably in terms of cost infrastructure to corporate bidders. In my opinion – and this is supported by observations of our own data – I expect an uptick in healthcare corporate divestitures to PE sponsors.

We plan to continue to explore this topic and are hosting a webinar titled Execute Effective M&A: Healthcare on May 23, 2017. As an industry advocate of best M&A practice, our experience on tens of thousands of deals over the past 50 years allows us to share insights on how to create an M&A Masterpiece, viewed through the lens of opportunity in the healthcare sector. I invite you to join the discussion.

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