How well did the health services sector do against expectations? Did the sector overachieve despite the macroeconomic headwinds and persistent inflationary pressures? What can be expected this year?
Health Services Sector: 2022 M&A Trends
The record highs in 2021 for health services M&A were characterized by a surge in deal volume, up more than 32% in comparison to the previous year. Deal values fared even better, up more than 65% YoY.
Not unexpectedly, the macroeconomic headwinds that impacted M&A activity globally in 2022 also affected the healthcare services sector. By mid-year, deal values appeared to be trending down by ~17%, while deal volume remained buoyant at +5% YoY. But even with this reset, valuations remained well above the long-term averages when looking beyond the records set in 2021.
In the U.S. market, subsectors of health services managed the turbulence in 2022 notably better than average. Long-term care saw both deal volume (+12%) and values (+2%) rise. This increase was largely due to the combined forces of an aging population trend and the continued interest of larger organizations to consolidate their hold on a highly fragmented landscape of smaller providers. Similarly, physician medical groups saw rising deal volume and values, as private equity investors competed with health management systems to build out national networks and grow market penetration. Home health, driven predominantly by pandemic-related attention, saw a tremendous increase in valuations (+19%), highlighting it as an essential and undervalued cog in services delivery.
“M&A is holding up remarkably well in 2022 as health industries investors seem largely undeterred by the economic uncertainty and other headwinds, remaining focused on acquiring innovative companies that can fuel growth via new technologies and digital capabilities,” reported Christian Moldt, global health industries leader and partner at PwC Germany.
Key Health Services Sector M&A Drivers
The health services sector’s resilience to 2022’s global macroeconomic turbulence was driven largely by three key factors: market fragmentation, digital transformation, and financial optimization and restructuring.
Market Fragmentation:
Many subsectors of health services remained highly fragmented globally, including long-term care, dental care, and medical testing and imagery. A significant volume of M&A activity was driven last year by the consolidation of smaller players, regional and/or national networks, into more established health services organizations. The goal of this consolidation activity appeared to be to both grow share-of-market in specific target geographies, as well as to drive financial economies-of-scale through “back-office efficiencies.”
In anticipation of 2022, more than 60% of healthcare executives responded to E&Ys Global Capital Confidence Barometer that they expected to focus their M&A activity on bolt-on acquisitions, and momentum of this long-term trend accelerated last year despite market turbulence. In part, this acceleration was due to the growing interest of private equity investors in the health services sector and their large dry-powder reserves. PE competed with larger health service organizations to grow share-of-market by scooping up and integrating smaller players. In 2021, nearly 50% of M&A deals were underwritten by PE investments, compared to a long-term average of closer to 33%.
Digital Transformation:
A longstanding trend towards the increased use of medical technology in health services delivery was only accelerated by the unique requirements of providing healthcare amidst a global pandemic. In particular, staffing shortages exacerbated issues already endemic to health services delivery, specifically in sub-sectors such as acute care hospitals and long-term care facilities.
Stemming from the pandemic, pressure on the health system’s revenue and profitability caused interest in the digitization of health services to increase, with its promise to streamline (make more cost-efficient) service delivery.
Providers continued to seek out joint ventures with, and/or acquisitions of, health tech companies in order to accelerate their digital transformations.
Financial Optimization and Restructuring:
Rising interest rates and falling government pandemic support put financial pressure on less efficient players in the health services sector. The problem was made worse by an exodus of skilled staff, due to both pandemic burnout and higher wages in agencies. This put an even greater financial pressure on organizations, as staff replacement increased the cost of labor — one of the most significant cost elements in health services delivery.
Many organizations were forced to restructure in order to address these financial pressures, including divesting poorer-performing assets, and/or seeking new forms of equity or debt capital. Investors were able to take advantage of good purchase opportunities of distressed assets as organizations struggled to address their liquidity challenges.
2023 Predictions
While economic conditions remain unpredictable globally, drivers of M&A activity in the health services sector are persistent and enduring. Fragmentation, the need for digital transformation, and financial pressures that were made more obvious by the unique circumstances of a global pandemic, remain issues that need to be addressed by organizations. But 60% of advisors surveyed by Firmex predict that healthcare deals will increase in 2023. It’s reasonable to expect that M&A activity and valuations will remain higher than long-term averages for the foreseeable future.
