Are health system deals picking up?

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Erin McCallister Senior Manager, Health Research Institute, PwC US October 01, 2020

Despite the pandemic, the number of health services deals disclosed by midyear 2020 was down by just 3% compared with previous years (between 2016 and 2019 in the first half of the year, the sector typically experienced more than 500 deals), according to an analysis by PwC. This year’s second quarter approached 200 deals, a barometer of quarterly deals interest, with more deals expected to be disclosed.

Excluding megadeals, the total disclosed deal value for the first half of 2020 was significantly lower than the first half of 2019, PwC found. But deal value in the second quarter of this year picked up, increasing by 8% over the first quarter.

Compared with the first half of 2019, PwC found that health services deals activity slowed during the same period this year. Hospital deal volume were down by 11.4%; physician medical group deals fell by almost 37%. Uncertainty and financial unsustainability brought by the pandemic likely weighed on the sector. But for Q2 2020, deal value in the hospital sector increased 11% compared with Q1 2020.

Signs from the past few months suggest that the momentum may be continuing, including the emergence of a new private equity firm focused on distressed acute care hospitals.

The deals come at a time of increasing scrutiny for private-equity healthcare acquisition. Earlier this year, the California Senate took up a bill that would have required healthcare systems, private-equity groups and hedge funds to provide written notice and obtain consent from California’s attorney general before an acquisition or affiliation. The bill died in the State Legislature in September after opposition from the groups it targeted.

HRI impact analysis

At midyear, PwC predicted that three factors would weigh heavily on deal-making for health services companies: liquidity positions, short- and long-term needs created by COVID-19, and preexisting market dynamics. The recent deals appear to tick many of those boxes.

The gap between hospitals struggling to keep the doors open and financially strong providers, will likely continue to be an area of opportunity for private equity and midsize hospital systems with boards eager for expansion at a discount with a majority of megadeals pushed into 2021. As noted by PwC earlier this year, “deals can be a resilience strategy: a way to add strategic assets or relationships that preserve growth, profitability, or operational excellence; and/or a way to free up needed capital by shedding non-core assets.”

The acquisitions and consolidation also address preexisting market dynamics, as some of the regional consolidation deals could help hospital systems to spread the risk and prepare for narrower networks and the trend toward value-based care.

Vertical integration in healthcare has also gained traction in recent years as companies look to reduce costs along the supply chain by owning more of it. This consolidation could be a source of deal flows in the second half among payers. A set of June guidelines from the Department of Justice helped to clarify how the agencies evaluate vertical mergers’ effects on competition and potential for antitrust violations.

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Trine K. Tsouderos

HRI Regulatory Center Leader, PwC US

Tel: +1 (312) 241 3824

Ingrid Stiver

Senior Manager, Health Research Institute, PwC US

Erin McCallister

Senior Manager, Health Research Institute, PwC US

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