The pandemic’s impact on the economics of the healthcare industry has been substantial. HRI spoke to PwC partner Nick Donkar about the deals landscape for health services and about where he thinks the industry is heading.
How did the COVID-19 pandemic affect health services deals activity in the first half of the year?
Deals volume for the first half of the year dipped below 500 for the first time since 2015. Many deals were paused or exited due to uncertainty. Three main sources of uncertainty have put deals on hold.
One: Business sustainability. Operationally, is the core business sustainable during and after the pandemic and the related economic downturn?
Two: Availability of financing. Can buyers secure financing for transactions in this market?
And three: Board approval. Will the board of directors approve the deal, with so many unknowns?
HRI: What does the deals landscape look like now, after the initial shock from the pandemic?
Nick Donkar: Payers and providers with strong balance sheets as well as private equity funds with investment dollars earmarked for healthcare are well positioned to pursue acquisitions. Physician practices, hospitals and health systems without the balance sheet to sustain them through the pandemic may be looking to those who are better positioned financially for support, sources which may not have been at the top of their list prior to the pandemic.
Payers in particular may be well positioned for deals, with large cash reserves and strong balance sheets resulting in part from the deferral of care and overall lower utilization during the pandemic. Some will focus on expanding product offerings and/or geographic footprint through acquisition of other payers. Others will explore deals with providers to streamline the member/patient experience and better manage the cost of care.
Purchasing physician practices is not a new tactic for payers. Expect payers to explore arrangements that align them with physician practices as they look to invest their excess cash in a manner that helps them better manage costs and population health in the long term while also providing a much-needed influx of cash to struggling providers in the short term.
HRI: How does the explosion of telehealth affect deals activity?
Nick Donkar: Had the pandemic never occurred, telehealth utilization likely would still be at February 2020 levels, which were relatively minimal. The pandemic was the accelerator of telehealth that telehealth companies have wanted for years.
Expect increased deals volume for telehealth and health tech companies, including platforms and support services that enable the virtual delivery of care. Along with suppliers of personal protective equipment, these companies likely will continue to see increased revenues and investment as a result of the pandemic.
Had the pandemic never occurred, telehealth utilization likely would still be at February 2020 levels, which were relatively minimal. The pandemic was the accelerator of telehealth that telehealth companies have wanted for years.
HRI: The pandemic is increasing demand for mental health services. To what extent is that driving deals?
Nick Donkar: Deals to consolidate mental health providers have been happening for years, and yet mental healthcare remains largely fragmented. Deals to consolidate likely will continue or even increase due to the continued fragmented nature of this specialty, increased willingness by employers over the past few years to expand access to mental health services, and now increased demand for these services stemming from the pandemic. We are seeing early signs of this, with at least one billion-dollar deal in the behavioral care subsector in the second quarter of 2020.
HRI: What impact could deals activity have on narrow networks?
Nick Donkar: Narrow networks may be the outcome of a successful acquisition of providers by payers, rather than an initial driver of these deals. Payers are always looking for opportunities to reduce costs and improve the member experience. They will look for deals that do one or both. Narrow networks and, more specifically, value-based care enabled by a narrow network can reduce costs and improve the member experience.
HRI: What is the deals outlook for the second half of the year?
Nick Donkar: The outlook for the second half of the year remains uncertain due to the pandemic and, more so, the economic impacts of it. However, several key factors remain constant and will be important deal drivers for the second half of 2020.
First, private equity funds have cash to invest in health services. Second, the pandemic is creating a dichotomy of financially strong providers and those who are struggling to keep their doors open. Last, the increased importance of technology for efficient virtual care delivery during the pandemic will remain a driver of deals.
As the pandemic and its economic impacts continue, the financial position of potential buyers and sellers continues to take a hit. But if the right opportunities arise, deals will get done.
To learn more about the health services deals activity in the first half of the year and the outlook for the second half, see PwC’s “US Health Services Deals Insights: Mid-year 2020.”
To learn more about the expansion of telehealth, increased demand for mental health services and growth of narrow networks, and how these factors could affect 2021 healthcare spending, see HRI’s recent report “Medical Cost Trend: Behind the Numbers 2021.”
PwC Partner, US Health Services Deals Leader, PwC US