Health services: US Deals 2023 midyear outlook

Optimistic outlook for deals through 2023

Coming off banner years for health services deals in both 2021 and 2022, volumes have remained resilient through May 15, 2023, despite multiple headwinds — including higher interest rates, increased antitrust regulatory review concerns, elevated (though softening) valuations, and general recessionary fears and macroeconomic concerns.

We continue to remain optimistic about the health services deals outlook for the remainder of 2023, with corporate and private equity (PE) players alike holding large levels of capital that needs to be deployed, and sector dynamics driving a need for health services companies to adapt and reinvent themselves.

Health services deal volumes in the 12 months ending May 15, 2023 declined a modest 4% from levels seen in 2022. However, volumes remain at nearly twice the levels seen from 2018 to 2020. Deal values declined by a more meaningful 15%, a continuation of the trend seen in 2022 where a greater portion of deal volume is being driven by smaller value roll-up and add-on transactions as opposed to transformational platform deals and megadeals.

Industry-wide enterprise value (EV) to EBITDA multiples have remained steady since the end of 2022 but have declined from heightened levels seen at the end of 2021. As of May 15, 2023, the average multiple across health services subsectors was 13.6x, versus 13.7x as of Dec. 31, 2022, and 15.9x as of Dec. 31, 2021. Multiples in five of the seven subsectors we track have dropped since Dec. 31, 2021, led by outsourcing (down from 19.2x to 12.6x) and managed care (down from 17.3 to 14.6).

Explore national deals trends

Over half of announced deal value in the 12 months ending May 15, 2023 was from megadeals, defined as deals valued at $5 billion or greater, consistent with the ratios seen in 2021 and 2022. The 12 months ending May 15, 2023 had six megadeals, including:

  • CVS’ $10.6 billion acquisition of Oak Street Health, a network of primary care centers for older adults on Medicare; Village MD’s (a Walgreens subsidiary) $8.9 billion acquisition of Summit Health-City MD, a provider of primary, specialty, and urgent care services; and the $7.1 billion acquisition of Syneos Health, a multinational CRO, by a private investment consortium including Elliott Investment Management, Patient Square Capital, and Veritas Capital. These three deals collectively represent $26.6 billion of the total $38.2 billion of other services deal value in the 12 months ending May 15, 2023.
  • Other megadeals include CVS’ acquisition of Signify Health for $8.0 billion (home health and hospice subsector), Mediclinic International’s $7.4 billion acquisition by a consortium of investors (hospitals subsector), and Chubb’s $5.4 billion acquisition of Cigna's life, accident and supplemental benefits businesses (managed care subsector).

M&A integration plays key role in transformational deals 

Companies face markets being reshaped by technology and disrupted by geopolitical unrest, a global pandemic, and economic shocks. As a result, CEOs are turning to transformative acquisitions to reposition and reinvent their businesses for long-term success. Companies are also beginning to crack the code on how to make big, transformative deals successful: leveraging experience, early and sustained investment in integration, and a commitment to creating and implementing new long-term operating models. 

Learn more about leading practices and transformational mindsets in PwC’s 2023 M&A Integration Survey.

Key deal drivers

Regulatory challenges persist

Recent uncertainty presents headwinds, but also yields potential opportunities.

Medicaid redetermination effects vary across states and their various regulatory approaches to disenrollment, but payers and benefit managers are continuing to seize this opportunity to capitalize on expected member growth in the exchange and employer-covered plans. Reduced enrollment and/or enrollment status ambiguity may result in short-term downsides for providers more heavily reliant on Medicaid. This may drive increased distressed or semi-distressed investment options for opportunistic buyers.

Antitrust opposition to deals continues, albeit at more tepid levels. This is leading to medium-sized players finding themselves in more favorable positions during competitive processes as traditional strategic participants remain concerned with potential regulatory objections.

As a result of the 2024 Medicare Advantage (MA) announcement, risk adjustment-based reimbursement declines will be phased in over three years rather than being implemented at once. While partially alleviating the immediate fears around MA plans, the continued focus on risk adjustment normalization presents opportunities for managed care, benefit management, and point solutions programs to differentiate themselves in driving lower costs of care, and in turn, volume share in the broader payer and related support services segment.

These are just a few examples of key sector investment themes that will continue to be influenced by the regulatory apparatus and the perpetual shift to value-based care.

Business model threats come from all angles and require adaptation

The need for health services companies to adapt and reinvent themselves to align with the current sector dynamics will only continue to grow. As we’ve highlighted in previous outlooks, non-traditional players continue to encroach upon incumbents. In addition to the headline-grabbing stories from retailers, hospitals and other incumbents face threats from benefit managers, point solution providers, and smaller traditional provider groups trying to expand their share of the pie through alternative mediums. Some examples include joint venture affiliations with ancillary facilities, direct contracting with payers for risk-based or value-based care arrangements, and creating new alternative care models (e.g., hospital-at-home concepts). PwC’s recent divestiture study also found that companies can reinvent themselves and increase their chances at creating value through timely and objective divestiture decisions.

PE buyers are also adapting. Physician practice management companies have been a traditional focus of PE over the last several years. While traditional ‘‘roll-up’’ assets in certain subsectors remain as a prime investment thesis, PE buyers have begun to more frequently seek newer asset categories that serve provider groups; specifically, those that facilitate opportunities for value-based care or offer other ancillary opportunities for physicians to supplement their traditional fee-for-service income streams.

As legacy investment theses become more repeatable, we expect PE buyers in particular to continue innovating and shifting their deals approaches away from direct buyouts to more partnership-based models and shift away from the traditional platform and add-on approach toward more niche solutions that directly enable provider groups. 


The profiles of transaction structures continue to evolve

It’s unclear whether interest rate increases are on the back burner, but the current environment has been a headwind to deal volumes, consistent with other sectors. In particular, megadeal values in the sector are down in the most recent 12-month period and have declined over 50% since the record levels of 2021. Further rate hikes may continue to disrupt larger processes and promote structuring alternatives.

PE buyers in particular have responded by implementing varying approaches to traditional buyout structures. We’ve observed more consortium deals recently and expect that to continue as financing costs continue to be elevated compared to recent norms. This will likely coincide with deals characterized by smaller buyer equity ownership interests and larger rollover equity percentages as a share of EV, as sellers anxious to realize some cash value on their investments acquiesce to the capital market constraints faced by buyers.

Corporate cash continues to remain flush, and undeployed PE capital levels remain elevated. The PE sector is overweight on health services and more recent capital raises indicate continued concentration in the sector. Despite the macro challenges, health services remains a sector with characteristics attractive to investors — one with a more limited downside, an end market with a rising share of GDP, and idiosyncratic economic moats.

“Even in the midst of macroeconomic headwinds, health services deal volume remained resilient when compared to recent historical record years, with positive underlying trends yielding incremental deal volume for the remaining year and into 2024.”

— Nick Donkar, US Health Services Deals Leader

About the data

LevinPro HC: The merger and acquisition data contained in various charts and tables in this report have been included only with the permission of the publisher, Irving Levin Associates LLC. All rights reserved.

S&P Capital IQ: Information provided by or through third parties is provided “as is,” without any representations or warranties by PwC or such third party. PwC and such third parties disclaim any contractual or other duty, responsibility or liability to client and any person or entity that receives such information.

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