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Health services: US Deals 2024 outlook

2024 health services outlook remains cautiously optimistic

Health services deal volumes through November 15, 2023, declined by 13% from 2022 levels, as the sector continued to be impacted by headwinds driving a slowdown in the broader deals market. Contributing factors include higher-for-longer interest rates, valuation gaps, increased federal and state regulatory concerns and general macroeconomic risks. However, the 2021 and 2022 comparison periods were record years for health services deal volumes. Trailing 12-month volumes as of November 15, 2023, remain at nearly twice the average annual levels seen from 2018 through 2020.

While deal values declined at a more meaningful rate in 2023, those figures only reflect disclosed deal values and do not include many private market deals. The decline in disclosed deal values does however illustrate the impact that the previously mentioned headwinds are having on larger transformational deals.  

Explore national deals trends

Industry-wide enterprise value (EV) to EBITDA multiples have steadily declined since the end of 2021. As of November 15, 2023, the average multiple across health services subsectors was 13.0x, versus 13.8x and 15.9x as of December 31, 2022, and December 31, 2021, respectively. That’s a positive for dealmakers looking to find value during a period with a higher cost of capital.

Our outlook for 2024 health services deals is cautiously optimistic. While general apprehension from all parties involved in the deal cycle continues, corporate and private equity (PE) players alike continue to hold large levels of capital that need to be deployed. Corporate entities recognize the importance of business reinvention and portfolio transformation to achieve growth and profit expectations, with M&A seen as a leading way to drive these changes. PE has been inwardly focusing on value creation at its portfolio companies. But the record levels of capital on hand, combined with current investments reaching the end of their target hold period and the recent emergence of non-traditional deal structures should all provide momentum for additional activity in 2024.

Key deal drivers

Funding is challenging, yet opportunistic

Most forecasts do not predict Fed rate cuts until at least mid-2024, putting pressure on traditional financing structures, particularly for larger deals. In general, seller expectations are aligned with this reality, evidenced by the continuing decline in average multiples.

Against this backdrop, average holding terms of healthcare investments have increased. As we have highlighted in previous outlooks, this is continuing to place pressure on sponsors to demonstrate returns and provide liquidity to limited partners and other co-investors. In response, we’ve observed increased use of continuation funds and special purpose vehicles through which sponsors exit a portion of their equity. This is often accompanied by a larger number of co-investors cutting smaller check sizes and/or preferred or mezzanine-like structures, which enables the simultaneous approach to liquidation, marks on retained interests and downside risk mitigation. Investors continue to adapt to the financing challenges and are finding creative approaches to executing deals.

Despite financing challenges, overall macro indicators are favorable. Reports show healthcare venture capital fundraising on pace to exceed 2022 levels and private equity sector fundraising efforts continue to be unencumbered. While the sector’s public valuations have underperformed relative to the market, significant cash levels remain available. Even amid lingering concerns of a downturn, there are increased expectations of a soft landing. The sector’s resilience makes it an attractive sector for increased activity in 2024. 

Unconventional deals endure

As we highlighted in our broader mid-year outlook, carve-outs are becoming more frequent and larger in scale due to multiple factors. Incumbents continue to face threats from non-traditional players, and retail sites are becoming even more valuable for providing direct care and indirect services such as decentralized clinical trial support. Conglomerates now frequently prioritize speed and resiliency over breadth and integration, prompting ongoing assessments of business units’ fit within the enterprise. In addition, sponsors are bringing value creation to the forefront of investment theses, enabling transformational deals that would have historically been reserved for strategics. We anticipate this trend to continue as corporates reassess the strategic fit of certain units within their portfolios.

Beyond business model reinvention, sponsors, corporates and nonprofits alike are reshaping their growth strategies. Nonprofit organizations, particularly health systems, have pivoted from organic growth to valuing speed and external expertise with certain capabilities as they reassess their five-year plans and local market strategies. This is continuing to foster partnerships with for-profit entities in areas such as value-based care (VBC) enablement, ambulatory service centers deployment and lower acuity services traditionally performed in the hospital (e.g., behavioral health). We expect continued cross-sector collaboration, specifically as an enabler of VBC and shifting less intensive services out of the hospital.

Opportunity amid uncertainty

The regulatory landscape remains challenging, influencing both traditional and non-traditional areas of investment.

That includes ongoing regulatory scrutiny of specific transactions as well as broader concerns over industry concentration. Investors, particularly sponsors, are watching the developments of regulator pushback on more traditional investment themes, such as physician practice management, with apprehension.

Providers across subsectors continue to express concerns over reimbursement rates, citing increases approved by the Centers for Medicare and Medicaid Services as inadequate to cover rising labor and supply costs, which have exceeded inflation expectations. While contract labor and nursing wages are beginning to revert to more normal growth trends, overall levels remain elevated. This, along with the increased cost of capital, may drive liquidity challenges, particularly for providers hit by reduced Medicaid enrollment following redetermination. Struggling businesses hit by these factors are prime acquisition targets for opportunistic investors.

Generative AI (GenAI) has countless potential applications and is being closely monitored by industry stakeholders. Its impact is far from certain and disruption looms across all functions, yet leaders see promise for productivity gains in both clinical and administrative realms. Whether GenAI ventures become sources of deal activity hinges on evolving regulations shaping patent rights and the protective moats they provide.

“The declines in sector transaction volumes are consistent with the broader macroenvironment but remain generally in line with 2021 levels. Non-traditional cross-sector partnerships continue to be a strategic focus of many health systems and strategic assessments persist in driving more divestitures and realignment in the sector. While financing challenges persist, the sector’s resilience continues to make it ripe for increased transaction volumes in 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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