Health services: US Deals 2023 outlook

Deal volume remains resilient despite headwinds

Megadeals, trading multiples, and overall deal values in the sector have not been immune to interest rate hikes and fears of an economic downturn. However, transaction volumes continue to increase due to enhanced attention on private equity (PE) platform add-ons during this challenging macroeconomic rate environment and continued sector resilience.

Payer-provider convergence and headline-grabbing investments from non-traditional players underlie the broader evolutionary theme of the sector– fee-for-service focused models are in the rear-view mirror and players are diving in and embracing value-based care throughout the ecosystem.

These factors, along with the continued large levels of corporate cash and PE dry powder, lead to a continued strong outlook for health services deal volumes in 2023. 

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Health services deals outlook

Health services deal volumes increased further from levels seen in 2021, but have softened thus far in Q4-22. Year-over-year deal volumes increased in each quarter through Q3-22, though some pullback has been seen in Q4 through November 15 (251 announced deals in Q4-22 through November 15 versus 307 in the same period in 2021). While deal volumes have continued to increase, deal values have declined from the peak set in 2021, a function of smaller value roll-up and platform add-on transactions representing a greater portion of activity in the current year.

Industry-wide enterprise value (EV) to EBITDA multiples have also declined from heightened levels seen at the end of 2021. As of November 15, the average multiple across health services sub-sectors was 14.4x, down from 15.9x as of December 31, 2021 and 14.9x as of December 31, 2020. Multiples dropped in four of the seven sub-sectors whose multiples we track, led by outsourcing (down from 19.2x to 15.0x) and managed care (down from 17.3 to 14.2).

Home health & hospice continues to be a sub-sector driving transaction value in 2022. This was one of only two sub-sectors that saw growth in announced deal value from 2021 levels, as pandemic-driven interest in alternative and patient accessible care models continued to be a key theme. There were 114 home health and hospice deals in the 12 months ending November 15, contributing to a 74% increase in deal value from 2021. This growth in deal value was driven by two megadeals – CVS’ acquisition of Signify Health for $8.0B and UnitedHealth / Optum’s acquisition of LHC Group for $6.0B.

Nearly half of announced deal value over the 12 months ending November 15 was from megadeals, consistent with the ratio seen in 2021. The 12 months ending November 15 had seven megadeals, including:

  • $18 billion merger between two healthcare real estate investment trusts (REITs) and an $8.9B acquisition of Summit Health-City MD, a provider of primary, specialty and urgent care services, by Village MD (a Walgreens subsidiary). These two deals collectively represent $26.9B of the total $44.3B of other services deal value in the 12 months ending November 15.
  • Two home health & hospice megadeals noted above, which totaled $14B of transaction value.
  • Other megadeals include Quidel Corporation’s acquisition of Ortho Clinical Diagnostics ($8.0B), Mediclinic International’s acquisition by a consortium of investors ($7.4B) and Chubb’s acquisition of Cigna's life, accident and supplemental benefits businesses ($5.4B).
health services value volume deals 2022 outlook
health services sub sector deals 2022 outlook

Divestiture-driven growth in 2023 and beyond

For select sectors, M&A volume retreated when compared to the historic levels experienced in 2021; however, the health services sector continued an impressive display of volume level through the last 12 months (LTM) ending November 15.

While traditional buy-side activity comprised a portion of this volume, an upcoming PwC study has identified the role divestitures can play in creating value in the healthcare sector.

PwC anticipates increased divestitures activity within health services for 2023 based on a variety of economic, regulatory and overall strategic repositioning. Given the variety of healthcare participants (e.g. for profit, not for profit and PE, etc.), each of the parties have varied processes for decision-making, but growth is the one goal they all share. As management teams assess growth, the power of strategically reviewing and aligning an organization's portfolio is critical to shareholder returns. Other key themes that can help create value through divestitures include: timely decision-making, actively embracing the process of divestitures and navigating inertial factors like entanglements.

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“While sufficient ‘headwinds’ existed in the deal markets to potentially stall health services deal activity, the sector performed well and is poised to further expand volume in 2023 between reshaping portfolios, divestitures and a flurry of PE ‘dry powder’ to support the activity.”

— Nick Donkar, US Health Services Deals Leader

Key deal drivers

Uncertainty is not new to health services entities

The increased volume of antitrust regulatory reviews, which have expanded outside of health systems and into the broader sector, coupled with specific challenges on certain larger transactions, have driven hesitation from potential suitors. The Centers for Medicare and Medicaid Services (CMS) reimbursements are slated to generally increase across the board; however, physicians face a looming ~4.5% rate cut absent congressional action. In addition, annual legislation is required to prevent further cuts promulgated by pay-as-you-go (PAYGO) rules and renew the annual Extenders for hospitals. Continued extension of the Public Health Emergency “kicks the can” on redetermination of millions of Medicaid beneficiaries that will cause a mass re-alignment across the Affordable Care Act (ACA) and uninsured populations when terminated.

As a highly-regulated sector, these challenges aren’t new. Antitrust reviews have yet to focus much on the cross-sector convergence with non-traditional players, but these deals may begin to draw heightened attention given their size and publicity. Much of the near-term reimbursement ambiguity will be put to rest before the end of the year, but longer-term uncertainty and potential variability is likely to remain without a collaborative legislative focus. Value-based care provider models, and the enabling technologies and services that accommodate them, continue to be prime targets for investors that want to ride the sector’s volume tailwinds while minimizing reimbursement and other regulatory risks. 

Non-controlling investments, club deals, and strategic reallocation will continue to drive capital deployment

Headwinds from the macroeconomic financing environment are causing companies to re-evaluate the capital allocation approach. The higher cost of capital is a challenge to larger, platform-sized deals, and is driving more club deals and non-controlling investments. Private equity sponsors in particular have re-adjusted capital towards their existing platforms via add-ons and an increased focus on organic value-enhancing initiatives. Some evidence of this approach is the ~15% increase in transaction volume despite overall deal value declining nearly ~40% since the prior year.

The potential for a downturn is also increasing risk aversion towards more cyclical sub-sectors, which will likely continue until it becomes clear that a “softer landing” is likely.

Lastly, health services has benefitted from a disproportionate share of capital, particularly from PE, over the last few years. As these portfolio companies run up against their traditional holding periods, there will be increased incentives for effectuating sales or significant recapitalizations that allow original sponsors to cash-out and demonstrate marked returns to limited partners.

Newer challenges are driving targeted approaches to deal evaluation and diligence

Cyber-criminals are increasingly attacking health systems and related entities in the sector. Nursing and other clinical labor wages continue to increase. Home health agencies are turning away referrals because they don’t have enough labor to meet demand.

These are examples of challenges felt across the entire sector that don’t have an endpoint in sight. Investors are increasingly wary of these threats – elevating their status within the overall deal evaluation and risk-mitigation process. In addition, investors are prioritizing these areas early on during diligence rather than waiting to address post-deal.

Buyers are performing more detailed analysis of local market labor supply / demand dynamics. Targets more highly-susceptible to wage pressures have been prime candidates for earn-out based deal structures, allowing buyers to mitigate the potential risk of continued elevation of wage levels. Cyber concerns are being addressed through increased efforts on network penetration testing and broader cyber-security diligence, along with enhanced focus on the broader information technology strategy, reliance on vendors, and leveraging of the cloud. 

These two areas – cyber and labor market dynamics – are specific areas of enhanced deal-evaluation focus that we’ve seen over the last year and expect that to continue, along with increased consideration of ESG factors.

About the data

LevinPro HC and LevinPro LTC: 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.

Contact us

Nick Donkar

Nick Donkar

Partner, Health Services Deals Leader, PwC US

Scot Schiefelbein

Scot Schiefelbein

Deals Partner, PwC US

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