And so it begins. A new year, a new administration, and a foreboding that things can and will go wildly out of control in the healthcare industry, as the new administration dismantles the Affordable Care Act and doesn’t bother to replace it.
Judging from the market’s behavior since the November 8 election, the notion that a Hillary Clinton victory was “baked in” to every healthcare deal doesn’t hold. Certainly some deals may have been put on hold following Donald Trump’s election, but 2016 ended with 1,536 deals, in our preliminary count. That’s 1% higher than 2015, which was the first year to break 1,500 transactions.
Spending on deals in 2016, while not in record territory, was healthy. The current total is $255.7 billion, representing a 36% decrease from 2015’s super-sized $400.3 billion (including $91.2 billion in managed care deals that may disappear by the end of this month, depending on the outcome of federal court challenges). There’s no question that the past three years have been a wild ride in healthcare mergers and acquisitions. It just may be over soon.
Our Predictions for 2017
By late November, we’re accustomed to seeing article after article of predictions for health care in the coming year. The 2016 election changed that. The few articles we can recall relayed predictions that the Trump administration’s pro-business bent will benefit M&A in general. Not a big stretch, by any measure.
So we’ll take a stab in the dark, just as Congress begins work on repealing the ACA, and perhaps even replacing it.
First, hospitals. M&A in the hospital sector had a different feel in 2016 than in the previous two years. Several small, rural and critical access hospitals changed hands in 2016. Thirty-eight (42%) of the 90 transactions were for standalone hospitals with fewer than 100 beds. Of that group, 10 had 25 or fewer beds, and four were designated as critical access hospitals. In 2015, seven of the 102 transactions were for critical access hospitals.
Bankruptcy proceedings also played a larger role in this sector. The number of targets involved in bankruptcy proceedings rose to 11 hospitals in 2016. Some of the fallout comes from the Chapter 11 bankruptcy filings by Pioneer Health Services in Mississippi and the Forest Park Medical Centers in and around Dallas/Fort Worth.
The market is changing fundamentally, with Community Health Systems (NYSE: CYH) and now Tenet Healthcare (NYSE: THC) looking to sell “non-core” hospitals. In Community Health’s case, the impetus is to pay down debt. For Tenet, it’s to focus more squarely on United Surgical Partners International’s ambulatory surgery centers that it acquired from Welsh, Carson, Anderson & Stowe in 2015 for $425 million. Already in 2017, UnitedHealth Group’s Optum (NUSE: UNH) announced its acquisition of Surgical Care Associates, Inc. (NASDAQ: SCAI) for $2.3 billion. The company operates 205 surgical facilities, including ambulatory surgery centers and surgical hospitals, in partnership with 3,000 physicians.
The future will be in outpatient services, and that may drive down values for standalone hospitals even further. Taken together with the possible repeal-but-no-replacement of health insurance coverage for those consumers who got healthcare coverage through the federal exchanges, beds will be harder to fill than ever. We’ll be discussing hospitals and their future in our next webinar on February 9, “Hospital M&A: Buying, Selling, Valuing.” You may want to join us.
Post-acute care sectors such as Home Health & Hospice and Long-Term Care are in for some changes, as well. Last year, Kindred Healthcare (NYSE: KND) announced its intention to get out of the skilled nursing business to focus more on long-term acute care and rehabilitation hospitals. The move shocked the market, but the Long-Term Care sector was set to slide into bear territory, after lofty pricing. Tenet Healthcare CEO Trevor Fetter’s announcement at the JP Morgan Healthcare Summit that his company is looking to sell its home health & hospice assets put that sector in the spotlight. Community Health Systems sold an 80% stake in its own home health & hospice business to Almost Family (NASDAQ: AFAM) for $128 million late last year.
We’re looking for more consolidation in the home health market in 2017, as Congress may pressure the CMS to crack down even harder on Medicare fraud and small operators look to get out of the business.
On a more upbeat note, M&A in the Biotechnology and eHealth sectors will continue to thrive. Biotechnology companies with venture capital backers are scrambling to sell or license promising drug candidates to pharma companies that have left in-house R&D behind. That’s a trend with legs, and the passage of the 21st Century Cures Act in December puts tremendous tailwinds behind more M&A.
As for digital health, the runway just gets longer and longer, it seems. M&A in this sector was up 23% in 2016 to a new record of 155 deals, and there’s little consolidation in sight. Wearables are out, in 2017. Primary targets are companies that combine data analytics around population health management, electronic medical records and revenue cycle management. Others provide smoother workflow and communications across the healthcare provider spectrum.
Physician Medical Groups will still be hot commodities, and given the uncertainty of what Congress will do to replace the ACA, this sector is still a very safe bet.
The only caveat is that uncertainty is the hobgoblin of the M&A markets. And there’s plenty of that to go around. □
