6 minute read 26 Apr 2021
Soyuz rocket launching

Health care organizations realign strategies for resilience and growth

By H. Mallory Caldwell

EY US Health Leader

Proven executive and business strategist. Passionate about helping reshape and restructure industry to meet marketplace demands.

6 minute read 26 Apr 2021

Health care executives feel satisfied with their performance during the pandemic but recognize the need to invest for the upturn.

In brief
  • Accelerated strategic and portfolio reviews prioritize managing longer-term pandemic impacts, investing in digital and divestment.
  • Globally, M&A in health is expected to slow in the year ahead, but some geographies and subsectors are already seeing a rebound in deal activity.

O

verall, health leaders believe they demonstrated resilience during the pandemic. According to the latest EY Global Capital Confidence Barometer (pdf), nearly half believe their company overperformed against their peers in terms of operational stability and did a better job of identifying, evaluating and responding to emerging risks in real time.

Some hospitals will continue to be challenged by cash flow constraints in 2021 stemming from lower patient volumes, rising expenses and a changing payer mix. As vaccinations become more widely available and consumers return, health care volumes should rise in the second half of 2021.

For most health systems and hospitals surveyed, revenue and profitability are expected to reach pre-pandemic levels by 2022.

Pandemic drives health care executives to accelerate strategic and portfolio reviews

For many health care CEOs and other business leaders, the emergence of the COVID-19 pandemic, and its resultant economic shock, posed an existential threat to their business. In response, 85% conducted a comprehensive strategy and portfolio review in 2020. For 80% this was unplanned — a direct response to changing events.

Corporate strategy

85%

of health care executives say they conducted a comprehensive strategy and portfolio in 2020.

Key strategic considerations include managing the longer-term impact of the pandemic, digital and technology investment and divesting of underperforming assets. The operational and strategic levers under review may not have changed radically, but which of these levers receives the most attention may shift in the wake of the pandemic.

Health execs main strategic considerations EY CCB23

Digital transformation hops on the fast track

More than half (53%) also believe they excelled over the past 12 months with respect to digital transformation. With a forced decline in outpatient and inpatient hospital visits, health systems suddenly accelerated the adoption of virtual technologies — such as telehealth, m-health, AI and analytics — to effectively reach patients and leverage resources.

Yet, health care organizations also realize they need to do more to accelerate their digital agenda, with 57% of respondents saying their organization will be increasing its investment in digital transformation. In addition to increased investment in digital health and analytics, health care organizations are looking to improve technology-enabled back-office remote work capabilities. We’ve talked about the need for health care organizations to fast-track their digital transformation efforts before, but we believe this is the year these initiatives take root.

M&A activity will focus on bolt-on acquisitions to close operational and digital gaps

The global health care services industry observed an 8.2% growth rate in the number of M&A deals from 2019 to 2020. However, global dealmaking virtually ground to a halt in the second quarter of 2020, coinciding with the peak of the first wave of the pandemic, only to reverse course and rebound in the last half of the year.

Despite a strong finish in M&A activity in the last quarter of 2020, fewer health care executives globally expect to pursue M&A in 2021 compared with a year ago, with 34% expecting actively to pursue M&A in the next 12 months, down from 58% a year ago. Health executives’ M&A expectations are lower than the cross-sector average of 49%. However, this is six percentage points higher than M&A intentions near the end of the Great Recession, and we are observing pockets of increased M&A activities in certain geographies and subsectors.

Health care organizations that do pursue dealmaking over the next year will be looking predominantly at bolt-on acquisitions to meet near- and mid-term financial and operational needs or to add capabilities (e.g., digital) that will be needed for longer-term transformation. Areas of focus will be centered on responding to regulatory changes and securing supply chain, boosting digital and technology capabilities, positioning their organizations amid sector convergence and growing into adjacent business activity.

M&A outlook

64%

of health care executives expect to focus their M&A activity on bolt-on acquisitions.

Sixty percent of health care respondents expect to see private equity play a more competitive role in M&A activity as health providers reposition through the recovery stage. With US$2.8t in dry powder available, including nearly US$1t dedicated to buy-outs, private capital is well-positioned to take advantage of the value creation opportunities during the recovery period.

Meanwhile, of those planning to acquire within the next 12 months, 64% are looking at assets outside of their own countries, but within their immediate regions. Top investment destinations include India, the US, New Zealand, Singapore and Saudi Arabia.

Health care executives will continue to realign strategies to remain resilient and accelerate growth

Since the outbreak of the COVID-19 pandemic, health care has been on the front lines of the crisis. Although the pandemic has negatively impacted revenues and profits across the sector, health care executives appear poised for accelerated change.

The pandemic has served to solidify and accelerate digital transformation and convergence, while at the same time forcing a focus on specific operational and strategic considerations, including supply chain, capacity and technology capabilities.

As 2021 unfolds, health care executives see Europe (38%), Latin America (18%) and India (14%) as key growth markets over the next three years. They will continue to refine and recast their strategies with an eye toward resiliency and long-term growth in a post-pandemic world.

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By H. Mallory Caldwell

EY US Health Leader

Proven executive and business strategist. Passionate about helping reshape and restructure industry to meet marketplace demands.