6 minute read 16 May 2022
Female doctor measuring girl's height while mother sitting at clinic

The CEO Imperative: How the health care industry is growing via M&A

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 16 May 2022

Health care organizations embrace telehealth, personalized care and more digital-enabled innovation as change and cost pressures accelerate.

In brief
  • The transformative nature of data in the health care ecosystem, and its current and future potential to create value, is top of mind for industry leaders.
  • As health care CEOs look to growth, 70% plan to actively pursue mergers and acquisitions in 2022.
  • As ESG captures more C-suite attention, improving diversity and inclusion is seen as the top priority, ahead of climate change impacts.

Chief executives leading the global health care industry are changing their operational, financial and digital strategy with an eye toward growth, after the COVID-19 pandemic exposed the fragility of existing business models, according to the EY 2022 CEO Outlook Survey.

They agree the pandemic has accelerated existing trends – bringing a rapid expansion of virtual and home-based care, the use of analytics to track health trends in real time, and growing concern for behavioral health and inequity in care. As health care leaders contend with these and other shifting market dynamics driven by new-entrant competitors and the consumerization of health, they can consider reconfiguring their internal ecosystems to nurture innovation, growth and resilience. They can also review their wider ecosystem — including technology, suppliers, partners and customers — to position themselves successfully for the future.

In this edition of the CEO Imperative Series, which provides critical answers and actions to help CEOs reframe the future of their organizations, we explore how health care CEOs are responding to these trends and other business challenges.

Technology seen as cost buffer, growth lever

A full 91% of the 126 global health care CEOs surveyed have seen a significant increase in input prices, as hospitals and health systems juggled with abnormal patient volume and the crisis was deepened by rising material costs from supply chain disruption and an ongoing staffing shortage that fuels rising labor costs.

Top three strategic drivers to protect or improve profit margins

A majority (58%) of CEOs see technology and increasing digital customer interaction as buffers against rising costs across the health care industry. They also see these as the most important levers for growth in the next five years, and the effective use of technology and real-time data as a key success factor for health care leadership.

Deployed thoughtfully, automation can result in notable savings in health care operational and administrative areas. The digital acceleration in health care organizations propelled by the pandemic demonstrated the value of these platforms to patient engagement and interaction. To succeed in the future, it is essential for health care organizations to integrate customer experience into their overall strategy, making patients the focus of every strategic decision.

As executives understand and exploit the value of these channels and the rich data that populates them, they can use the knowledge for building a path to personalization and redesigning the health care experience to further embrace customer-centricity.

Three of every four CEOs in the health care sector are re-evaluating their supply chain decisions around vendors and logistics to become more resilient toward risks as supply chain disruptions, dramatically increased costs and the scarcity of critical items amid the pandemic have highlighted the importance of supply chain and inventory management. Health systems are developing integrated supply chain strategies that are aligned with their overall organizational strategy. Leaders are being challenged to think creatively about cost saving strategies that will lessen the complexity of vendor relationships.

Health care industry M&A ambitions rebound

With 70% of health care executives expecting to actively pursue acquisitions in 2022, their outlook is even more bullish than their counterparts in other sectors, where 59% plan to acquire. This is also a sharp increase in their M&A appetite over 2021, when only 34% expected to pursue acquisitions, signaling that in the post-pandemic world, health care companies may be even more compelled to acquire the capabilities to help them rapidly navigate market dynamics.

M&A intentions

70%

of health care CEOs say they expect to actively pursue acquisitions in 2022.

These bold intentions will likely run into headwinds, as even more health care leaders expect the deal landscape to be hotly contested:

  • An increase in hostile and competitive bidding is predicted by 76%.
  • Private equity is expected by 67% of respondents to play a major role in driving the market.
  • An increase in both cross-sector and cross-border dealmaking, with the US and UK the top two target countries, is anticipated by 61%.
  • Megadeals (US$10b) are expected by 58% (62% – US) to be fueling the activity.

Regulatory and geopolitical issues are adding to the risks within this highly competitive picture, with 64% saying that geopolitical challenges are forcing them to adjust strategic investment, and 40% expecting to see an increase in governmental intervention and regulation issues affecting the health care sector.

Given heightened competition, uncertainty and business risks, it’s even more important for health care executives to engage in M&A based on strategic rationale supported by better information. They will also want to consider alternatives to traditional deals — such as forming strategic health care partnerships, alliances and joint ventures – as effective and sometimes less risky ways to enhance performance, accelerate innovation and drive transformational growth.

These options can be considered as health care leaders aim to pursue their goals for planned M&A activity, including:

  1. Bolt-on acquisitions to increase market share
  2. Strengthening their environmental, social and governance (ESG) footprint
  3. Increasing operational capabilities
  4. Enabling geographic expansion
  5. Acquiring technology, talent and innovation

Sustainability seen as more of a risk

Climate change and sustainability impacts also rank as the top risk to growth for health care systems, together with changing demographics and permanent changes in the economy, followed closely by increasing geopolitical risks.

Regulatory pressure is the leading driver of sustainability strategy for health care leaders, as organizations in some geographies are under immense pressure to lower their impact on climate change by decreasing their greenhouse gas (GHG) emissions. As 93% of health CEOs say ESG issues are top of mind, some are starting to perceive ESG in health care as a core element for long-term value creation, and more than one-third of survey participants have set sustainability key performance indicators (KPIs). ESG scores and metrics are becoming a differentiator for many health care companies surveyed, as they compete in the M&A market.

It should be noted that CEOs in the health care sector rank improving diversity and inclusion as their most important ESG objective, followed by reducing climate change and other environmental impacts. This reflects the growing imperative to improve health equity and outcomes for all populations, as well as the need for more diversity across health care professions. From building professional training programs that enlist diverse candidates to partnering with community organizations to tackle issues of equity, health systems leaders are addressing this need through a variety of approaches.

Top ESG objectives for health care CEOs

Slightly more than half (52%) of health care respondents say they encountered a lack of investor support on their sustainability strategy. Yet CEOs recognize the growing focus on ESG and the goal to balance the needs of all stakeholders and being able to demonstrate broader long-term value – not just financial value to shareholders – as the top two challenges of their changing role as health care leaders. As health care systems move from managing COVID-19 as a pandemic to endemic, this balancing act will be in the forefront as leaders look to build resilience against future shocks while continuing to grow.

Summary

Health care CEOs are prioritizing growth through M&A, strengthening ESG performance and digital innovation. A key ESG focus is improving health equity and outcomes for all populations, as well as the need for more diversity across health care professions. These, and other ESG metrics, are becoming a differentiator for many health care companies as they compete in the M&A market.

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.