5 minute read 8 Mar 2021
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Why health care is increasing M&A to build digital health and services

Authors
H. Mallory Caldwell

EY Americas Health Leader

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

Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.

5 minute read 8 Mar 2021

Health care M&A is expected to strengthen in 2021 as organizations look to build strategic capabilities.

In brief:

  • The pandemic has underlined the benefits of breadth in health care, not only for financial stability but also to leverage capabilities.
  • More than half of patients overall say they are likely to use telehealth for urgent care in the post-pandemic world.

Health care organizations are likely to increasingly pursue mergers and acquisitions (M&A) in 2021 as organizations look to build digital health and other strategic capabilities and scale. And smaller organizations that have been pressured by the COVID-19 pandemic are becoming ripe targets for consolidation.

We expect 2021 to be a year of revision and renewal, as 74% of health care executives say they will need to adjust their medium- and long-term strategies in light of the pandemic, according to the EY Realizing Strategy survey.

Health care M&A deal volume¹ dipped somewhat in 2020, although it did not collapse as many might have expected when the pandemic first hit. For the year, there were 162 deals of more than US$10m each, with a total deal value of US$63.4b, compared to 169 deals and US$60.8b total deal value in 2019.²

Some hospitals and health care systems faced pandemic-related financial losses, which helped spur tactical transactions such as Prime Healthcare’s acquisition of St. Francis Medical Center in California in bankruptcy court. However, other hospitals — boosted by COVID-era anomalies like federal relief funding — experienced one of their strongest financial performance years.

Deal volume in digital health, meanwhile, increased more than 26%, with one notable deal being Teladoc Health’s US$18.5b acquisition of Livongo Health. During the pandemic, the decline in in-person visits has been driven by social distancing practices and eased government regulations around telehealth. Increased use of telemedicine services is a phenomenon we expect to continue after the pandemic.

Lastly, demand for home and behavioral health care paralleled deals in those areas, including TPG Capital’s acquisition of LifeStance Health and Providence Service Corporation’s acquisition of Simplura Health Group. Deals in behavioral health tech, in particular, have doubled in volume globally since 2017.³

We expect many of these trends to continue in 2021, with increased competition for assets from private equity funds, which have roughly US$1.5t in dry powder.

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Growth to improve patient care

The pandemic has underlined the benefits of breadth in health care, not only for financial stability but also to leverage capabilities. This trend can include bringing together groups of hospitals, physicians and home health care providers. It can also be enabled by technology, which, for example, can allow specialist doctors to connect with rural hospitals. Overall, in the past year, health care organizations have seen the need to reach patients closer to where they live, including at home and through facilities located outside of city centers.

Organizations can benefit from acting early to find and acquire the most attractive assets, especially those under some financial pressure. For example, independent practices have been hit hard by the pandemic and some could benefit from being acquired by large health care systems. Of course, this action must fit in with a long-term capital strategy that will meet new patient expectations once the pandemic is under control.

But competition for attractive assets could be fierce as private equity continues to be a major player in health care M&A and brings significant dry powder to compete for assets in most subsectors, including providers, payers, diagnostics and software and technology. In some health systems where there is a significant appetite for growth and innovation, new investment joint ventures with PE investors have helped consolidate, scale and grow important care delivery assets in the markets that those health systems operate. These deals have shown to have a positive impact.

The number of health care PE deals increased by more than six percent in 2020.⁴

Digital health, accelerated

The pandemic unleashed growth in virtual health care services, including telehealth, remote monitoring and both broad and specialized applications across the telemedicine spectrum. Furthermore, there is a utilization uptick in mental health and coaching, and even higher use of employee assistance program (EAP) services through digital and telephonic channels.

Adoption of these technologies increased notably among patients aged 55 and older with a household income of less than $100,000, and 59% of patients overall say they are likely to use telehealth for urgent care in the post-pandemic world. For some patients, telehealth may remain a preferred option. This growing acceptance may lead more health care organizations to acquire telehealth providers and services to expand their capabilities and offerings.

Digital growth in health care

59%

of patients overall say they are likely to use telehealth for urgent care in the post-pandemic world.

At the same time, organizations are looking to add Internet of Things, artificial intelligence, data analytics and patient monitoring capabilities to improve care effectiveness and optimize administrative tasks. Health care organizations can choose to develop some of these capabilities on their own or could partner to position themselves to capitalize on the uptick in volume and meet patient expectations. 

Conclusion

While the pandemic has prompted health organizations to think differently about strategy, sustainability and growth, some fundamental considerations for creating value remain key. The strategy largely remains the same for providers and is centered around trying to reach more patients. However, providers are also growing more comfortable with loosening their definition of what it means to reach more patients and reconsidering their role in that equation. Should their role be to treat the patient, be a channel or enabler for the patient or be both? The continued focus on end-to-end patient care delivery, digital innovation, and building the right network of caregivers and capabilities are elemental components driving strategy in the current deal market. 

  • Show references#Hide references

    ¹ Capital IQ, Kaufman Hall

    ² Capital IQ, Irving Levin Associates

    ³ CB Insights: State of Healthcare Report: Investment & Sector Trends to Watch (Q4 2020)

    ⁴ ThomsonOne, EY-Parthenon analysis

Summary

Health care organizations are expected to be active acquirers in 2021 as they look to improve patient care and outcomes with digital capabilities, including telehealth.

About this article

Authors
H. Mallory Caldwell

EY Americas Health Leader

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

Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.