By Evan Sweeney
The following is an excerpt from an article published in FierceHealthFinance's eBook "Building Sustainability Through Mergers and Acquisitions." Download the eBook here to read more.
Things aren't always as they appear. This adage is particularly applicable to the future of healthcare mergers and acquisitions (M&A). Statistically, healthcare M&A deals are down in 2014 compared to the previous year, but experts say anecdotal evidence paints a more promising picture of the market in 2015.
An August report published by consulting firm PwC indicates that M&A deal volume in healthcare has remained steady through the first two quarters of 2014, although the second quarter saw a 13 percent decrease in deals compared to the same period in 2013. Hospitals, behavioral health and home healthcare services saw significant declines in deal volume, although overall value has increased significantly, at $24.6 billion in the first half of 2014, up from $17.2 billion in the same period of 2013.
But these statistics haven't tempered the optimistic expectations for the M&A market for the remainder of the year and into 2015. A survey published in June 2014 by Bass Berry Sims, a law firm that specializes in the healthcare industry, indicates that 86 percent of respondents expect M&A to increase in healthcare and life sciences, and 84 percent of respondents believe private equity activity will increase in relation to strategic M&A.
Interestingly, deals activity data is counter to the firsthand experiences of financial experts, says Dan Farrell, a health services deals partner at PwC in Philadelphia. Defined more broadly, they say, deal activity that includes more than just traditional M&As--such as affiliations, joint ventures and management service agreements between organizations--is robust.
"Deals activity, I think, is as strong as it's ever been," Farrell says.
The majority of changes from the Affordable Care Act (ACA) went into place in 2014, paving the way for a new healthcare landscape in which many organizations navigate toward a redesigned clinical delivery system.
"Participants are recognizing that there is a need to, for lack of a better term, repurpose the healthcare system and change the clinical pathway. Those are certainly the more innovative and forward-thinking organizations," Farrell says. "And they are using deals as a conduit to affect that change."
Navigating a new healthcare landscape
The flood of regulations that accompanied the first half of 2014 has largely subsided, and now that the industry has cleared the hurdle of complying with new regulations, healthcare organizations will look to restructure the way they provide care.
In 2013, and in the first several months of 2014, there was some level of uncertainty surrounding health exchanges, says Phil Pfrang, lead partner of the Health Care and Life Sciences Merger and Acquisitions Transactions Services Group at consulting firm Deloitte and Touche, headquartered in New York City. Although the industry wasn't "shaking in its boots" over healthcare reform, it wasn't clear how health insurance exchanges would reimburse providers. Perhaps more importantly, the payers and providers were simply busy complying with the new regulations and creating health plans that met the requirements of the newly established health exchanges.
"With the healthcare reform changes behind us in 2014, I really think you're going to see bigger M&A activity in 2015 and beyond," Pfrang says.
ACA's transition from fee-for-service reimbursement to population- or disease-based reimbursement has also created opportunities for more growth. In 2015, M&A deals will form based on the desire for healthcare organizations to adapt to these reforms.
Some states have programs in place to help providers navigate that process. Eight states currently have Delivery System Reform Incentive Payment programs that provide funding to providers that experiment with ways to provide better, low-cost care.
But for organizations in the remaining 42 states, M&A deals are often the next viable option in accessing the capital to navigate these new care models.
"A lot of organizations don't have the capital access [to experiment with reimbursement models], but those that do are going to be the winners because they are the ones that are going to be the forward-thinkers in the industry," Farrell says.
To read the rest of this story and other articles, download FierceHealthFinance's free eBook, "Building Sustainability Through Mergers and Acquisitions."