Though dealmaking volume slowed to prepandemic levels in 2023 and its fourth quarter, M&A is expected to hold steady in 2024 as dealmakers will be on the lookout for opportunities in the physician practice, payer and health IT markets.
Many healthcare providers are still expected to pursue scale via merger deals while others contend with rising valuations for the most appealing payer or health IT acquisition targets in 2024, according to a new outlook report and industry survey from KPMG.
“We see a convergence of factors laying the groundwork for a potentially stronger deal market in 2024,” Ash Shehata, U.S. sector leader for healthcare at KPMG, said in a statement. “Notably, private equity sitting on high levels of dry powder and valuations stabilizing due to the presumption that health system volumes are underway as a result of a total volume recovery.”
The industry has its fair share of headwinds that could scare off financial investors like private equity and venture capital—reimbursement challenges, tight margins, relatively high interest rates, heightened antitrust enforcement and general federal scrutiny of financial interests interfering with care, the professional services firm wrote. The latter of these factors could also throw cold water on merger and acquisition deals within the industry, particularly after the pandemic’s flurry of consolidation now leaves fewer potential targets.
As a result, financial investors and other players will increase their scrutiny when eying potential acquisitions in the physician practice, payer and health IT spaces, which KPMG noted still hold strategic opportunities in light of the growing demand for care.
Meanwhile, operating pressures have made greater scale “a key to maintaining positive margins” for hospitals and are paving the way for more partnerships, KPMG wrote.
“In short, M&A offers many healthcare companies hope in an uncertain marketplace: they can share resources to become more efficient; gain access to new markets, offerings, or talent; or sell to a larger entity with the resources to invest in profitable growth,” the firm wrote. “This is why we believe healthcare M&A is likely to remain steady in 2024, with some megadeals and many smaller transactions: the deals may not yield the quick, big paydays of years gone by, but they make strategic sense to buyers and sellers.”
Looking back, “about half” of the roughly 500 healthcare and life sciences industry leaders polled by KPMG for its report said they had invested in more deals during 2023 than they had anticipated at the beginning of the year.
Hospitals and health systems were the exception, with just a third of respondents reporting greater than anticipated dealmaking, per the report. Additionally, dealmaking from financial investors fell drastically within the healthcare space, from 526 deals in 2022 to 291 deals in 2023 through Dec. 10, according to Pitchbook data cited by the firm.
“Some private equity firms found they could not integrate or improve new acquisitions as fast as they had hoped; many are still working hard to improve the efficiencies and integrate the operations of companies they paid top dollar for when dealmaking peaked in 2021,” KPMG wrote, later suggesting that burned investors would be thinking twice about healthcare targets in the coming year.
Within the umbrella forecast of “steady” healthcare dealmaking, KPMG offered differing pictures for specific industry subsectors.
Among hospitals and health systems, KPMG said it expects to see “more megadeals in 2024 and cross-market deals that allow new economies of scale without triggering antitrust concerns. Some health systems will also seek in-market deals that can help improve efficiencies and community access to a wide range of care.”
Among physician practices, financial investors will give way to strategic buyers seeking “long-term goals” such as broader provider networks and services. “The most successful dealmakers will have an array of strong capabilities in place, such as in value-based payer contracting, home health, remote monitoring and telehealth, depending on the specialty,” the firm wrote.
Among payers, merger and acquisition activity will be “inevitable” as scale, capabilities and expertise become vital. Increasing demand for services and companies that can efficiently fill in the gaps led KMPG to predict that “valuations of the most appealing targets to rise, and owners of smaller and less successful businesses in the space to seek suitors more urgently in 2024 and beyond.”
Among healthcare IT companies, similar trends will drive demand for “innovative” technology companies and accelerate dealmaking. However, “given the challenges of identifying which early-stage companies are most likely to succeed, we expect acquirers to be strategic, focusing on targets with proven offerings, not just promising ideas,” the firm wrote.
“As the heightened volatility we saw this past year continues into 2024, HCLS leaders will need to remain agile as they balance the challenges of today against their growth objectives of tomorrow,” Kristin Pothier, U.S. sector leader for life sciences at KPMG, said in a statement. “The ascension of generative AI and precision medicine has transformed the landscape placing a greater emphasis on digital health, value-based care and patient-centricity driving investment and innovation.”