Health services M&A deals surged in 2021. Here are key trends that could impact dealmaking next year, PwC reports

Healthcare mergers and acquisitions surged in 2021, growing 56% in the 12 months through Nov. 15 versus 2020.

There was particularly high growth among physician medical groups, which saw more than 400 deals, as well as managed care and rehabilitation subsectors, according to a new report from PwC. This compares to about 200 to 250 deals per year between 2017 and 2019.

There's the potential for more consolidation and private equity roll-ups in 2022 and beyond as practices have experienced challenging economics and may face 2022 Centers for Medicare & Medicaid Services (CMS) payment cuts.

Looking ahead to 2022, the established pattern of deals surging after an economic downturn is expected to continue, with companies actively exploring M&A, divestitures and other transactions, PwC reported.

“The pandemic’s not over but health services and private equity firms are finding plenty of opportunities to invest and grow. That said, resilience and unlocking value are front and center as competitive and regulatory pressures loom," said Nick Donkar, PwC’s U.S. health services deals leader, in the report.

Dealmaking in the health services sector could take new forms in 2022, however, as M&A deals could face more scrutiny and longer review times from regulatory agencies, both federal and state, given review backlogs and a July 2021 executive order that spotlighted antitrust enforcement of hospital consolidation, according to the report.

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These developments—along with recent opposition from employees and communities against some mergers that led health systems to scrap deals—could reshape merger plans. In fact, only the hospital subsector saw a decline in deal volume in the past year compared with 2020. However, since health systems are still looking to achieve population health and financial goals, they may consider alternative alliance models.

PwC identified several trends that could impact health services M&A deals in 2022:

  • With deals potentially under greater scrutiny and multiples still high, demonstrating deal value will be key. Look for deal activity among government and Affordable Care Act health plans, anticipating continued Biden administration support for Medicaid and Medicare Advantage programs and broader coverage expansion. 
  • Look for more deals in the home care market, given the growing emphasis on care beyond inpatient settings and the CMS' increased payments for home health services in 2022.
  • Behavioral care could be a big market, given continued need and access issues.
  • For hospitals and other service providers, labor shortages mean rethinking workforce evaluation in deal diligence. Ongoing supply chain issues mean some systems have invested in manufacturers to ensure resource continuity as well as income flows.
  • For payers, the pandemic complicates visibility into future income. Depending on Congress’ final budget reconciliation package—and whether the national public health emergency is renewed past January 2022—coverage and reimbursement levels could change, altering the market segments that dealmakers find attractive.

Competitive dynamics also are changing. In the payer market, the CMS price transparency enforcement and surprise billing regulations could alter payer-provider relationships and local competition. Also, watch to see whether Blue Cross Blue Shield Association insurers diversify following a 2021 rule change, the PwC report said. 

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While payers continue to integrate vertically, health systems will continue to expand to capture more of the care continuum.

Digital health consolidation could impact patient engagement dynamics and choices about who payers and providers partner with or ultimately acquire, the report said.

2021 M&A trends

This year, deals appetite persisted despite high multiples—the sectorwide mean enterprise value to EBITDA multiple for the period reached 15.2x.

Deals are being driven by forces including capital availability, regulatory pressures, searches for value, resilience imperatives and evolving value chain power dynamics, according to the report.

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In the same period, the sector has seen nine megadeals valued at $5 billion or more, plus traditional IPOs and IPOs backed by special purpose acquisition companies (SPACs).

Given recent activity, ongoing interest in the public markets is expected. For years, there were no pure health services IPOs, but 2020 saw two, and 2021 has seen eight, PwC reported. This count excludes SPAC-backed IPOs, of which there have been at least a dozen in the 12 months through Nov. 15; two were classified as megadeals.

While 2019 and 2020 saw just one megadeal each, the past year had seven non-SPAC megadeals. This includes four deals targeting the contract research or manufacturing space, Humana’s acquisition of the remaining 60% stake it did not own in Kindred at Home and two deals related to Walgreens Boots Alliance: its divestiture of its Alliance Healthcare business and its increase of its stake in primary care-focused VillageMD