Hospitals, payers, staffers are warming up to merger and acquisition deals for 2021 and beyond: Moody's

Hospitals, health insurers, healthcare staffers and others within the industry will all be on the lookout for new merger and acquisition opportunities through the rest of 2021, according to a series of quarterly reports from Moody’s Investors Service.

Released on Wednesday, the reports outline major factors within these sectors that could influence deal-making and, for certain categories, the players most likely to open their wallets.

Hospitals and health systems target geographic expansion

The ratings agency said that large not-for-profit systems will have revenue diversification and geographic expansion on the mind as a greater portion of their reimbursement comes from lower-paying government programs.

Consolidation “provides large health systems with greater leverage in negotiations with payers, boosting reimbursement,” the agency wrote. At the same time, gaining access to additional clinical and technological resources would draw patients seeking complex, high-revenue procedures.

For-profit hospitals will also be ready to acquire due to the “unprecedented” dry powder built up through cost reduction and CARES Act funds, Moody's said. These organizations will be eyeing deals that deliver stronger out-of-hospital services to consumers demanding more flexible care.

RELATED: Kaufman Hall: Hospital industry made 72 deals in 2020, down from 92 in 2019

On the other hand, smaller hospitals and independent physician groups will continue to feel the burden of COVID-19 disruption despite stimulus funds and their own expense reduction strategies.

The ratings agency said that smaller systems with less liquidity are likely to turn to partnerships with others, while independent physicians will be more open to exploring affiliation opportunities with large systems that can offer financial incentives.

A review published earlier this month by consulting firm Kaufman Hall Hospital found the total number of hospital and health system deals had declined year over year for the first quarter but were much larger in size. That report also described a similar preference among larger organizations to obtain local market expertise.

Insurers combat costs by picking up non-traditional services and capabilities

The payer market has already seen big-name activity in 2021 with UnitedHealth Group’s $13 billion purchase of Change Healthcare and Cigna’s acquisition of MDLive, among others.

The year’s remaining insurer deals likely won’t include a payer mega-merger, Moody’s wrote, but instead will continue this trend of payers seeking to move beyond traditional coverage. By acquiring new technology capabilities—or by launching collaborations with big tech names like Alphabet—payers will aim to contain healthcare spend that lately has grown well beyond the rate of inflation.

RELATED: Change Healthcare betting on accelerated use of AI in hospitals with Optum acquisition

Even the deals not focused on technology acquisition will be made with cost control in mind, according to the report. Here, the agency pointed to Centene’s recent $2.2 billion acquisition of Magellan Health as part of a strategy to address behavioral health conditions, which can drive additional spend if left unchecked.

Moody’s noted that some payer deals will be strategically advantageous but credit negative in the short term.

“UnitedHealth, for example, will increase debt by approximately 30% to buy Change, which will raise leverage,” the agency wrote in the report. “But we believe the company will return leverage to near pre-transaction levels by year-end 2022, if not sooner.”

Healthcare staffing deals bounce back

Although healthcare staffing mergers and acquisitions slowed down last year as these companies sought to conserve their cash, Moody’s anticipates a return to form due to the availability of affordable financing and generally improving business conditions.

Private investors who own most staffing companies will be more prepared to lean on debt to fund their acquisitions—although they will also be more selective of their acquisition targets than they have been during the past decade.

RELATED:Kaufman Hall: Hospital Q1 deals down compared to 2020, but size greatly increases

Among rated healthcare staffing companies, Moody’s said acquisitions are most likely to come from AMN Healthcare, ONEX TSG Intermediate, U.S. Anesthesia Partners and Radiology Partners “due to their good liquidity, stable operating trends and acquisitive nature.”

On the other hand, Envision Healthcare, Team Health Holdings, MEDNAX, Medical Solutions Holdings and NAPA Management Services were all cited by the agency as unlikely acquirers “either because of weaker liquidity, ongoing operating issues or very high leverage.”

Moody’s reports also extended to the markets for branded pharmaceuticals, generic pharmaceuticals and medical products and devices. All three of these areas will similarly maintain their appetite for mergers and acquisitions throughout the coming year, the agency said.