By Blaise Heid
In 2023, the post-Covid healthcare market presented its own challenges. While the federal support to the healthcare system was invaluable during Covid, once the support was gone many healthcare providers were faced with tremendous labor shortages and supply chain disturbances with essential PPE. Covid literally drove healthcare workers into retirement with nearly 100,000 registered nurses leaving the workforce between 2020 and 2022. The supply chain issues have mostly been resolved but staffing shortages, particularly in nurses, medical technicians and support staff remain a material distraction and result in increased costs.
Despite staffing difficulties, the healthcare industry continued to be an attractive investment, as investors and practices looked to build efficiencies through scale. According to the accounting firm PWC, in the last 12 months ending November 2023, total number of deals, involving investments and acquisitions in healthcare services, were more than 1,500 with a value of more than $56 billion. While lower than prior years, due to higher interest rates, this remains one of the most active sectors in the market.
Private equity continues to be the largest investor in healthcare services, with more than $750 billion invested over the past decade. Private equity is often a driving force behind healthcare service roll-ups, providing capital to the founders and resources for infrastructure investment and bolt-on acquisitions. The goals are greater efficiencies and resulting profits, but most importantly providing the highest quality patient care and outcomes. At the same time, many privately held and non-profit providers are also pursuing both vertical and horizontal expansion in order to improve their service offering, resourcing, as well as expansion into new markets, with a goal to create operating efficiencies through volume. The shift by both government and certain providers toward value-based care is a motivator and driver toward greater operating efficiencies. According to the Health Care Payment Learning & Action Network’s annual measurement of participation in alternative payment models, slightly more than 60% of healthcare payments in 2020 included some form of quality and value component. That’s a jump from 2011, when it was only 11%. There are many benefits to value-based care but whether it’s an Accountable Care Organizations or another provider structure, improving efficiencies of medical delivery is key.
For 2024 with the expectation of declining interest rates, mergers and acquisitions activity in healthcare services is poised to rebound.
With all the consolidation and deal making, one would expect that the market is consolidating around only a few major players. However, there remains many sectors within healthcare which are currently quite fragmented, such as outpatient surgery centers and diagnostic imaging. HealthValue Group (April 2023) estimates the top 100 out-patient imaging operators in the U.S. only represent about 20% of the total market. Other sectors are more integrated. According to a study by Alvera Health (May 2022) fully 74% of physicians are affiliated with a hospital, heath system or corporate entity.
Banks continue to play an important role in healthcare, including support for working capital, acquisitions and capital strategies, as well as support for specific capital growth initiatives and financing major equipment purchases in addition to facilitating payments, streaming the revenue cycle and protecting against fraud. In the middle market alone, banks fund healthcare companies in the U.S. between $2 billion to $3 billion per annum. A significant amount of middle market loans are driven by private equity sponsor-based transactions involving strategic investments or acquisitions. In determining the value of these enterprises, banks will consider the economic improvements from such acquisitions through review of independently prepared quality of earnings reports and examination of synergistic adjustments to earnings before interest, taxes, depreciation, and amortization (EBITDA). For example, this could include increasing adjusted EBITDA to reflect owner compensation in excess of a market salary for a CEO, as well as cost savings from consolidating functions or facilities. As a result, banks can help in the success of a merger or acquisition through providing lower-cost funding, compared with equity.
Blaise Heid is Practice Leader – Healthcare Banking at BankUnited, N.A.
