Healthcare mergers and acquisitions are having an interesting moment and were quite the topic of interest at April’s American Health Law Association’s Health Care Transactions Conference. As has been reported numerous times over the past year or two, the number of deals has dropped but the average size has gone up. Questions about how the current administration and FTC would approach consolidation have been a talking point across industries since now-President Biden won the presidency. Some massive deals go through, others get scuppered. And in the middle of these moves by traditional providers, private equity continues to evolve its role in healthcare delivery, bringing organizations together and backing them with capital and operational guidance.
With that backdrop, we circled back with a few of our AHLA friends to get their impressions of the current healthcare M&A environment. Specifically, we asked them:
- What were your top two takeaways from the event or conversations surrounding it?
- What was the biggest surprise?
- In light of the above, what are the top considerations for provider organizations to successfully navigate a transaction today?
Here are the topline takeaways. Quotes from the experts follow.
Uncertainty and concern around regulatory scrutiny of deals remains. And it’s not just from the FTC, but from states, as well.
The cost and shortage of labor, particularly travel nursing, is having downstream effects on the cost of doing business and patient outcomes.
In the PE world, valuations are rising but not always for reasons one might expect. In many cases, multiples are pushing valuations as much as margins are.
It’s not just small, independent organizations that are being buffeted by a tough financial outlook. It’s a rocky landscape even for large systems, and that will likely be seen soon in M&A volume.
Across the board, seasoned industry veterans are expressing a notable level of concern thanks the rising cost of doing business and the added scrutiny on transactions.
Running a clean, organized transaction process is more important than ever.
Get counsel involved early to stay ahead of regulatory roadblocks.
Make the case for a deal – clearly and early.
Health systems we talked with have been upended by the trend of traveling employees, especially nurses. In many cases, the cost structure of the organization has risen by 20 percent. The impact can not only be felt in the financial statements, but also in quality and safety measures. Temporary staff are often working in unfamiliar departments, with new equipment, and without the muscle memory on a team. The New York Times covered this well a few ago:‘Nurses Have Finally Learned What They’re Worth’
Health systems we talked with have been upended by the trend of traveling employees, especially nurses. In many cases, the cost structure of the organization has risen by 20 percent. The impact can not only be felt in the financial statements, but also in quality and safety measures. Temporary staff are often working in unfamiliar departments, with new equipment, and without the muscle memory on a team. The New York Times covered this well a few ago: ‘Nurses Have Finally Learned What They’re Worth’
The degree to which historically high-performing systems have been shaken in 2022 was a surprise. While we don’t yet see the impact on M&A volume statistics, I think we will in the coming quarters.
Transparency is key. Designing and implementing a competitive process to provide fiduciary decision-makers with a basis of comparison has always been central to demonstrating to regulators (e.g., state attorneys general) that the terms and conditions achieved in a particular transaction are “fair.” Where a lot of systems go wrong is not using the LOI stage to proactively communicate the rigor of the market clearance, the rationale behind the combination and merits of the partnership to AGs.
SENIOR HEALTHCARE ATTORNEY
My biggest takeaways were related to the conference’s antitrust track. Essentially, between the FTC’s new “holistic approach” to merger review and the increased scrutiny on affiliations, we can expect more vigorous reviews on the federal level. When you layer that with new state laws requiring pre-transaction notifications, the shifts could have material impacts on the approach and timing of some transactions.
Given the pace of PE transactions in 2021, I was surprised to learn that unspent capital is still near record highs.
Prepare and prepare some more! Provider organizations considering a transaction would be well served to understand their organization’s operations, the market conditions, and the basics of the regulatory landscape. Deals are still moving very quickly whenever possible, and being well organized with good professional support can make a big difference.
Whether it is on the equity and funding side, or on the compliance side, healthcare transactions are under a tremendous spotlight from every level. Couple this scrutiny with a greater demand by sellers for creative upside capture (e.g., earnouts, aggressive liability limitations, representation and warranty insurance growth, etc.), and there is significant pressure on what the market will support in transactions.
Healthcare transactions are always under scrutiny, so many practitioners see it as simply part of the practice. But hearing so many seasoned practitioners raise the flag on the new long-look landscape was eye-opening.
Transaction fundamentals matter more than ever. That means good governance behind an organized, clean transaction process being run by reputable counsel. Add in the antitrust scrutiny and greater examination of transitions, and I think we will see an uptick in deals that stall, fail or unwind – and that’s when the quality of the transaction will be examined in the public and courtroom.
The keynote speaker discussed the returns on investment for private equity investments in healthcare. One of the statistics mentioned was that almost half of the returns enjoyed by PE investors in healthcare in the last decade have come from the increased multiples. Meaning, the improvement in multiples provided as much of the return on investment as revenue increases and margin improvement combined. Can we expect multiples to continue to increase over time from current levels?
I heard an overall uncertainty, and some anxiety, regarding the level of anti-trust enforcement going forward. The administration has definitely communicated an increased focus on healthcare transactions, but the level of enforcement beyond acute care seems to be uncertain.
Also, an interesting fact conveyed by the keynote speaker is that valuation creation in private equity-backed entities, historically, has been through revenue and multiple expansion, not margin expansion. That leads to the question if such growth is sustainable.
The biggest surprise to me is the prior noted comment regarding the lack of margin expansion in private equity-backed deals. This runs counter to the MSO model of creating efficiencies through scale to generate incremental value.
I think the tried and true approach of involving competent healthcare legal counsel early in the process to navigate regulatory and transactional landmines remains key, along with involving healthcare-specific financial and compliance advisors. Several stories were shared at the conference of bad outcomes when this isn’t followed.