Big Bets to Build the Future of Care
The healthcare industry has experienced high deal flow for the past several years and the pandemic has shown the value of partnerships. Shared resources, access to capital, expanded geography, technological advancement and cost synergies are growing in importance and we expect that facing the industry’s challenges alone will become less and less common.
According to the 2022 BDO Healthcare CFO Outlook Survey, while many healthcare organizations prefer a cautious approach to growth, 23% say they will employ a big risk, big reward growth strategy in 2022. For many, that may mean prioritizing transformation.
The pandemic accelerated change across the industry, from patient behavior in how, when and where they seek care, to the importance of data analytics to track care outcomes and forecast staffing and service needs.
Now, CFOs are responding to these changes by pursuing digital transformation strategies, partnering to innovate in care delivery and creating new revenue streams.
Tracking Transaction Outcomes
The survey showed that 32% of healthcare organizations are planning to pursue a debt restructuring in the next year. By contrast, only 17% of respondents had the same plans going into 2021. Furthermore, a full 62% of healthcare organizations plan to pursue a transaction in the next year.
In addition to these concrete plans, 29% of healthcare organizations say they are considering acquiring physician practices, and 37% may join a clinically integrated network (up from 30% in 2021).
Deal volume and deal value are both on the rise. However, while the healthcare megamerger trend continues, such deals may also be subject to greater scrutiny. In July, President Biden called on the Department of Justice and Federal Trade Commission to enforce antitrust laws and called out the healthcare industry specifically, noting that competition in the market is important to price management for patients as well as quality of care.
SPACs are also changing the calculus and opportunities for healthcare deals by opening up another source of capital for healthcare companies. Healthcare SPACs raised $11.1 billion in 2020, and at the start of Q4 2020, there were 60 healthcare SPACs still looking for targets, according to Evercore. Notably, 8% of private healthcare organizations plan to enter into a SPAC in 2022.
No matter the deal type, the pressure to ensure deals can unlock value and deliver on both operational synergies and improvements in patient care and outcomes is likely to rise in 2022. The good news is that healthcare CFOs are bullish on ROI based on their past experiences.
When survey respondents think about healthcare deals over the last 3 years, 45% say their planned deal synergies met expectations and 19% say the synergies exceeded expectations.
This tracks with a recent study published in JAMA Network Open which found rural hospitals that pursued M&A reported better patient outcomes, including a greater reduction in inpatient mortality for several conditions, compared to independent hospitals.
As King & Spaulding notes in response, “A merger or acquisition is oftentimes the only available lifeline for an independent rural hospital that provides critical services for its community…Many rural hospitals have seen improvements in quality of care through increased access to clinical resources and the ability to participate in value-based care models that require large networks of providers.”
While optimism around M&A is high, a word of caution is in order. We’ve witnessed multiples increase and deals get pricier. At the same time, the entire industry is pressured to do more with less. As these trends continue, we’ll likely see more deals fail to meet expectations, and it’s possible that some organizations will pull back on deal-making altogether.
Investment in Innovation
Healthcare deals and areas of investment will also likely surround the industry’s biggest opportunities. As healthcare organizations work to enhance the patient experience, improve current offerings and add new capabilities, the role of partnerships will often be increasingly important. It will also be important for many organizations to take a close look at in-demand care areas.
For investors, the consumerization of healthcare creates opportunity. As Jon Santemma, Co-Founder of Regal Healthcare Capital Partners recently shared on BDO’s Private Equity PErspectives podcast, “Urgent care is the poster child for the healthcare experience that's better, more convenient and more accessible than the emergency room it was trying to replace. We see that trend continuing. You have high deductible plans and consumers spending more of their own dollars on healthcare. When you spend your own money, you expect a better experience.”
Interestingly, primary care investment decreased sharply over the past year, particularly among hospitals and health systems, academic medical centers and physician and provider groups, and only 31% of respondents are planning to partner with a capital provider or operator for primary care in 2022.
This trend could be traced back to multiple factors, largely related to investments in the form of deal making. First, deal prices have increased sharply in primary care, which could be pushing suitors away from pursuing deals in this space. Second, labor shortages in professional services — such as legal, accounting, auditing and banking — are making it increasingly difficult to close deals. It’s possible we’ll start seeing a drop-off in deal volume across the board as these pressures continue.
By contrast, when it comes to healthcare services, urgent care and other ambulatory care centers are a top area of investment, trailing only specialty services (including cardiology, oncology and dermatology) and virtual and telehealth.
Investments aren’t the only way to grow — partnerships frequently play a crucial role in the maturity of healthcare organizations. Behavioral health is the most in-demand area of focus for growth through partnership, followed by post-acute residential care. This may be due in part to the specialized expertise, or real estate needs of those capabilities.
The growth of behavioral and virtual health opportunities appears to have been accelerated by the pandemic — both in necessity of access to care outside of the medical facility, and in the increased awareness and national conversation around the importance of mental health. Kaiser reports that in March 2021, 47% of adults said the pandemic affected their mental health, and the disruption, grief and solitude can have lingering effects.
Behavioral health is also a crucial part of preventative healthcare, and it can bring major ROI. A 2016 report from the World Health Organization found that every $1 invested in mental health returns $4 in better health and productivity.
Healthcare organizations may stand to benefit too. Behavioral and telehealth start-ups continue to attract investor cash, and market research suggests that the behavioral health industry could be valued at nearly $100 billion by 2028.
As healthcare organizations across every sector rethink the future of care, they need the right mix of creativity, investment and risk.
Finding the right partner or investor will be critical. When exploring partnerships or transactions, it’s wise to start at the end: What is the desired goal or end state? Finding partners who are aligned with your mission and putting patient outcomes at the core of decision-making will contribute to the development of a successful process.But the deal is just the beginning. Integration is what separates a great idea from a great outcome. Healthcare organizations should plan carefully throughout the deal or partnership process for operational integration and scale, employee enablement, data integration and analysis, and patient care improvements to maximize value for the patient and all of the organization’s stakeholders.
Looking to boost your financial resilience to face the year ahead with confidence?
The 2022 BDO Healthcare CFO Outlook Survey polled 100 healthcare industry CFOs with revenues ranging from $250 million to $3 billion in October 2021. The survey was conducted by Rabin Research Company, an independent marketing research firm, using Op4G’s panel of executives.