Healthcare-related mergers and acquisitions declined for the third consecutive year in 2001 as investors remained shellshocked from the bursting of the technology bubble and the collapse of so many PPMs and IPAs.
And though conditions may improve in the new year, the capital that flowed so freely in the late 1990s is a lot harder to come by.
"There's going to be a lot less risk taken," says Daryl Demonbreun, a principal in Delta Health Care, a physician practice consulting firm in Brentwood, Tenn. He says financiers will be looking for stability, longevity and a solid business plan rather than just a good idea in assessing potential takeovers and investments.
"I think the capital is going to come back, but I think (lenders) are going to be looking more carefully," Demonbreun says.
Healthcare services companies were involved in just 83 mergers and acquisitions in the third quarter of 2001, according to Irving Levin Associates, a New Canaan, Conn., research firm that tracks merger activity in healthcare. That is down from the 129 in the third quarter of 2000.
For the nine months ended Sept. 30, 2001, merger activity in healthcare services declined to 315 deals, 21.1% fewer than the 399 in the similar period the year before.
The third quarter, which includes the weeklong shutdown of U.S. markets in the wake of the Sept. 11 terrorist attacks, also saw just five initial public offerings in healthcare, according to Levin Associates.
However, business started to pick up on the M&A and IPO fronts during the fourth quarter, especially in managed care. Blue Cross Blue Shield licensee Anthem had a blockbuster offering in October, raising $2.1 billion to become the nation's fourth-largest publicly traded HMO.
WellPoint Health Networks, based in Thousand Oaks, Calif., will have 15.9 million enrollees once it closes pending takeovers of Missouri's RightCHOICE Managed Care and Maryland's CareFirst BlueCross BlueShield.
But M&A activity remains slow in regard to physician practices. Pin that more on the lingering effects of the PPM debacle than on the sagging economy, experts say.
While the high-profile implosions of PhyCor, MedPartners, Coastal Physician Group, KPC Medical Management and Physicians Resource Group grabbed the headlines, a number of smaller mergers lurked in the shadows during 1999 and 2000, according to Michael LaPenna, a Grand Rapids, Mich., healthcare consultant.
"This is going through the unwinding now--the second-tier companies that never made it to the IPO level and unwinding of hospital-sponsored networks that have fallen," LaPenna says. As management contracts expire, a lot of small practices have been breaking these ties, he says.
When it comes to PPMs, "There really is nothing left but the shouting and the lawsuits," LaPenna says.
In information technology, "I think you're going to see a lot more consolidation in this area," Demonbreun forecasts. "That's not bad in the sense that there is going to be more R&D money available."
Some large companies could buy smaller ones that have a piece of technology of use to the larger firm, but only those who can deliver will be sought, he says.
An example is powerhouse GE Medical Systems, which purchased Data Critical Corp. and VitalCom last year for their wireless data management functionality.
Demonbreun says there will be fewer startups in the tech sector because venture capital is scarce. But the aggressive interest rate-cutting by the Federal Reserve has made borrowing more affordable. LaPenna notes that a project that might not be economically feasible with a loan carrying 9% annual interest might work if financed at 6%.
"Hopefully we're going to see doctors using the low interest rates to consolidate and upgrade their practices," says LaPenna.
As employers seek to control the cost of benefits, a massive shift back to HMOs may further pinch doctors already stung by reimbursements that have not kept up with expenses.