Healthcare merger and acquisition activity likely to stay strong in 2016

Healthcare merger and acquisition activity is likely to remain strong in 2016, driven by the growth of value-based payment models.

Private equity players will continue to scout out primary-care physician practices that have expertise in the managed-care environment. There may be more consolidation of hospital-based medical specialties such as anesthesia, similar to last year's TeamHealth takeover of IPC Healthcare.

Post-acute-care providers have been operating in a fragmented market, but that could change as hospital systems take on greater responsibility for outcomes. And the walls between health systems and insurers may continue to break down.

Possible constraints to some deals are the federal government's tough antitrust scrutiny and regulatory uncertainty related to the 2016 elections.

Slava Girzhel, managing director at KeyBanc, anticipates more provider consolidation because independent provider groups “are just less able to participate in value-based care. If you're going to shrink the pie, you're going to need to take costs out of the system.”

Girzhel predicted “post-acute care will probably come back in vogue. It has a tremendous impact because it has a major referral pattern.”

On the possibility of deals between health systems and insurers, Heather Delgado, a partner in the Chicago office of law firm Barnes & Thornburg, pointed to Ascension's $50 million acquisition last February of U.S. Health and Life Insurance as an example.

On the financing front, investment bankers said they expect capital to remain available to providers and the impact of the Federal Reserve's interest rate increase to be negligible.

About 71% of healthcare chief financial officers who responded to TD Bank's annual survey said they don't expect a rate increase to affect their borrowing. About two-thirds expect to increase their capital expenditures in 2016, though 23% said the increase is likely to be modest.

Dealmakers become skittish, however, when there's regulatory uncertainty such as a major U.S. Supreme Court healthcare decision looming. That caution is likely to grow as the November presidential and congressional elections approach.