Healthcare M&A activity expected to be flat or down in 2019

Almost 60% of healthcare investors and operators said industry mergers and acquisitions will either stay the same or decrease in the next year, according to a recent survey.

The survey, conducted by Capital One Healthcare, indicates that 48% of respondents said healthcare M&A will stay the same in the coming year as it has been within the past 12 months, while 10% said it will be lower.

Al Aria, a senior managing director with Capital One Healthcare, said he thinks those results reflect respondents' reactions to the current state of geopolitical uncertainty.

“I don't think it's plateauing from an opportunity standpoint, I think it's very robust right now,” he said. “We're seeing record M&A. I think some people might be questioning how much higher it can go, because we're already at such a high level.”

There's “tremendous” opportunity for companies to grow organically, Aria said. On the payer side, Medicare Advantage could provide a huge boost in covered lives. For some providers, M&A deals can help them truly move into the elusive world of value-based care, which has been slow to catch on.

Other healthcare experts were surprised by the survey's M&A findings, arguing they have not seen indications of a slowdown.

Don McDaniel, CEO of Canton & Co., a healthcare consultancy in Baltimore, said he thinks the trend toward consolidation will continue. Some factors that could be slowing the pace: Health plans are getting so big, they could be running out of targets.

“We may see a redirection toward enabling or enhancing assets,” McDaniel said, “because if you're one of the big health plans, how many more targets do you really have?”

McDaniel said he doesn't think the metric is indicative of a plateau in healthcare deals. “It's a redirection or a level setting,” he said. “You do this crazy consolidation for a while, and then you have a level setting.”

Michael Cole, managing director and healthcare industry leader in Alvarez & Marsal's transaction advisory group, also said his firm doesn't see any signs of an M&A plateau on the horizon. “We see a lot of reasons for why the interest in this space is growing,” he said. “Healthcare continues to grow at a mega level.”

One hang-up that could hamper some deals: High-priced targets, Cole said. Investors might be waiting on certain deals until prices come down, he said.

Other findings support that notion. About 1 in 4 investors who responded to a July survey by West Monroe Partners said their top challenge in completing healthcare mergers and acquisitions was a shortage of attractive targets. The top reason? They were too expensive.

Asked to identify the biggest healthcare growth segment in the next year, 46% of Capital One Healthcare's respondents said healthcare information technology. Another 30% said home health and hospice. Eight percent said insurance providers and another 8% said assisted living and skilled nursing.

Healthcare IT also took the top spot in a 2016 Capital One Healthcare survey. That year, 66% of respondents said health IT would see the most growth.

Capital One's Aria said that all comes back to the ongoing shift toward value-based care, which providers can't do without data. The ultimate success of the proposed CVS Health-Aetna union that just won U.S. Justice Department approval will be a good indicator of how having data on patients actually can drive down costs, he said. Aetna will be able to collect all of the data on its members and collaborate with CVS to ensure people are compliant with their prescriptions and educated on chronic diseases, Aria said.

“If we do end up with a value-based care system, we need to be able to measure it somehow and there's no way to measure it other than data and outcomes,” he said. “That's why you're seeing so much investment in that.”

Unfortunately for providers, McDaniel said, the analytics services market is a mess. Tools are proprietary, siloed, and they're not sharing data, he said. “I think there is a legitimate question as to, 'Who is the company the market is going to start to rely on to be an honest, credible broker of these capabilities?'” McDaniel said.

The running joke with hospital companies in Nashville, where Cole is located, is to ask what healthcare IT system they're using.

“They say all of them,” he said. That's because most have grown through acquisition, and took on hospitals that already had certain software.

Aria said he's not surprised that home health and hospice continue to take second place. The cost difference between a hospital bed and home health or hospice is “astronomical,” he said. Patients also prefer those settings over hospitals, he added.

More than 60% of the respondents to Capital One's survey said their transition to value-based care is just beginning. About 30% said they were about halfway. Six percent said nearly complete, and only 2% said they were fully transitioned.

Aria said he doesn't think that response indicates resistance to the trend, it's just being hampered by the ability to get reliable, quality data.

The status quo is powerful, and physicians are especially leery about taking on downside risk, McDaniel said.

Another problem is that investors don't see that they can make money in a value-based payment model, Cole said. Until that happens, it's going to have a hard time catching on, he said.

On the provider side, it's hard to nail down a specific definition of value and translate that into a policy that works for different kinds of providers, Cole said. “You probably have a lot of providers that just don't believe value-based care is a real thing,” he added.

Also in Capital One Healthcare's results, 72% of respondents said they expect their business to perform better next year, compared with 68% in 2016. No respondents said their business would perform worse in the current survey, compared with one in 2016.

Capital One Healthcare compiled the survey in advance of its annual conference for healthcare payers and providers. This year's gathering will feature about 200 healthcare investors, bankers, operators—payers and providers—and thought leaders, about half of whom took the survey.