KPMG thinks it's the Roaring Twenties all over again for the healthcare industry, a century after the era of economic prosperity that followed the devastating 1918 flu pandemic.
Of the more than 300 executives the Big Four accounting firm surveyed for its 2022 Healthcare and Life Sciences Investment Outlook, 70% expect to increase their merger and acquisition activity this year. More than half of private equity investors in those sectors reported they plan to participate in at least 10% more deals than during 2021, a year heavily impacted by the ongoing COVID-19 pandemic.
That's a notable prediction considering how many transactions took place last year. According to KMPG, there were 1,839 healthcare and life sciences deals in 2021, up 13.7% from 2020 and 19.2% from 2019, the year before the pandemic began. Deals per quarter averaged 460 in 2021 compared with 405 in 2020 and 385 in 2019.
"We look at this as almost like we're going to continue on the growth that we've seen and keep our Roaring Twenties in 2022 moving forward," said Ash Shehata, an author of the new report and KPMG's national sector leader for healthcare and life sciences. "The fact that we're still predicting a solid 10% on top of a banner '21 year is tremendous."
That's not to say there won't be challenges. Half of investors surveyed think rising inflation and increasing capital costs will have modest effects on M&A this year. Another 28% said those issues pose major obstacles. These were big concerns for industry executives last year, as well, Shehata said.
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Healthcare leaders' biggest challenge this year may be the demand for labor, a problem that has worsened during the pandemic as hospitals become increasingly desperate for nurses to treat waves of coronavirus patients. That's now looking like a longer-term problem, not a short-term, pandemic-related issue, Shehata said.
"The health sector seems to be really, really keyed in on this as a major risk going forward," Shehata said. "We see that in board rooms and executive suites throughout the country."
The ongoing nursing shortage received significant attention at the J.P. Morgan Healthcare Conference this month.
At the virtual event, Universal Health Services Chief Financial Officer Steve Filton said patients treated by the for-profit, King of Prussia, Pennsylvania-based health system are staying in hospitals longer even though their illnesses are less severe than seen earlier in the pandemic. The reason is that post-acute care facilities can't take patients when they're ready to be discharged because they, too, are short-staffed, he said.
Labor shortages, rising wages and inflation continue to pose problems for hospitals, home health and hospice providers, and specialty physician groups. But even during what continues to be a difficult time for the healthcare sector, the pandemic has encouraged a wave of innovation around technology, care platforms and a renewed volumes outlook, Shehata said.
The global crisis also accelerated scientific advancements and new methods for developing therapies, the KPMG report says. The pandemic has spurred higher telehealth utilization and enabled new delivery models for behavioral health, virtual care and other areas, for example.
KPMG projects resurging volume in three key categories: post-acute care, expanded acute-care services—especially within specialty medicine—and technology. Those subsectors have stayed strong throughout the pandemic, Shehata said.
"Now we're kind of getting back to these areas, the old Warren Buffett investing rules: Focus on those resilient industries," Shehata said. "Healthcare, life sciences, health insurance—those are all resilient industries in facing the mounting pressures of inflation and the pressures on the workforce."
Hospital profitability took a hit in 2021, largely because of lower elective procedure volumes and higher labor costs. For some health systems, especially large for-profit chains, the remedies were horizontal and vertical deals that expanded their reach into other sectors and diversified their revenue. KPMG counted 314 hospital and health system acquisitions last year, up more than 26% from 2020.
One example was Dallas-based Tenet Healthcare's $1.2 billion purchase of 92 ambulatory surgery centers in November. The investor-owned chain sold five Florida hospitals for $1.1 billion in June.
At the other end of the spectrum, KPMG predicts smaller health systems that struggle will likely be forced to partner with larger organizations this year.
The report also says hospitals and health systems seeking deals in 2022 will most likely look to multispecialty physician practices, primary-care groups and digital health companies. Dealmakers are likely to make transactions in the first half of 2022 to get ahead of the political uncertainty related to the upcoming congressional midterm elections, Shehata said.
The aging population driving industry growth will be a tailwind for hospitals this year, as will a return to higher elective care volumes, the report says. Headwinds for hospitals include President Joe Biden's pledge to crack down on anticompetitive consolidation, the continued push for outpatient care and the labor shortage.
Overall, KPMG expects a positive year ahead for healthcare and life sciences, Shehata said. Not only did a majority of private equity investors say they intend to do at least 10% more deals this year, but 30% of healthcare investors and 40% of life sciences investors gave the same response.
