By all accounts, 2019 was a year of continued robust healthcare M&A activity by private equity firms, significantly outpacing 2018. Private equity firms continued to deploy significant capital broadly across the healthcare industry during 2019 as demands to solve for industry inefficiencies, value-based payment models, and overall cost reduction all point toward private equity investment as an attractive option for healthcare businesses with aggressive growth strategies. In addition to the sustaining performance of the U.S. economy as a whole in 2019, the changing reimbursement and regulatory landscape of the healthcare industry contributed to deal volume overall and in particular sectors.
Reimbursement changes affect home health, hospice, ASC deal volumes
We expect a spike in home health transactions in 2020 and beyond as investors and operators get a better handle on the fallout from the Patient-Driven Groupings Model (PDGM) by CMS, which went into effect January 1, 2020. With an anticipated 6.42% Medicare base rate reduction for home health, revenues of home health providers are estimated to decrease by up to $1 billion in 2020 alone. Investors took a wait-and-see approach to this change, slowing M&A activity in the home health sector in 2019. As the impact of PDGM becomes clearer, dealflow should increase, particularly acquisitions of smaller home health agencies that may be struggling to adapt to the new reimbursement model.
On the flip side, buyers – both investors and strategics – directed more investment in 2019 toward the hospice sector. Changes in reimbursement also played a role in this shift. CMS is updating the payment rates for hospices by 2.6% for 2020. This increase will result in additional payments to hospices of up to $520 million compared to 2019. And beginning in 2021, Medicare Advantage will expand to “carve-in” hospice benefits for those Medicare Advantage organizations participating in the Medicare Advantage Value-Based Insurance Design (VBID) Model. In addition, hospice providers have expanded their offerings to include services such as palliative care, personal care, and home-based primary care in order to meet the needs of the growing senior population. The foregoing factors make the hospice sector ripe for investment. As a result, private equity interest in the hospice sector and deal multiples were at an all-time high in 2019. This is a trend that likely will carry over into 2020.
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Smaller transactions proliferated in the ambulatory surgery center (ASC) sector in 2019. However, we should expect to see continued interest in ASCs, particularly with upcoming changes in reimbursement. Under the ASC payment final rule for 2020, CMS is increasing rates by 2.6%. As a result, total payments to ASC providers in 2020 are expected to increase by $230 million compared with 2019. In addition, the list of services payable in the ASC setting is set to expand, including coverage for total knee arthroplasty (commonly known as a knee replacement). These announcements by CMS, on top of an increasingly aging population with surgical needs and overall shift of surgical procedures to the outpatient setting, present ongoing opportunities for both ASCs and their investors.
Greater PE interest in physician practices, HIT
Continued robust investment activity by private equity in the physician practice sector was a resounding theme of 2019, including the launch of several new platforms. Private equity has gained traction in the physician practice sector in recent years due to a number of factors, including the ability to deploy substantial capital to further enhance ancillary service lines, technology capabilities, compliance functions, and administrative support services.
An impactful trend from 2019 that is likely to continue this year and beyond is the expansion of interest by private equity investors into additional specialties, such as orthopedics, gastroenterology, urology and oncology. In addition, 2019 saw exits from some existing platforms from early consolidators in specialties such as ophthalmology. Following this lead, we can expect 2020 to be another year of exits from mature platforms in other physician specialties.
Healthcare information technology companies have seen an uptick in M&A activity for several years, and 2019 was no exception. But the landscape of this sector is changing – and fast. Increased investment by private equity firms in service sectors has reinvigorated interest in the technology platforms selling into them, including companies with enhanced revenue cycle management, electronic medical records, and practice management solutions. Private equity investors and their portfolio companies are increasingly seeking out strategic partnerships to implement innovative technologies to drive down costs and increase efficiencies. Add to that the wave of digital health, med device “apps,” and arrival on the healthcare scene of companies such as Amazon, and we very well may have the perfect storm.
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Undoubtedly, healthcare information technology will continue to disrupt traditional healthcare delivery models. Given the dynamic nature of the information technology space and demand for innovative healthcare solutions, this makes for attractive investment opportunities and consolidation plays heading into 2020, especially acquisitions of companies that have a focus on innovation, cost reduction and quality improvement. We also can expect to see the expanding presence and new entry of traditionally non-healthcare companies in the industry with solutions that disrupt traditional industry practices.
As predicted, 2019 was a year of continued growth of private equity investment in healthcare. It is likely 2020 will only provide more of the same, notwithstanding the uncertainty of the 2020 election and concerns over an eventual economic downturn. How will the post-acute sector shake out? How long will the physician practice consolidation wave continue? What’s next on the healthcare technology scene? These are all questions to be answered and trends to watch for in 2020.
Photo: freedigitalphotos user Salvatore Vuono
Angela Humphreys is chair of the Healthcare Practice Group at Bass, Berry & Sims PLC and co-chair of the firm’s Healthcare Private Equity Team. With more than 20 years of experience, she counsels private equity firms and national healthcare organizations on mergers and acquisitions and investments in the healthcare sector. She can be reached at [email protected].
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