Providers Ripe for M&A?

Cruickshank: Providers know that people will eventually get care for what is critically important to them. Now that many have begun doing nonessential treatment, they will see more people getting back into the system.

But they can’t make up overnight for almost a year of revenue removed from the system—and more specifically revenue from mostly commercial members, which are twice as profitable as public members. So there is an underpinning inside the entire system. Systems that weren’t healthy before are now on life support. It’s easy to say it will be rural versus urban, but even in urban centers with a lot of competition, one hospital may not be winning because COVID has cut their volume too much. One of the byproducts of that is that these hospitals will become vulnerable to M&A activity. And if these large regional or national delivery systems take over local hospitals, it usually means you are going to lose intimacy as a community. It’s an environment that is ripe, where if a group was a winner and has capital, they can acquire assets to deliver on their mission, which is to own more of the healthcare delivery system.

Cruickshank: If you broke physicians into two camps—specialists and primary care—PCs were impacted less through COVID because they were the first to come back and deal with their community health needs. Specialists were crushed. Inside this group, the vast majority are fee-for-service, so they didn’t get paid. A lot of primary care doctors in more metropolitan areas have moved to capitation, so they were getting paid regardless of whether they saw anyone or not. The big winners during COVID were probably the Kaisers that were capitated and took care of their physicians. The employer plans were still paying bills even though people weren’t going to the doctor.

Specialty groups have had a higher degree of stress than PCs, and they, like hospital systems, have lost out on billions of dollars in revenue: income for infrastructure and growing practice needs. I would say that specialists may not want to see this happen again and may be more vulnerable to M&A activity now. If someone is knocking on their door to buy, they might listen this time.

Greenbaum: It would be counterintuitive to say 2020 wasn’t an active time for transactions. It was active because of the environment and interest rates were extremely low. Financing debt has never been as easy. Debt is cheap, so people could get a lot of deals in.

There is a lot of capital out there, and it’s working toward consolidation in the industry: historically high amounts of capital. This applies to the larger M&A landscape—healthcare and everything else. Investors are in search of yield. The stock market is high, and investors are looking for diversification. They want other assets that perform well but are not stocks. Huge amounts of capital have moved into private equity, and firms need to deploy that capital and are looking at what to buy.

I had a client buying orthopedic practices with private equity, moving into medicine as an investment class. They are going to buy 50 orthopedic practices, get scale, produce efficiencies and then take them public or operate at a greater rate of profit. Healthcare is a good space for that because of the aging of the population and percent of baby boomers needing more healthcare. Also, the government is a major payer, so it has stability and lots of capital is going there.

Greenbaum: Physicians are having a hard time retaining profitability. Being a doctor on the corner providing health to the neighborhood isn’t really a profitable option, though many wish it were. Rural hospitals are not seen as attractive investments or investments people necessarily want. Some specialties are a bit of a darling of investors since reimbursement rates are higher. Things seem to be moving toward specialty areas where payments are higher, like orthopedics and radiology. Those spaces are also ones that tend to have greater capital needs.

To get efficiencies, you need scale. Investors come in and say they can provide capital to aggregate providers and generate a better economic model and turn an organization from healthcare delivery into an economic enterprise. That way it feels a bit more like business than healthcare.

Greenbaum: When I saw it pushing toward healthcare, it seemed like, ‘What are we doing buying doctors? Doctors aren’t an investment.’ In a way it doesn’t feel right. It feels like a dangerous place to go, but there is an enormous amount of that happening today. Providers are giving up on an independent path because they want to focus on being a healthcare provider, not a businessperson. If they sell, they can just be a doctor again. Hospitals are doing it too; scale among them generates efficiencies and value.

Olson: There has been a lot more outreach from hospitals into home health. We are seeing many facilities moving into home health situations where they can see patients but in a different setting. It’s not necessarily M&A activity, but there are a lot of factors that are shaping what healthcare is going to look like in the coming years.

From a business level, we are seeing M&A where people are trying to build larger networks and capture more of the Medicare and Medicaid population. There is a direct contracting entity that went live on April 1, and it’s a new vehicle for providing benefits to the Medicare population.

There has also been a great amount of development in facilities and labs because of COVID testing. Startups and facilities have had to pivot into COVID, particularly as fewer people need drug testing for new jobs.

I think that looking at private equity is a precursor to where things are going to go. We work with a lot of private equity firms looking to support localized physician networks that contract with employers or the big health plans of the world to provide primary care and do it in a way that is technology enabled. People can send a message to a doctor and get a response or online chat to prequalify a situation to determine what is the most appropriate course of treatment. A doctor can look to see if they have a spider bite versus a rash versus something else. Or even coordinating lab results and looking at the digital side of how a physician will interact with labs or testing or other specialists.

There is massive money that can be involved in those processes. We are talking about managing the health of a population in the tens of thousands or hundreds of thousands of people. That can amount to a lot of money from the physician group side.

Greenbaum: Brokerage is one space that has had a lot of consolidation. One of the things that fueled all of the consolidation is that insurance distribution is a stable economic model. And, again, scale by aggregating brokers is a good space to be in.

Anyone who has any kind of scale has people calling every day to acquire them. Either other brokers or investment bankers are looking to buy. The investors are largely funded by private equity looking for more acquisition opportunities.

Greenbaum: I don’t really think it’s going to change the way brokerages work. What was interesting to me is a year ago I looked at the ability to conduct and complete transactions because it is part of a business model. We would grow organically by clients and inorganically by purchasing other firms.

You would meet with a seller, spend time with them and decide if it fit with your business, and they would see if you were an attractive suitor. You would do your due diligence to evaluate the economics of the business.

Then overnight, it went virtual, just like everything else. We went from spending all of our time on planes to doing interviews on Zoom. At first, I thought it wouldn’t really work, and, much like rest of the world, we got to the same place. We had a banner year from an acquisition standpoint and sort of surprised ourselves.

I was used to flying into a city and meeting a potential seller and having dinner; it’s like dating leading to marriage. These are people that you think of as part of your family, and now there are many businesses we’ve acquired and we have never physically met them or their employees.

Greenbaum: The early returns are positive. We are feeling optimistic about the synergies being created and relationships we have built with the firms we’ve acquired. But it is much harder work to connect everybody. We are doing exciting things, but getting there is different and it’s a more complex path than it was a year ago.

Eventually, we will probably end up with a mixed-media model. I will welcome time to spend with people again and will ultimately settle on some form that’s face to face but with less of that than before.