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Healthcare M&A Deal Value Up 152% in Q1 2014

 |  By John Commins  
   May 27, 2014

Flat or declining deal volume doesn't indicate that the M&A market is cooling, but increasing deal values indicate that larger deals are in the works, says a PwC analyst. At the same time, hospitals and health systems are slowing their pace of physician practice acquisitions.

The volume of deals in health services mergers and acquisitions for everything from physician practices to health plans in the first quarter of 2014 held pace with the same period in 2013, even as the total deal value rose 152% to $12.3 billion, according to PwC's Q1 2014 US health services deals insights report.

Brett Hickman, partner and PwC's U.S. healthcare deals leader, says he expects healthcare services M&A's to continue at a strong clip in the near term as the sector adjusts to value-based reimbursements, lower inpatient volumes, and federal mandates.

"The biggest issue is sustainability, especially as payers and providers look at how they can compete in a population health world, whether it is a high-deductible plan that is impacting utilization, or appropriate medical management being done on a medical home model. All of those things have large implications on utilization  of traditional settings of healthcare," Hickman says.

"Organizations realize that not only do they need to invest significant capital to make the journey to a new model, one that is less acute but provides better and more frequent access at a much lower cost. They realize they are going to have significantly larger population to take that risk. To do that they have to be in an environment where the economics are totally different to be able to take on that risk."

Larger Deals in the Works
"Size does matter. Market share matters. You have to have a broader population to spread that risk. You need access points across a broader continuum and you have to be able to do that in a highly efficient and cost effective manner."

Hospital deal volume in the first quarter of 2014 fell 43% when compared to the first quarter of 2013, from 21 to 12. However, deal value increased from $320 million in the first quarter of 2013 to $388 million in the first quarter of 2014.

Hickman says declining deal volume doesn't necessarily indicate that the M&A market is cooling, but increasing values indicate that larger deals are in the works.

"We are going to move from systems buying individual hospitals to systems buying systems. There will be fewer deals, but the deals are going to start to get bigger and much more complex," he says.

 

In the managed care sector, M&A activity was up slightly in the first quarter of 2014 as deal volume increased 150% compared to the first quarter of 2013. Deal value was not disclosed for any of the deals announced this year.

Physician Management Companies Lead Practice Takeovers
The PwC US report shows that the ground is shifting in physician practice acquisitions, with physician management companies taking over the dealmaker role once held by hospitals.

Hickman says hospitals and health systems are slowing their pace of acquisitions. In 2011, hospitals and health systems accounted for 51% of all physician practice volume, but by 2013 accounted for 14%.

Physician practice announced deal volumes were down slightly in the first quarter of 2014 when compared with the first quarter of 2013. However, physician management companies accounted for all nine of the reported practice affiliation deals reported in the first quarter of 2014.

Hickman says this trend will likely continue in the near term because specialty physician groups are adjusting to higher regulatory costs and reimbursement changes.

Only So Many Physicians Can be Leaders
"Physicians want an alternative to selling out in their minds to a health system and the deals aren't as sweet as they used to be," Hickman says. "Hospitals have become a lot more wary of promising too much. You can only make so many physicians in your system leaders. Like all Type A personalities, everybody wants to be the boss and there are only so many roles for that."

"I like the fact that there is some alternative for physicians. Competition is healthy. It keeps everybody honest," he says. "The reality has set in that from the physicians' perspective, their value to care delivery has never been greater and yet they have never been treated worse from a reimbursement perspective, from the government, from leadership, from the media. All of those."

"Now they are finally waking up and realizing they are the only ones who can do this and they can do it better if they do it around the clinical delivery system."

In this new dynamic, Hickman says, independent physician organizations such as California's Monarch Healthcare are becoming more integrated on the care management side and taking on risk.

"The competitive model to the institutionally driven accountable care organization or the clinically integrated network or population health systems are going to be physician driven; Kaiser Permanente models without bricks and mortars," Hickman says.

"The payer and the physician together are thinking 'we can buy a hospital bed anytime we need it. If we move to population health we have too much institutional assets. So, it becomes a commodity that can be purchased on a needs basis.'"

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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