Buoyed by the addition of two blockbuster deals, the dollar value of healthcare services mergers and acquisitions tripled during the second quarter of 2012 compared with M&A activity during the comparable quarter in 2011, according to Norwalk, CT-based Irving Levin Associates Inc., which publishes a quarterly report on M&A activity in the healthcare industry.
Healthcare services, which includes physician groups, hospitals, and managed care, recorded 133 transactions valued at $23.1 billion in second quarter 2012 compared with 139 transactions valued at $7.3 billion for second quarter 2011.
The 2012 numbers, however, include a blockbuster $3.9 billion deal that involved two German hospital companies, Fresenius and Rhoen-Klinikuma. (Levin Associates includes foreign transactions in its M&A report, but these usually show up only in the medical device, biotechnology, and pharmaceutical categories.)
Omitting that mega-deal still pegs the value of healthcare services M&A at $19.2 billion, which is more than double the 2011 value.
The surge in M&A activity reflects increased pressure on the healthcare industry to reduce costs and increase the quality of care. Everyone is "trying to figure out what they need to do that," Steve Monroe, a Levin Associates editor, told HealthLeaders Media.
Physician Group Deals
The value of physician group M&As climbed to $4.2 billion during second quarter 2012 thanks to another blockbuster, the $3.7 billion agreement between Davita, a Denver-based dialysis chain with 1,800 locations, and HealthCare Partners, which operates medical groups and physician networks with more than 2,500 employed or affiliated physicians in California, Florida, and Nevada.
There were 21 physician group M&As posted for the quarter compared with 27 transactions valued at $416 million for the comparable 2011 quarter.
The Davita-Healthcare Partners acquisition reflects the continuing effort by providers to position themselves to tightly control costs and to create alignments that enable the care continuum to be realized. This is happening across the healthcare industry, explains Monroe. "Everyone is trying to position themselves, and cover themselves, so they can deal in an environment that is still a bit unknown."
Managed Care Deals
Managed care M&A's posted nine deals valued at $730 million during second quarter 2012. Monroe reports that the largest deal was Towers Watson's $435 million acquisition of Extend Health, which operates a private Medicare exchange. The deal positions Towers Watson, which primarily consults on employee benefits, to capitalize on the growing interest in private health plan exchanges.
Managed care M&A activity for the 2012 quarter lags well behind the second quarter of 2011 when there were seven managed care deals valued at $1.7 billion. That quarter included WellPoint's $800 million acquisition of CareMore and Aetna's acquisition of Prodigy Health for $600 million.
Insurers have not been shy about moving into the M&A market to meet their needs for Medicare and Medicaid plans to meet anticipated enrollment increases. While several deals were completed in 2011, insurers are still on the hunt for acquisitions that will position them to capitalize on new enrollment opportunities presented as part of healthcare reform.
Excluding the German hospital deal, the dollar volume of hospital M&A activity for the second quarter 2012 totaled around $600 million for 21 transactions. The largest hospital M&A transaction reported in the quarter was Highmark Blue Cross Blue Shield's $275 million acquisition of controlling interest in Pittsburgh's Jefferson Regional Medical Center.
The quarter is well off the pace set for hospital M&As in second quarter of 2011 when 32 transactions valued at $3.5 billion were reported. Two blockbuster deals were the hallmarks of that quarter: The acquisition of West Penn Allegheny Health System by Highmark, with a value of $1.5 billion, and HCA Holdings' acquisition of the remaining interest in HealthOne, which was valued at $1.4 billion.
Levin Associates' Monroe expects to see an uptick in 2012 M&A activity now that the Supreme Court has upheld the individual mandate and "there is more certainty." But some uncertainty remains, particularly in relation to the upcoming elections, especially if Republicans take over Congress and the White House and try to disassemble healthcare reform.
Still. if the cost of capital remains low, Monroe says 2012 M&A activity could end up similar to that of 2011. He says the potential for tax increases could spur end-of-year activity especially in the long-term care category, which is dominated by small, private firms and individuals that may be more interested in cashing in rather than taking the tax hit.
The Levin report separates M&As in the healthcare industry into two segments: healthcare services and technology. Combined the two segments recorded 251 transactions valued at $61.2 billion for second quarter 2012. That compares with 243 deals valued at $73.5 billion for second quarter 2011.
The technology segment, which includes medical devices and pharmaceuticals, continues to dwarf the services segment in the value of its transactions. For second quarter 2012 the technology segment recorded 118 transactions valued at $38.1 billion compared with 104 transactions valued at $66.2 billion during the comparable quarter in 2011.
Margaret Dick Tocknell is a reporter/editor with HealthLeaders Media.
