Adam Sorensen, Ernst & Young LLP Strategy and Transactions Principal, shares his analysis on healthcare M&A activity and what trends to follow in 2021.
During Q1 2021, the healthcare industry experienced fewer M&A transactions compared to Q1 2020, but the size of the deals was larger, according to a recent Kaufman Hall report.
The pandemic had a slight impact on healthcare consolidation, with less than 80 hospital mergers happening in 2020, but M&A activity is already picking back up.
Adam Sorensen, EY Americas Health Integrations and Divestitures Leader and Ernst & Young LLP Strategy and Transactions Principal, recently shared with HealthLeaders his analysis on industry M&A activity and what trends to watch out for in 2021.
"There was a lot of activity that was in flight in the first quarter of ," Sorensen said. "Not surprisingly, due to the uncertainty created by the pandemic, in the March to June timeframe a lot of deals either went pencils down or were canceled."
Sorensen said some of the deal cancellations will be permanent, as some of the transactions could have been tied to timing but noted that M&A activity started back up in the late summer and early fall of 2020. This included a significant increase in deals that had been on pause, as well as an influx of new transaction activity.
"While there haven't been a ton of headline-grabbing deals in healthcare since that fall timeframe, we're seeing transaction activity right now in the sector unlike anything we've ever seen," Sorensen added.
Due to health systems and health plans trying to put their large cash reserves to work, there’s also a lot of joint venture conversation happening, he said.
"While you haven't seen a ton of announcements of significance recently, expect that to change in the coming months. We expect there to be robust activity continuing through the rest of 2021, well into 2022 and potentially beyond," he added.
Improving Patient Care
While the pandemic affected the size and frequency of healthcare M&A activity, COVID-19 also accelerated the focus on consumerism and provider organizations being ‘patient-centric,’ Sorensen said.
"Now the digital front door to health systems has become a much more important aspect of the business because of the growth in virtual care,” he said, adding that there's still work to be done in the improving technology space.
"While most of the health systems have a well-established her [platform,] we're seeing from a CRM and an ERP standpoint that there's going to be a lot of adoption in that space especially with regard to cloud type technologies."
Sorensen also said that optimizing capacity is crucial as provider organizations grow through M&A activity, keeping patients within the system to create a stronger referral network to drive improved quality of care and outcomes in care.
M&A can also help reduce costs in the back office, Sorenson said, resulting in more money to invest in patient care and technology, which can lead to better outcomes.
"If you look at the level of scale and consolidation that exists in the health system sub-sector, it still lags significantly behind almost every other industry in the country," he said. "The need to have your own individual revenue cycle system, your own supply chain organization, and having that in an independent manner creates additional costs for the system."
What to do about Telehealth
The enduring popularity of telehealth is another trend that healthcare leaders can expect to continue to focus on in 2021, according to Sorenson.
"There's still some pending legislation out there to make some of the rate changes that were instituted at the beginning of the pandemic more permanent," Sorensen said.
The scaling of telehealth operations early in the pandemic was a historic endeavor, accelerating years-long timelines to meet unprecedented care demands.
"One client we spoke to said that they had a five-year [telehealth] plan that they essentially rolled out in five weeks, so there was a significant acceleration in the creation of telehealth capability."
Forward-looking, Sorenson said there will be opportunities for virtual care optimization and health systems need to think differently about what care must be delivered in-person as opposed to via telemedicine.
"This is a question not only on the care delivery side but also with regard to the back office and the individuals working remotely, opportunities for offshoring and outsourcing, [and] alternative service delivery models," he added.
Melanie Blackman is a contributing editor for strategy, marketing, and human resources at HealthLeaders, an HCPro brand.