Although some industry commentators predicted a decline in healthcare M&A transactions following a banner year in 2015, final 2016 deal statistics show that the industry continued its positive trajectory.
A January 2017 report by Irving Levin Associates revealed that total deal activity in the healthcare space increased between 2015 and 2016. This continued growth on 2015 deal flow levels should be seen as good news on its own for the growing and dynamic healthcare industry. In addition, as we look forward to sector activity in 2017, there are indicators that activity in the health provider space may be even more robust than available aggregate health sector deal statistics suggest.
Much of the integration activity in this sector is not accounted for in M&A reporting statistics. Many healthcare provider organizations looking to expand and collaborate have elected to pursue joint ventures and partnerships rather than mergers and acquisitions. For example, in September 2016 alone, Becker's Hospital Review reported 67 separate hospital transactions and partnerships. When compared to the grand total of 49 mergers and acquisitions publicly announced in the entire first half of the year, it is clear that affiliations, joint ventures and other relationships are a large part of the complete picture. The proliferation of health provider joint ventures and other affiliations demonstrates that the industry is actively employing non-M&A strategies to meet the challenges healthcare organizations increasingly face in the current healthcare environment.
Historically, joint ventures and other strategic alliances have been challenging in the healthcare space because of the difficulties involved in integrating distinct organizations with different business models, cultures and philosophies. However, such arrangements are increasingly popular today because of the important advantages of scale and a broader "footprint" in a world of fewer payors and pressures to achieve value-based delivery of health services. Joint ventures also afford both parties the relative ease of negotiating and completing deals with regard to defined services, assets or operations, as opposed to a full transfer of assets and ownership.
Organizations entering into joint ventures may have greater freedom to maintain existing governance systems, collaborate with a wide range of organizational partners, and maintain areas of individual distinction and valuable goodwill in the market. Joint ventures can, in certain situations, pose fewer risks and result in lower transactional costs for healthcare provider organizations. They may also enable hospitals and providers to enhance their levels of prestige and access to capital without the same degree of regulatory scrutiny and operational disruption as traditional mergers and acquisitions. Joint ventures can sometimes be the preferred vehicle of choice for non-provider transaction partners and third party investors.
Joint ventures and partnerships can also help organizations obtain many of the benefits of mergers and acquisitions, such as improved recruitment opportunities, enhanced quality of care, greater efficiencies, and expanded leverage with payors, while still allowing for the continuity of existing operations. Joint ventures may (but not always) allow hospitals and providers to pursue new affiliations with lessened antitrust concerns.
By no means should hospitals assume that their peers are standing still or that the healthcare deal boom is reaching a plateau because related industries lumped under the "healthcare" umbrella for deal statistics purposes may not be experiencing a high rate of growth. The pressures on hospitals to manage populations, to provide high quality and cost-effective care, and comply with increasing and uncertain regulations have continued to drive substantial activity in the provider deal space. Not all of these activities will emerge in the form of, or be reported as, pure mergers or acquisitions, due in part to the various alternative structures available to providers and their deal partners.
Many industry experts expect that even more health sector deal activity of all types will occur in 2017 than 2016. Heading into the second half of 2016, PriceWaterhouseCoopers stated that this area "seems to be the hottest" in terms of attracting buyers. A recent Capital One Healthcare study showed that 61% of healthcare executives expect the industry to be more active in 2017 than 2016. Fitch Ratings echoed this sentiment and predicted brisk M&A alignments and joint venture agreements between hospitals, physicians, and non-acute providers in 2017. Fitch noted that "the benefit of size and scale to reduce per-unit shared service costs, create clinical efficiencies and gain access to larger patient populations will continue and drive consolidation in the acute care space."
The reality is that providers of healthcare services are continuing to align with each other and with non-provider partners utilizing a range of transaction and regulatory models. Expect widespread deal activity in the health provider sector to continue into 2017 and beyond.