PwC’s 2013 Third Quarter Healthcare Mergers and Acquisitions Report Show Small Uptick, but Still Lags Behind 2012

PricewaterhouseCoopersPricewaterhouseCoopers released its 2013 third quarter healthcare mergers and acquisitions report and there a small uptick over the first two quarters in the number of healthcare deals with 138 total transactions so far. The value of the deals announced is $15.8 billion, up 35 percent over the second quarter, but 2013 is still behind 2012 with volume down 4.6 percent and value down a whopping 25 percent.

For-profit deals were up, continuing the serge from the second quarter, marked by Tenet Healthcare Corporation’s proposed acquisition of Vanguard Health Systems for $4.3 billion, and the third quarter opened with the announcement of Community Health System’s $3.9 billion offer to purchase Health Management Associates (HMA).

Hospital Deals

During Q3 2013, deal volume and value were up when compared to Q3 2012 with the total volume of hospital transactions increased 59 percent from 12 in Q3 2012 to 19 in Q3 2013. Overall deal value increased significantly from $38 million in Q3 2012 to $12.3 billion in Q3 2013. This is largely the result of two $1+ billion transactions in Q3 2013.

The two $1+ billion transactions announced in Q3 2013 were responsible for the significant increase in total deal value.

According to PwC, several factors continue to serve as a catalyst for activity in this sector and include: 1) uncertainty and developments with healthcare reform, 2) convergence within the payer and provider arena, 3) expanding physician alignment (ensuring continuum of care coverage) and 4) capital needs for hospital projects.

Managed Care Deals

Weakness in the Managed Care sector continued in Q3 2013 following the significant uptick in M&A activity in 2012. There was a slight uptick in deal activity from Q2 2013 (three announced deals) to Q3 2013 (four announced deals). For the nine months ending September, Managed Care announced nine deals in 2013, compared to 21 announced in the same period in 2012 (57% decline).

Despite the continued weakness in 2013, health payers continue to slowly use M&A as an avenue to expand their positions in Medicaid programs in certain parts of the country. This trend is expected to continue in anticipation of the expanded insur- ance coverage beginning in 2014.

Post-acute Care Deals

Long-term care sector saw deal volumes at the highest compared to other sectors (if not by dollar value). An attractive environment for sellers to exit investments, similar to the 2006-2007 period, as a result of low interest rates and available financing (such as HUD loans) is thought to be one driver of this year’s consolidation.

Physician Practice Deals

Announced deal volumes ticked slightly up from Q3 2012, although as typical with physician practice acquisitions, no deal values were announced. Deal volume continues to be generated from both national and regional medical groups leveraging their economies of scale in the highly fragmented physician practice space, as well as hospitals and health systems attempting to secure volumes due to changing reimbursement models.

Perhaps the most fascinating thing about this portion of the report is the current trend of physician practice acquisitions by regional and national medical groups is expected to continue in the near term as physician groups look for ways to respond to reimbursement changes. For hospital-based acquisitions, it remains to be seen whether the recent acquisition trends are sustainable given the past issues of operating losses generated by hospital-owned physician practices; however, personally, I believe they will continue for the foreseeable future.

Private Equity Deals

Private equity saw a continued decline in deal volume with seven  announced. For comparison purposes, in the third quarter in 2012, there were 20 such transactions as shown above. The sluggish volume of private equity deals in the third quarter of 2013 is consistent with what we experienced earlier in 2013 where six private equity deals were announced in the second quarter of 2013 and four private equity deals were announced in the first quarter of 2013.

It will be interesting to see what the fourth quarter brings, especially given the Vista buy out of Greenway and the merger with Vitera.

PwC defined US M&A activity as mergers, acquisitions, shareholder spin-offs, capital infusions, consolidations and restructurings where acquisition targets are US-based companies acquired by US or foreign acquirers. Transactions are based on announcement date, excluding repurchases, rumors, withdrawals and deals seeking buyers.

We consider deals to be mergers or acquisitions when there’s a change of control or the makeup of the control- ling interest changes. In the instance of an acquisition, one company takes effective control over another company or product. In a merger situation, two boards are combined and/or monies are combined. An affiliation or collaboration is neither considered a merger nor an acquisition.

Perhaps this report is a little off base from a health IT perspective, but the M&A culture is fascinating to me and given the impact these deals have on IT and technology post-merger – when systems and solutions are combined and/or done away with – there is certainly a felt need from the IT vendor perspective.

It’s important to watch these transactions as the market continues to consolidate. With fewer organizations to sell into there will be fewer deals to announce from the IT side. When that happens, we’ll really see vendor contraction, at least in the EHR space.

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