Healthcare Transactions Market Update

Healthcare transactions declined nearly 11.0% from 2021 to 2022 according to Scope Research’s recently updated M&A volume transaction database. The sharpest decline was seen in Q4 of 2022 as compared to the post pandemic surge seen in Q4 of 2021 with an approximate 32.0% decrease year over year (711 in Q4 of 2021 vs. 481 in Q4 of 2022). The declines seen are not unexpected as the pandemic caused certain transactions to be put on hold and post pandemic there was an expectation these pipeline transactions would be revisited and pushed through in 2021.

However, due to the rise in inflationary costs (including labor shortages/staffing challenges) and the corresponding downward pressure on margins coupled with an increase in acquirers’ cost of capital, it is no surprise that 2022 saw a decrease in transactions overall as some buyers and sellers took the wait and see approach.

We can further sort this data down to certain segments to see which areas are receiving the most attention. It stands to reason that these areas will still garner a majority of the focus as we head into 2023 and beyond.

Professional services were by far the segment with the most transactions. This segment primarily consists of physician practices, urgent care clinics, dentistry, physical therapy and other specialty clinics. Other segments that saw heightened activity included the behavioral health space and home-based services as the pandemic shined a bright light on the needs that these segments fill.

Scope’s data comes with the caveat that these are only publicly announced healthcare service transactions and excludes general acute care hospitals, which the researcher tracks separately. While overall healthcare transactions appeared down in 2022 compared to 2021, Kaufman Hall’s recently published 2022 M&A report showed an uptick in announced hospital and healthcare system transactions.

As you can see from the chart above, there is still a ways to go for activity to return to the pre-pandemic levels in the hospital and health system segment in terms of deal volume. However, the published report importantly notes that while deal volume was below the height seen in 2017, the combined transacted revenue of the parties involved actually surpassed 2017.

It is also important to note that the percentage of the 2022 transactions that involved not-for-profit hospitals and health systems as both target and acquirer as a percentage of the total grew from approximately 81.0% in 2021 to 91.0% in 2022. Specifically, Q4 of 2022 was noted as one of the most active quarters for these types of transactions since the pandemic began in Q1 of 2020. Kaufman Hall’s report gives strong insight into the regaining of momentum for this segment seen in 2022 and going forward.

As we head further into 2023, operators of healthcare platforms and their strategic advisors have numerous questions. The question on many of these people’s minds is “will we continue to face headwinds in 2023 as the cost of capital remains high and margins remain squeezed with inflated costs? Or will these headwinds soon turn to tailwinds and return us to the immediate post pandemic wild, wild west?” The answer? It is too soon to tell, but interest in healthcare operating platforms remains high and there is plenty of reason for optimism despite pending economic concerns.

As experts in healthcare valuation and advisory, we often get asked these questions and more. Later in the week, I will share some frequently asked questions from our clients and some helpful answers/insights for consideration.

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