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Friday, October 7, 2016

Healthcare M&A Expecting Uptick in Q4

Health-Care Transactions Update: August 

(from BNA) 

Sept. 21— Health-care transactions activity is expected to pick up in the fourth quarter following a bit of a slow down over the summer months, attorneys who advise clients on deals told Bloomberg BNA.

It wasn't a surprise that the summer months had a lower volume of closed deals, as shown in the August list, Gary W. Herschman, of Epstein Becker Green in Newark, N.J., said. Those months traditionally are slower, Paul A. Gomez, of Epstein Becker Green in Los Angeles said.

Both advisers expect transactional activity to be more robust in October, November and December, because of a large number of deals that are in the “pipeline” and targeted to close before year-end.

Hershman said, however, that there may be a “a bit of a lull” in deals leading up to the presidential election. Investors may “sit on the sidelines,” waiting to see how the election works out before pursuing new deals. Regardless of who is elected president, Herschman said he doesn't foresee many of the value-based payment (VBP) programs and clinical integration initiatives (CIIs) resulting from Obamacare going away.

August Transactions

Even if the exchanges and insurance mandate are repealed, which Herschman believes “would be tough to accomplish,” the systemic changes in the delivery of care based on VBP and CII are unlikely to go away. Those programs have reduced the overall cost of care and maintained or improved quality, Herschman said. 

Deal activity in 2016 overall appears to be strong, according to Gomez. A year-to-date list showing that over 400 deals have been proposed or completed over the past eight months supports his observation.

Long-Term and Acute Care
The August list, while a little shorter than in some months, attests to health-care industry stakeholders' commitment to developing relationships that maximize patient health and provider payment, Gomez said. Nowhere is that more apparent than in the post-acute care sector.

The “post-acute care sector was by far the one with the most deal activity in August,” when combined with sectors “such as behavioral health, home care and hospice care,” which may be “considered to fall under the broader umbrella of post-acute care,” Gomez said.

Government and commercial payer payment initiatives “continue to drive the need for close relationships” among those providers, Gomez said.
These initiatives include the Bundled Payments for Care Improvement (BPCI) model, the Comprehensive Care for Joint Replacement (CJR) model and new proposed episode payment models for cardiac care and rehabilitation and surgical hip/femur fracture treatments.

Transactions Year to Date

“These relationships help maximize patient health post-discharge from an acute care setting,” Gomez said. They also “help reduce preventable readmissions to hospitals post-discharge.” Both goals “are among the primary aims of these payment initiatives,” he said.

Consolidation in the home and hospice care sectors also caught the attention of Robert Aprill, an analyst with Provident Healthcare Partners LLC in Boston. Deals in the sector were up five to 10 years ago, but dropped off, he said. The August numbers indicate that transactions activity in this sector has “come back to life,” he said.

‘Core' of Activity
Investors' current focus is on three “core” sectors—long-term care, health information technology (HIT) and physician practice, Herschman told Bloomberg BNA. “There likely will be over 100 closed deals in each of the top three categories” by the end of 2016. These sectors are “where the action is,” he said. 

Herschman added that these three sectors “represent the top drivers of success as the industry continues to progress through a sea change towards value-based purchasing.” The VBP model—the direction toward which all health-care providers are moving—“rewards high quality, cost-effective care provided in the most appropriate setting,” he said. 

Monthly Transactions by Sector
“Survival in this environment requires that care be coordinated by physicians, be driven by advanced data analytics and be assisted by robust clinical integration protocols and care management programs,” Herschman said. It is no surprise the leading three activity sectors all support this model, he said.

Physician Practice Activity
August also saw a significant number of physician practice deals, Gomez said. The VBP models and initiatives have been among the leading factors driving substantial physician practice activity “for years,” he said. This year, they've “added more fuel to the acquisition ‘fire.'” 

Monthly Transactions

That's because many physician practices have reached the conclusion that “they need to partner with other medical groups, be acquired by a private equity firm or be acquired by and join a hospital or health system to have access to the business experience and capital needed to help meet patient quality care metrics.” 

Consolidation also helps practices meet “related data collection and reporting requirements that are crucial to succeeding” under new payment models, Gomez said. He cited the Medicare Access & CHIP Reauthorization Act (MACRA) and the Merit-Based Incentive Payment System (MIPS) as setting out examples of payment models providers are striving to meet. 

Additionally, the bundled payment models, like the BPCI and CJR models, were designed to encourage greater cooperation and coordination among providers across multiple care settings, Gomez said. They also are “driving deal activity in the physician practice sector.” 

The August list contains deals involving single-specialty and multi-specialty practices, as well as groups that specialize in caring for patients while they still are in an acute-care hospital setting, Gomez said. Arrangements with physicians who specialize in in-patient care have been shown to “contribute to better outcomes and fewer readmissions” after patients are discharged, he said.

Urgent Care ‘Hot.'
Urgent care is an especially “hot” subsection of the physician practice sector, Herschman told Bloomberg BNA. This sector experienced growth a few years ago, then suffered a drop off. Now, though, it's “huge,” Herschman said.
Urgent care provides an important “piece of the puzzle,” Herschman told Bloomberg BNA. It is convenient—patients want to be able to see doctors in the evenings and on weekends, and more physician practices aren't able to accommodate same-day appointments for sick patrons. That's where urgent care centers come in. 

Urgent care also is less expensive for patients and insurers than emergency room care, Herschman said. He added that there doesn't appear to be any compromise in quality of care in the newer clinics.
Doctor groups, hospitals and for-profit companies all have been involved in creating new urgent care centers, Herschman said. One reason, Aprill said, is that the urgent care model is “easily replicable.” 

That is, Aprill said, urgent care centers have “relatively low start-up costs, and the ramp-up to profitability is much quicker compared to” other physician practice sector activities. The August list contains four or five urgent care deals, and Aprill said he expects to see a lot more activity in this subsector.

Mega-Hospital Mergers
Herschman also observed an overall trend toward “mega-mergers” of multi-hospital systems. Smaller hospital systems have been merging with each other—and with larger systems—to create huge systems throughout the country, he told Bloomberg BNA. He expects the trend to continue until there are no more than three or four systems in any particular market.
Mergers and acquisitions, however, aren't the only consolidation model in this sector, Herschman said. Some systems have been entering into close-knit networks, thereby retaining their independence while coordinating and consolidating care. 

Another trend to watch for is the emergence of for-profit hospital systems as potential buyers in some markets, he said. Not only are for-profits targeting health systems in general, smaller hospitals that no one else seems to want could be attractive acquisition targets for for-profit firm as well, Herschman told Bloomberg BNA.

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