Editor’s note: Samantha L. Prokop is a shareholder at lawfirm Gunster, Yoakley & Stewart and the head of Gunster’s healthcare transactions team.
As we close out 2023 in the healthcare M&A world, a question arises regarding what trends are on the horizon for 2024. While we may not have a crystal ball, most signs are pointing to continued consolidation, but perhaps not in the same form we saw pre-COVID-19.
Pre-pandemic, private equity firms dominated the healthcare M&A space. However, as we approach 2024, we may see more provider-to-provider consolidation.
Key drivers for consolidation in healthcare continue to be increased administrative burdens, consumer demand for telehealth and convenience, decreasing payer rates, providers unable to secure payer contracts to be in-network and talent retention.
Providers will be squeezed by rising labor and supply costs and declining reimbursements in 2024. Government audits related to pandemic relief funds are also on the rise — resulting in an increased administrative burden for providers and often large government paybacks.
Shift in funding sources
Post-pandemic, we have seen a rise in interest rates that serves as a barrier to financing new deals. As such, we may see less PE-based deals and more provider-to-provider consolidation with increased seller financing opportunities in 2024. While I have personally seen a decrease in 2023 in seller-financed deals, 7%-plus interest rates may make seller financing a more attractive option for a seller willing to hold a note.
As the dust settles post-pandemic, hospitals seem to be at the top of the list of struggling providers. We have seen several hospitals file for bankruptcy in 2023. COVID relief funds are now depleted. Hospitals that were using those funds to pay a premium for travel nurses and other providers must right-size those salaries and payment streams.
Supply chain issues continue to be an issue, as well as the increasing costs of supplies and other overhead. We believe these factors will lead hospitals to seek opportunities to consolidate. As part of this consolidation, we also expect to see less deals with a cash purchase price, and more that incorporate debt payoff instead.
During the pandemic, several laws were relaxed to allow the expansion of telehealth services. Patients have gotten used to the convenience of telehealth visits, and providers have shown that they can deliver safe, efficient care via telemedicine.
We expect to see an uptick in acquisitions in the technology space as payers and states relax their telemedicine restrictions. We also cannot ignore the role that artificial intelligence will continue to play as this technology is further developed and integrated into healthcare delivery models.
Consolidation in other sectors
By following the CMS’ payment trends, we can also get an idea which sectors will be motivated to consolidate. We expect that decreasing reimbursement rates will lead to an increase in provider-to-provider consolidation to create scale and volume to leverage commercial payer rates.
We expect to see this trend in physician practices, as the Medicare Physician Fee Schedule will see a 3.4% decrease in rates. Anesthesia providers will also see a 3.27% decrease in Medicare reimbursement.
For those entities that care for a high volume of Medicare patients, an increase in Medicare rates could make the investment attractive for PE firms. Sectors seeing increased rates include hospital outpatient departments and ambulatory surgical centers, whose rates will increase by 3.1%.
In addition to rate increases, providers and groups that are taking on risk with managed care contracts through Medicare Advantage Programs are incentivized to stop the “leakage” of funds that are namely caused by patients seeing specialists.
As a result, we expect to see providers in the managed care space acquiring specialty practices or entering into contractual arrangements with shared savings, pay for performance and similar structures to align the financial incentives and encourage these groups to work together to cut costs while providing quality patient care.
We also cannot ignore the fact that managed care organizations are routinely including language in provider contracts giving them the right of first refusal to purchase the practice should a provider ever want to sell. We are likely to continue to see payers acquiring practices.
Forward Thinking Leaders
What do all of these trends mean for leaders in the healthcare space? We believe that forward-thinking leaders will be paying attention to and developing strategic plans around the following:
- One of my lobbyist colleagues once told me “If you’re not at the table, you’re probably on the menu.” It is important for leaders to stay abreast of legislative and regulatory changes that could impact their industry before final decisions are made. This means hiring lobbyists and actively participating in industry groups to monitor what is going on in the legislature, and working to change potentially adverse legislation before it is passed.
- Leaders are going to have to get creative in determining what is important to retain and attract employees. With pandemic relief funds depleted, it may not be feasible to continue to pay premium salaries, and leaders need to evaluate how to right-size salaries while maintaining sufficient staffing levels. We are seeing more and more providers negotiate contract terms that include a weekday off and hybrid work from home (telehealth) and clinic models. While salaries are important, so is culture. Forward-thinking leaders will do their research and listen to their employees to determine how to retain and attract talent.
- Leaders should be thinking about how to incorporate new and innovative technology into their delivery systems. Go to the new tech convention, schedule the lunch meeting with a sales representative, create or join an industry peer group to share thoughts on what is working, what is not and generate new ideas.
- What is your organization’s next move? Leaders should be paying attention to industry trends and factors driving consolidation. Getting to a size and scale to leverage payers and better rates should be on the radar. This can come through mergers, acquisitions or contractual relationships. Finding ways to cut costs and retain talent will also be another key area on which leaders should focus.
As we close out 2023 and open the doors to 2024, we don’t know exactly what awaits us.
What we do know is that if we have forward-thinking leaders who are innovative and find ways to work together through joint ventures, consolidations or otherwise, they will have the best chance at making 2024 prosperous.