VMG Health, a thought leader in the healthcare field, recently published its 2022 Mergers & Acquisitions (M&A) Report which highlights the general M&A healthcare sector activity and also drills down into three main areas of healthcare including ASCs, PMGs and BHFs.
Healthcare Trends in M&A
Overall, the report highlights that healthcare M&A activity was back in full force in 2021. In 2021, M&A volume and value both exceeded pre-pandemic levels. Additionally, the report states there is $1.6 trillion in dry private equity power globally yet to be deployed. Healthcare M&A internal rates of return outperformed the broader market over the past 10 years by 6% due to healthcare’s recession resilience. VMG strongly believes that there are new opportunities for strategic and private equity investors. While their report reviews nine different healthcare sectors, this blog is focused on ambulatory surgery centers, physician medical groups, and behavioral health.
Regarding Ambulatory Surgery Centers (ASCs)
In 2021, there were 5,906 Medicare certified ASCs. 70% of freestanding ASCs are independently owned and the other 30% are owned and operated by large companies. In terms of transactions, VMG noted that in 2021, the valuation multiple ranges for ASC transactions tightened. While the median EBITDA multiple remained flat with prior years, at 7.8 X, the 25th and 75th percentiles got closer to the median, at 7.5 X and 8.4 X respectively. This was based on 25 observations. One of the largest companies, Surgery Partners paid $325 million for multiple acquisitions in 2021, at multiples of mostly 8 times EBITDA. VMG states that ASCs continue to be an active transaction target as major companies consolidate and look for new opportunities. ASCs can generate consistent distributable cash flows and contribute to lower cost of care in the US.
Regarding Physician Medical Groups (“PMGs”)
In January 2022 there were 1.1 million physicians and 87% were active providing patient care and the remaining 13% focus on teaching, research, and other professional activities. There has been significant consolidation recently, with the primary factors being 1) rising labor costs and rising supply costs that have affected profit margins for physicians; 2) independent practices are struggling to keep pace with the capital requirements of the industry’s transition to value-based payments; and 3) increased competition in physician recruiting from health systems and PE firms. This has exacerbated a multi-year trend of shortages in the physician labor market.
PE firms and management service organizations (“MSOs”) offer the capital and business expertise needed for the scale and operational efficiencies required to combat these pressures. Platform practices (typically larger with ancillary services) can typically negotiate a price that is higher than a smaller add on practice. A perceived arbitrage opportunity exists if the PE firm can buy a practice at a lower multiple when a bolt on practice and then sell the entire business at a higher platform multiple to another PE firm.
There were 461 deals in the PMG sector in 2021. This represented an increase of 145% from 2020 volume. In December 2021 alone, there were 78 deals for PMGs. 70% of physician transactions in 2021 were attributable to a PE firm or their portfolio companies. Ophthalmology and dental practices represented the most active specialties in terms of transaction volume in 2021. Texas and California remain large markets ready for expansion due to aging and expanding populations, especially Texas.
Physician providers face personal decisions that may affect their desire to sell their business including impending retirement, a desire to reduce the administrative burden to focus on patient care, access to capital, and lucrative exit opportunities. VMG expects consolidation to continue and deal activity within the sector to remain strong as a result.
Regarding the Behavioral Health Family Services (BHFs)
The market for BHFs had over 15,400 facilities in 2020 including psychiatric hospitals, general hospital units, substance abuse and mental health residential treatment centers and outpatient clients. 60% of BHFs are operated by private nonprofit organizations and 21% are private for-profit organizations and 19% in the public sector. 40% of BHFs are outpatient mental health facilities, 21% are community mental health centers, 7.9% are general hospital specialty units 6.6% are RTCs and 5.4% psychiatric hospitals. The remaining 19% are residential treatment centers for children, vets, etc. Reimbursement has changed for the better for this healthcare sector, due to a bill called SUPPORT for Patients and Communities ACT in Oct. 2018. This will assist in reimbursement for mostly substance abuse disorders.
Private equity has led the deal activity in this sector. Volume accelerated in 2021 and early 2022 with PE buyers comprising more than 2/3 of deal volume as reported. Regulatory changes including the CARES Act funding and No Surprises Act, and the ongoing opioid crisis exacerbated during the Covid 19 pandemic has led to an abundance of investment capital for behavioral health companies.
The continuing evolution of changes in healthcare
The healthcare sector is still experiencing significant growth and consolidation and presents opportunities for both large and small health care entities as can be seen in the data reported above. If you have questions regarding your company and valuation services, please don’t hesitate to email us.