Healthcare mergers and acquisitions slowed in the first quarter on economic concerns and the impact on Omicron, KPMG says
- According to a report by KPMG, the healthcare sector turned cautious in the first three months of 2022, closing 34% fewer deals than in the fourth quarter of 2021. The total number of deals fell to 427 and private equity deal volume fell by half.
- Business disruptions from Omicron’s surge earlier in the quarter, rising interest rates, Russia’s invasion of Ukraine and concerns that inflation could linger through the end of the year slowed transactions, the accounting and advisory firm said.
- Nonetheless, KPMG believes that in the healthcare industry, where hospital systems are facing increasingly challenging economic conditions, IT and telemedicine will continue to attract investment as virtual care continues to expand and improving interoperability for patient records, billing and other systems priority remains.
U.S. healthcare store activity surged in the fourth quarter, with some transactions hitting record valuations, KPMG said. The buyers have rushed to complete acquisitions in 2021 ahead of expected tax law changes, she added. Healthcare transaction volume increased in the second half of 2020 and remained active throughout 2021, even as there were signs of an impending slowdown.
Hospital systems announced fewer mergers last year compared to 2020, with mergers often aimed to strengthen core operations battered by the COVID-19 pandemic, a recent analysis by Kaufman Hall found.
KPMG said hospitals are still grappling with rising costs, high staff attrition and elective surgeries that remain below pre-pandemic levels. Smaller hospitals could be vulnerable to restructuring, consolidation, closures or bankruptcies, she warned, while large for-profit chains remain financially healthy despite some slumps in profits.
Deals aimed at boosting a buyer’s digital capabilities remained prevalent, driving the largest healthcare acquisitions in the first quarter, KPMG said. During this period, revenue cycle management specialist R1 RCM announced plans to buy Cloudmed for $4.1 billion and medical device maker Stryker completed the purchase of Vocera Communications for $3 billion.
Still, digital health funding is cooling after record investments in the first two years of the pandemic, falling to a six-quarter low in Q1 2022, according to CB Insights.
KPMG also examined private equity’s waning interest in the healthcare sector, noting that private equity fund investments in hospitals fell 61% in the first quarter as healthcare systems’ labor and utility costs outpaced revenue growth. Acquisitions of medical practices fell 24% from the fourth quarter to 19 deals.
While strategic mergers and acquisitions also declined in the first quarter, the decline in the number of transactions due to pursuit of growth opportunities or the need to divest underperforming assets was less pronounced. Such deals declined 13% to 241 transactions over the period. According to KPMG, behavioral health was the only subsector to see an increase in transaction volume, with transactions up 17%.
Earlier in January, Centene completed its $2.2 billion acquisition of managed-care organization Magellan Health, strengthening its presence in the behavioral health space, where demand for services has increased as the pandemic has impacted mental health has affected.