Aging Population to Be Major Driver of Healthcare M&A

The aging population is a major force in the booming health care mergers and acquisitions market, which saw 579 deals for U.S. health care targets last year.

West Monroe Partners, a Chicago-based business and technology consulting firm, conducted a survey of 100 market practitioners in collaboration with Mergermarket for a new report on how competition and technology are changing the health care M&A sector.

Of the survey respondents, 23% said the aging population was a key element in the interest in the health care sector. With the number of Americans aged 65 and older going from 35 million in 2000 to 49.2 million in 2016, according to the U.S. Census Bureau, subsectors such as pharmaceuticals and home health have momentum.

“Home health certainly has its challenges from a reimbursement perspective,” a managing director at a generalist private equity firm with long-term capital told West Monroe. “But if you have the subject-matter expertise and you can buy something of scale, you can really drive efficiencies and compete well, because of favorable demographic trends.”

The importance of being reimbursed

The Centers for Medicare & Medicaid Services (CMS) has taken steps to shake up the skilled nursing facility reimbursement model, announcing the new Patient-Driven Payment Model (PDPM) as a replacement for the proposed Resident Classification System, Version I (RCS-I) in late April. The model is designed to shift incentives to caring for the needs of the patient over therapy minutes.

How the government reimburses for health care is a major factor that shapes the decisions of dealmakers, according to the report.

“In working with PE sponsors, the biggest risk we see is the level of reimbursement from the government,” Brad Haller, director of M&A at West Monroe Partners, said in the report. “They want to keep that as low as possible, and will even step back from the brink of a deal and walk away if a final analysis shows a large portion of government reimbursement in their finances.”

That could be bad news for SNFs, given their dependence on Medicare and Medicaid, but even so, 16% of respondents told West Monroe that the home health, long-term-care and hospice services sector is a No. 1 priority in terms of acquisition targets.

The move to bundled payments, though of late somewhat sidelined for SNFs, as well as value-based payments, is also a consideration. When asked what recent or potential regulatory issue has the most impact on M&A strategy, the top issue was the move from fee-for-service (FFS) to bundled/value-based payments, cited by 19% of respondents.

Competition crunch

With many buyers looking for an inroad into health care, the result is a favorable market for sellers. The median earnings before interest, taxes, depreciation and amortization (EBITDA) multiple for U.S. healthcare targets rose almost 3x from from 2015 to 2017, reaching the level of 13.8x, according to the report.

As the number of interested buyers grows in the health care sector, 25% of respondents said a shortage of attractive targets was one of the largest financial or market barriers to making acquisitions at the present time.

“Excessive competition for targets means that a lot of attention is being concentrated on fewer companies,” the director of acquisitions and development at a skilled nursing care facilities company told West Monroe. “These high-quality targets get noticed and acquired in the market much sooner than others.”

Written by Maggie Flynn

Maggie Flynn on Linkedin
Maggie Flynn
Business reporter at Aging Media Network
When she's not working, Maggie enjoys running, reading, writing and sports, in no particular order. Favorite things include murder mysteries, Lake Michigan and the Pittsburgh Penguins.

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