Health systems eye perks of M&A post-COVID shock

Second-quarter deals were largely concentrated in the East, with some outliers in Illinois, Wisconsin, Iowa and Arizona. But recent deals in general have not been concentrated in a single part of the U.S., said Karl Henkel, an associate at Ponder. The influx of federal Covid support temporarily stabilized more vulnerable systems.

“Now that … we’ve found a way to work through the pandemic, we’re returning back into those strategic conversations of, ‘OK, what do we now need to get back on the path of what we were doing before to address industry transformation,'” said Anu Singh, managing director at consultancy Kaufman Hall.

The pandemic forced health systems to reassess strategies for revenue diversification, and systems may opt for add-ons to avoid the additional regulatory hurdles of full-scale deals, said Nick Donkar, partner at consultancy PwC. Individual service lines may also want to join a larger organization.

Its multispecialty physician group and hospice organization made Exeter Health Resources of Exeter, New Hampshire, an attractive buy for Cambridge, Massachusetts-based Beth Israel Lahey Health, said Peter Shorett, Beth Israel’s chief strategy officer. The two organizations announced the proposed deal, which also includes Exeter Hospital, in March, a little more than a year after Exeter Hospital’s acquisition by Massachusetts General Hospital fell through due to antitrust concerns.

The deal would allow Beth Israel to expand in the Northeast and aligns with its efforts to bring care closer to patients, part of its long-term strategic plan, Shorett said.

“We’re always open to exploring opportunities that make sense,” Shorett said. “We serve a national and international market, but we’re also very cognizant of the importance of focusing our energy and resources on the communities we serve, which is really the New England market.”

The remaining not-for-profit pool is better positioned to be more selective with deals, said Jake Aygun, director of Ponder’s M&A group. Many mid-size providers benefit from isolated service areas with little competition, strong physician alignment and consistent profitability, he said.

Private equity transactions also could grow in popularity.

Drawing on past success, private equity investors are taking a more pointed look at the healthcare sector because of the room for growth and innovation, Donkar said. Healthcare spending accounts for about 20% of the U.S. gross domestic product, compared with 17% a decade ago. Investors are attracted by returns and a desire to create a more efficient system, he said.

“The notion of a not-for-profit, religious, faith-based health system partnering with a private equity fund … wasn’t even on the table,” Donkar said. “Now, our clients are going, ‘How can we co-invest or jointly invest with some of the private equity funds to have a financial return? It helps our mission. It helps grow what we’re trying to do for healthcare.”

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