M&A in the Healthcare Industry: Trends and Regulatory Challenges

M&A in the healthcare industry worldwide has been displaying significant growth all through the latter half of 2023. Mergers and acquisitions have proved to be a valuable metamorphic tool that can alter the landscape of the health and pharmaceutical industry.

Results of a survey conducted revealed that 68% of the top executives in the sector anticipate a rise in the volume of deals. At least 60% believe that M&A transactions in healthcare will dominate instead of private equity sales and IPOs.

This sector is evolving rapidly, and companies are focusing on vertical mergers and developing digital capabilities. Building on and scaling the healthcare ecosystem has fuelled accelerated growth as the industry navigates post-COVID challenges.

Pharmaceuticals and life sciences (PLS) and healthcare services (HCS) are attracting investors as they restructure their vision and strategies. They are also reorganizing their assets and capabilities with the objective of long-term sustainability and growth.

Trends in the M&A in the Healthcare Industry

Large-cap pharmaceutical companies are keen on acquiring and investing in mid-size and small biotech startups and businesses. The objective here is to fill gaps in the pipeline for sourcing supplies and innovations, including Intellectual Property and technology.

At the same time, M&A in the healthcare industry is not without challenges. The adverse economic conditions and rising interest rates are affecting acquirers’ ability to raise adequate capital to buy companies. Even so, sellers prefer to sell their startups as an exit strategy instead of IPOs.

Further, publicly traded companies with underperforming stock prices are converting into private ownership. Cash-rich private equity firms are quickly snapping them up.

Larger M&A deals can undoubtedly unlock substantial value, but they also carry higher risk. That is, in cases where the targeted company values more than 30% of the acquirer’s size. The core areas where M&A transactions occur include technology and ancillary services like diagnostics and supportive. Cost reduction and improving the quality of care are also objectives.

Studies indicate that M&As have a higher probability of creating value and achieving complete integration in two years post-closing. As against five years after the closing. To make that happen, companies now approach the merger with a disciplined and carefully-strategized process.

Artificial Intelligence (AI) is fast emerging as a robust tool that can help streamline integration with the surviving company. Using new technology, companies can ensure M&As have the desired impact quickly and achieve long-term value creation.

M&A deals in this sector must comply with antitrust and competition regulations designed to protect consumers. These rules are also set in place to prevent monopolistic practices. Dealmakers face several other roadblocks when entering into acquisitions. Read ahead to understand them in detail.

M&A in the Healthcare Industry Have Unique Challenges

Mergers and acquisitions in the healthcare industry face unique challenges such as:

• Rising inflation rates have resulted in hiked interest rates that have raised the budgets of providers, suppliers, and consumers.
• Cyberattacks and cyber threats have become a huge problem for healthcare facilities that have now become the primary targets. A hacking incident can compromise patient care and lead to expensive litigation and damages. Organizations need to make substantial investments to ramp up security protocols to protect Personally Identifiable Information (PII).
• The federal and state governments had provided funding to support pandemic-hit healthcare providers. Now that these programs have ended, the costs are spiraling higher than the reimbursements providers receive.
• Although supply chains were recovering from the pandemic, the Russia-Ukraine war seems to have escalated issues again.
• The shortage of skilled nurses and other workers has resulted in higher labor costs.

Read ahead for some of the most common post-closing snags dealmakers encounter in M&A in the healthcare industry.

Successful Integration

As with mergers in any other business vertical, post-M&A integration is challenging and critical to achieving value-adding synergies. As deals continue to become larger than ever before, so do the integration complexities.

The solution is to adopt a top-down approach that includes making strategic decisions during the negotiation stages of the deal. CEOs must work out protocols for reorganizing the business structure, workflow, operations, and company culture, moving forward.

Dealmakers must also decide on the leadership, management, and board structures. Having the right plans in place will ensure that the integration maintains momentum and culminates in a success.

Careful and methodical integration of the IT departments is also crucial, starting with identifying the existing infrastructure. Next, planners should have a strategy for aligning the structures with proper governance and monitoring.

Other than the CEO, the company CFOs also play a critical role. Their job includes capturing the costs, revenues, and other financial synergies from the deal by closely monitoring the relevant statistics.

Thus, they can ensure that the merger has positioned the two companies for long-term value creation. However, as a rule, acquired hospitals don’t always demonstrate higher operating margins.

Staying Relevant in a Cloud Computing Landscape

Adopting cloud computing capabilities has become indispensable in healthcare to allow care providers to maintain a centralized database of medical information. By accessing cloud platforms, employees can access enterprise data from any location as long as they have an internet connection.

This feature enables agility and flexibility in operations and also makes patient care mobile infusing additional efficiency. Adopting cloud computing can streamline the integration process since the staff can quickly access patient data and continue providing care.

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Maintaining Operational Continuity

When it comes to mergers in the healthcare sector, the most critical facet is business continuity. There can be no breaks in delivering nothing but top-notch care to patients and enhancing customer experience. Regardless of the myriad other activities that follow the closing.

For instance, streamlining inventory and medical supplies delivery, changing names on paperwork, altering signages on facilities, and more. Considering that IT and automation are an integral part of patient care, organizations interfacing their systems must focus on efficiency.

Challenges like complexity and data mapping need to be addressed along with timelines for their execution. Not dealing with these potential issues can lead to higher costs and lower synergies. Not managing IT integration can account for a 70% loss of all the merger synergies.

Dealmakers can infuse continuity by ensuring open communication with stakeholders and complying with legal requirements and regulations. Directing healthcare staff members on the protocols to follow when caring for patients through the merger is also an effective strategy.

Special attention should be given to employees who are directly providing patient care. Management should relay any changes that will likely impact the frontline staff clearly and in pre-planned stages to ease transitions.

As the COVID demonstrated, burnouts are a real threat in the healthcare sector which is very similar to employee attrition. Building a genial atmosphere for the staff to work will lower turnover rates and ensure minimal disruption in providing care.

Healthcare is a direct-to-customer service and patient satisfaction is crucial for customer retention and long-term business. Ensuring this satisfaction is one of the key challenges in M&A in the healthcare industry.

Interrupted Supply Chains

Medical companies, hospitals, private practitioners, or any other facilities need consistent supply chains to remain operational. Mergers can result in unexpected disruptions but also price hikes.

• When different physicians and professionals require supplies, they may disagree on what items are needed. Disagreements like these can result in delays in making decisions and confusion.
• If the surviving company is operating out of separate locations, supply chain vendors may have to cater to both facilities. This requirement could again drive up prices and take away from cost-cutting synergy.
• When two organizations come together, they may bring with them contracts for suppliers and vendors. Overlapping contracts where both source their supplies from different vendors need to be sorted out.

Aligning the New Company Culture

Regardless of the business vertical, a merger can drastically alter the company culture for surviving companies. Employees will likely be apprehensive and uncertain about how the organization will operate moving forward.

HR managers need to be clear about layoffs, altered salary structures and perks, and potential staff restructuring. They also need to focus on the new culture that aligns with the existing model of both organizations.

Crafting compelling messages to communicate with the staff is critical as is customizing the notes to resonate with the recipients. Talk about the different facets of the merger, explain why it is happening, and what are its key objectives.

You’ll get their buy-ins by explaining the value to be achieved from the merger, and how it is likely to impact them. Also, project the shared vision and mission for the surviving organization to ensure their conviction in the merger.

Regulatory Challenges in M&A in the Healthcare Industry

The federal and state governments are scrutinizing mergers and acquisitions and instituting antitrust regulations that dealmakers must comply with. Their focus is on mergers and acquisitions, strategic deals, and joint ventures. Private equity and deals among physicians are also under the radar.

The objective here is to ensure that there are no compromises on the access, quality, and cost of healthcare. These potential compromises may arise because of anti-competitive behavior.

During the due diligence process, sellers must disclose all the necessary information that acquirers may require. Financials are an integral part of this process and the targeted company provides details about projections and forecasts.

The government focuses on monitoring the future impacts of the transaction and may also conduct operational audits. These audits aim to find areas that need improvement within the organization to ensure that its operations are effective, productive, and efficient.

Moving forward, government review processes will expand on omnibus resolutions such as:

• Nonprofit health system AG reviews
• Licensure change-of-control reviews
• Certificate of need/exemption reviews
• Hart-Scott-Rodino Act (HSR)

The Federal Trade Commission (FTC) will expedite its antitrust investigations for M&A transactions that are below a specific value. This value could be below the limits that require reporting to antitrust agencies.

The FTC and Department of Justice (DOJ) have also announced that they are re-examining their M&A guidelines. These guidelines will determine whether a merger is in compliance with antitrust laws.

Traditionally, investigations have always focused on finding out if a merger brings about any material changes in the market. And, if the resultant market share leads to less competition. But, regulating agencies now also look for behaviors arising from mergers that can eventually harm consumers.

In Conclusion

M&A in the healthcare industry is poised to make great strides because of innovations and changes in caregiving. Organizations are keen on acquiring and retaining new talent and thus find new channels for fuelling growth. That’s how they hope to stay relevant in an increasingly competitive market.

The medical sector is now making forays into ancillary services such as nonacute ambulatory and virtual care. Investors are also keenly interested in backing physician practices since customers are now open to visiting outpatient care facilities.

Providing care at home for aging customers is another area attracting interest. The steadily growing customer base comprising senior citizens are payors who prefer to get quality care outside hospitals. This is why, hospitals and medical care providers are expanding their services to hospices and home health care.

The healthcare sector remains innovation-first thanks to the massive influx of funding infused into it during the pandemic. Even though there is less funding now, the sector continues to make great leaps in areas like fast, accurate, and convenient diagnostics.

There is also demand for AI-driven and automated medical devices, development of cell and gene therapies, and biologic drugs. Developing new and more effective drugs is another area attracting attention.

With so much transformation, mergers and acquisitions continue to drive value and synergies and ensure steady growth in this vertical.

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