INSIGHT: Health-Care Transactions Will Pick Back Up After Virus

Merger and acquisition activity in the health-care industry has been growing leaps and bounds ever since the passage of the Affordable Care Act in 2010 with its mandate for reducing cost, increasing quality of care and resulting value-based reimbursement.

The effect, over the last several years, has been increasing consolidation in major sectors of the industry. Health-care transactions in 2020 started off at the same fast pace as prior years, but much of the activity has slowed down as the coronavirus pandemic sweeps through the nation.

One reason for the decline in transaction activity is obvious. As the nation locks down with piecemeal stay-at-home/shelter-in-place and social distancing orders, management meetings and site tours were canceled and are only now either being done virtually or postponed to later in the year.

Other, more significant, reasons include concerns from investors about the corporate debt markets where the cost of borrowing, especially for mid-market deals, has gone up. As a result, transaction activity, especially involving private equity (PE) sponsors in the middle market which have historically been leveraged with this type of debt financing, are slowing down. Increasingly, investors are reaching out to their lenders to gauge their appetite for financing new investments in a potential global recession.

Other reasons include the impact of the pandemic on many physician specialties such as dental, dermatology, GI, and urology, which, almost overnight, closed down or had to substantially reduce services due to various emergency orders, laws and the like. As these practices struggle to remain day-to-day operations, investors in these practices are reluctant to enter into new or add-on transactions until the dust settles from the pandemic.

As new guidance comes out almost on a daily basis from various federal government agencies like the Centers for Medicare & Medicaid Services, Office of Inspector General for the Department of Health and Human Services, etc., new and different opportunities are arising for many practices. For example, on March 30, the CMS announced that, if consistent with a state’s emergency preparedness or pandemic plan, ambulatory surgery centers can contract with local health-care systems to provide hospital services or enroll and bill as a hospital during the emergency declaration.