Health care deal activity to remain steady amid elevated interest rates

ARTICLE | November 01, 2023

Authored by RSM US LLP

While deal volume in 2023 remains lower in comparison to 2022 and 2021, mergers and acquisitions in the health care sector remain a popular option for investors as they continue to seek value in an environment of onerous capital costs underscored by high interest rates and tightening credit requirements.

Cross-market opportunities

Cross-market consolidation among hospitals and health care systems will continue as organizations look to manage costs and gain operational efficiencies.

Organizations exploring M&A are focusing on potential staffing improvements, expansion of services and optimization of patient throughput. Hospitals and health care systems have recently focused on cross-market consolidation, whether in state or out of state. Below is a list of recent cross-market announcements where combined operating revenues exceed $1 billion.

One tailwind helping cross-market mergers is the increase in digital enhancements throughout the health care industry. Investment in robust electronic medical record platforms and virtual tools such as telehealth and back-office platforms has reduced geographical barriers. Investment in digital technologies, coupled with higher inflation and interest rate costs, will continue to encourage hospitals and health systems to look for complementary capabilities with organizations beyond their current geographical borders.

Private equity continues to adore health care

Private equity continues to find value in health care as well. According to Levin Associates, private equity transactions through June 30 have accounted for 36% of health care M&A activity in 2023, a figure that hovered around 40% in 2022 and 2021. 

Private equity’s focus on improving operational efficiencies and overhauling back-office functions like scheduling, clinical coding, billing and financial planning makes health care an attractive market for private equity funds as well as strategic acquirers. Independent physicians’ offices today are overburdened by administrative back-office tasks that diminish the time available for patient care. Private equity sponsors can alleviate that stress and find their strategic role in the health care ecosystem by acquiring these practices, adjusting procedures to scale and managing the administrative functions.

However, while health care can be an attractive endeavor for private equity, regulatory risks and barriers continue to emerge as well. Recently, the Federal Trade Commission filed suit against a private equity firm, scrutinizing how it “rolls up” or consolidates practices, a common strategy for many private equity groups investing in health care organizations. Health care will likely continue to see heightened scrutiny around private equity strategies.

The takeaway

M&A activity in the health care industry remains stable. The desire to increase market share or achieve economies of scale will continue to drive deals. As elevated interest rates and higher capital costs continue, hospital and health system leaders should consider how cross-market mergers and private equity investors can help them meet their goals for cost-efficiency and higher quality.