- The healthcare sector turned cautious in the first three months of 2022, completing 34% fewer deals than in the fourth quarter of 2021, according to a report from KPMG. Total transactions fell to 427 and private-equity deal volume dropped by half.
- Business disruptions from the omicron surge early in the quarter, rising interest rates, the Russian invasion of Ukraine and concerns that inflation may last through the end of the year have curbed transactions, the accounting and professional services firm said.
- Still, in the healthcare industry where hospital systems face increasingly challenging economics, KPMG expects IT and telehealth will continue to attract investment as virtual care expands further and improving interoperability for health records, billing and other systems remains a priority.
U.S. healthcare deal activity soared in the fourth quarter with some transactions reaching record valuations, KPMG said. Buyers hurried to complete acquisitions in 2021 before expected tax law changes, it added. Deal volume in healthcare climbed in the second half of 2020 and remained active throughout 2021 even as there were signs of an approaching slowdown.
Hospital systems announced fewer mergers last year compared with 2020 with tie-ups often aimed at strengthening core operations battered by the COVID-19 pandemic, a recent analysis from Kaufman Hall found.
KPMG said hospitals still are struggling with rising costs, high employee attrition and elective procedure volumes that remain below pre-pandemic levels. Smaller hospitals could be vulnerable to restructuring, consolidation, closure or bankruptcy, it warned, while large for-profit chains remain financially healthy despite some softening of profits.
Deals aimed at bolstering a buyer’s digital capabilities remained prevalent, driving the first quarter’s biggest healthcare acquisitions, KPMG said. In the period, revenue cycle management specialist R1 RCM announced plans to buy Cloudmed for $4.1 billion and medical device maker Stryker completed the $3 billion purchase of Vocera Communications.
Still, digital health funding is cooling after record investment in the first two years of the pandemic, retreating to the lowest level in six quarters in the first quarter of 2022, according to CB Insights.
KPMG also looked at private equity’s waning interest in the healthcare sector, finding that private equity funds’ investment in hospitals dropped 61% in the first quarter as health systems’ labor and supply cost increases outstripped revenue growth. Acquisitions of physician practices fell 24% from the fourth quarter to 19 deals.
While strategic M&A also declined in the first quarter, the decrease in the number of deals driven by the pursuit of growth opportunities or need to shed underperforming assets was less pronounced. Such deals fell by 13% to 241 transactions in the period. KPMG said behavioral health was the only subsector to see an increase in transaction volume with deals rising 17%.
In early January, Centene completed its $2.2 billion acquisition of managed care organization Magellan Health, bolstering its presence in the behavioral health space, which has seen a rise in demand for services as the pandemic took a toll on mental health.