12 Healthcare Sectors: Quick Takeaways & M&A Expectations

In this episode, host and VMG Health Chief Commercial Officer Jen Johnson has a discussion with Valuation & Transaction Directors John Meindl, CFA, and Taryn Nasr, ASA about the world of mergers and acquisitions in the healthcare industry.

Meindl and Nasr recap 12 sectors to provide key takeaways from 2022 and M&A expectations for the remainder of 2023 and into 2024. These insights are a small portion of what is available in the Annual Healthcare M&A Report, a comprehensive analysis compiled by a team of nearly 40 professionals at VMG Health. This report covers essential information across the 12 healthcare sectors, including market participants, notable transactions, reimbursement changes, regulatory updates, and most importantly, M&A expectations.
 

Topics covered in this conversation include:

• How various healthcare sectors are recovering from the pandemic
• Predicted strength of acquisition activity across most sectors
• How private equity companies have emerged as significant buyers in the healthcare industry and are employing unique strategies
• Outlook for the rest of 2023 M&A activity and expectations for 2024

Want to learn more about this topic?

Access the most recent Annual Healthcare M&A Report linked here: VMG Health 2023 Healthcare M&A Report

Access VMG Health's Pulse on the Public Market tool linked here: Pulse on the Public Market

Transcript

Intro 0:06: Welcome to the Healthcare Download with VMG Health. We are the leaders in strategy and transaction advisory dedicated to finding solutions for the healthcare industry. In each episode, we will leverage our expertise to provide trends and timely updates about what is happening on the business side of healthcare so you can move your strategy forward.

Jen Johnson 0:33: In this episode, “12 Healthcare Sectors: Quick Takeaways and M&A Expectations,” we will be interviewing two leaders who lead VMG Health’s charge to produce its Annual Healthcare M&A Report. For those of you who aren't familiar with the M&A Report, each year VMG Health has a team of nearly 40 professionals tasked with analyzing and summarizing information to help industry participants better understand what's happening in healthcare's M&A environment. Essential information for each healthcare sector is covered including the market participants, notable transactions, reimbursement changes, regulatory updates, and of course, M&A expectations. But for this podcast, I decided just to focus on M&A expectations for the remainder of 2023 and all the way into 2024. So, now I'd like to introduce the experts who helped bring our industry this incredible resource. Taryn Nasr andJohn Meindl are both directors in VMG Health's Valuation and Transaction Advisory division. Taryn and John assist clients around the country with navigating and valuing healthcare transactions. I'm Jen Johnson, VMG Health's Chief Commercial Officer, and I'm ready to get us started with a dose of some practical insight on the business side of healthcare. So, Taryn and John, welcome. Thank you for joining. We are all coming out of the Dallas office today, which is nice, we're all in person. It was technically, with the heat index, 130 degrees yesterday. So, how are y'all holding up? 

John Meindl 1:57: It's getting warm. 

Jen Johnson 1:58: Yep, yep. Just a little warm.

Taryn Nasr 2:03: It is, I just got back from Las Vegas where it was even hotter. So this was a bit of a cooldown.

Jen Johnson 2:06 Seriously? Okay. I had no idea. I thought we were the hottest. Alright. So, speaking of hot, the M&A Report, this is a pretty big report for us. It is actually the biggest one of the year that we put out. Now, the M&A Report obviously covers too much material for a short podcast. It's 70 pages and chock-full of important information for healthcare leaders on 12 different sectors, inclusive of what PE buyers are up to. So we're going to spend the last few minutes looking at PE specifically. But what I'd like to do is mainly focus on your predictions for each sector as it relates to M&A expectations. But first, let's get an overview from John on some of the macro factors impacting all of these sectors. John? 

John Meindl 2:45 Excellent. Yeah, thanks, Jen. And, yeah, it's important when you're talking about where we are now within these sectors to really kind of take a step back and look at 2022 and year to date, 2023. And what's happened and what's led us here. And, by the way, a lot of this data is covered in our M&A Report. It's on our website, if you'd like to go out, if you haven't read it, you can go and download it, we'll have a lot more information in there. But really what we're gonna look at in a very short conversation today is in 2022 it's a tale of two phases. There's everything that was pre-June of 2022 and then everything that was post-June of 2022, up until today. Pre-June was obviously before the Fed started raising interest rates and then post-June is after the Fed. And what happened is once the Fed started raising interest rates, there was a, before that there was a strong continuation of M&A activity. Valuations were strong, volumes were high, and then the Fed started their interest rate hikes and it really had a muting impact on the industry. That said, what analysts have been predicting, and are continuing to predict is that we're going to see an uptick in the back half. They used to say the back half of 2023, it’s probably now looking at Q4 2023, Q1 2024. But they're expecting to see a big uptick in M&A activity and the reason for that is because the Fed has already started to pull back on the interest rate hikes, they're already starting to say we're close to being done. And that is removing a huge level of uncertainty, so investors don't like uncertainty, the Fed is saying we're going to finish with interest rate hikes fairly soon. The market is less concerned with, is it one more hike, two more hikes, or zero more hikes. They're way more concerned with is there an end in sight. The second reason why analysts predict an uptick is that corporate growth theses haven't changed. Inorganic growth is still central to strategic hospital and strategic player growth plans. They're still planning to go through M&A and that has not changed. Then the third reason is that PE dry powder remains very high. There's so much cash sitting on the sidelines, and private equity firms are incentivized to deploy that cash, and people think that when the time is right that cash is going to come flooding back into the market. That said, the one thing that is a little bit nuanced this year is the tighter lending standards that have been caused by the regional bank crisis. There are banks who are a little bit more concerned about lending right now, there's still quite a bit of lending activity, but it's definitely a lot slower and that has had a little bit of a muting impact. Then the last thing I'll say on kind of a broad macro perspective is that transactions, because of this cash tightness, because of the unwillingness to deploy cash as quickly as before the Fed started raising interest rates, there is a trend towards smaller transaction volumes, or excuse me, smaller transactions, higher transaction volumes. So more tuck-ins, less platform acquisitions, and the platform ones that we do see, some of them are actually commanding premium multiples because there are so few going to market that when one does go to market. If it's a well-performing asset, it can actually get a premium pricing right now.

Jen Johnson 5:44 Okay, wow, great recap. And obviously, it sounds like a lot of activity across probably all the sectors. So, that's what we're going to do, we're going to hit each sector briefly and just look at what we expect to see. So, let's go ahead and start with the ASC sector. One of the biggest trends we're seeing here is, I think everyone knows about this, higher acuity cases are shifting to ASCs. So, just one example that you guys noted in the report, it's projected that half of cardiology procedures will be done in ASCs by mid to late 2020s. This is a very significant shift in the site of service. So, Taryn, as ASC market participants prepare for this, what are you seeing as it relates to M&A? And can you comment on expected transaction activity, types of buyers, anything in that realm?

Taryn Nasr 6:28 Sure. Thanks, Jen. So yes, we are seeing that the larger players are continuing to focus on these higher acuity specialties, including cardiology, as you mentioned when they're looking at both organic growth and the M&A transactions. Some notable comments have come from both USPI and Surgery Partners, who mentioned the focus on these higher acuity cases in their most recent earnings calls. Speaking of USPI, just in the first quarter of this year, Tenet, parent company for USPI, their ASC revenue grew 22.6% year over year. So there is a very significant focus on both organic and M&A growth for the ASC industry. I think that is likely due to this focus on these higher acuity cases shifting over to that outpatient market. We're also seeing PE firms becoming more intentional in the ASC industry. They are continuing to focus on primary care specialties, such as general surgery, but there's a more recent focus on ortho and cardiology practices. Notably, both of those specialties being higher acuity as well. So, while we've seen multiples remain consistent in recent years, they are still at a higher level than the pre-pandemic multiples. I think as we continue to see those higher acuity specialties shift over, revenue and earnings increase, those multiples, while the multiples may stay somewhat consistent, I think the actual dollars being included in these transactions would continue to rise. As far as what we've seen in 2023, I think the fragmented nature of this industry, along with some of these changes and reimbursement and regulatory rulings, I think we could see more activity in the latter half of the year. Also, continuing what John was saying at the beginning with these interest rates starting to stall, we're gonna see more transactions across most industries. One large transaction to note is the recent collaboration between Intermountain Health and Surgery Partners. Surgery Partners is set to take over the management of IHC’s ASCs and then develop more ASCs in the market. So, I think that's one example of these larger transactions that we'll likely see more of in the latter half of the year.

Jen Johnson 8:35 Okay, perfect. I think that's all good news. And you know, honestly, even just from our website hits, the ASC sector page is hit more than anything. I mean, just so I know, there's always a lot of activity and interest in there. So, good to hear it keeps on moving. Let's switch over to a big one, acute care hospitals. I'm gonna stick with you, Taryn. This is a fairly robust part of our M&A Report, I think probably the largest part of the report, and there's a lot going on. We've obviously got financials for 2020 and ‘21. We're super clouded by COVID and we had stimulus funding, COVID volume, and other non-recurring factors. As we sit here today, I see the two major factors bubbling up, we've got labor costs are a huge issue, but at the same time, we have the highest market basket update in 25 years with a 4.3% increase to reimbursement. So, I really think acute care hospitals are one of the most complex of all the sectors that we're navigating here at VMG Health. So, how do you tease through all this information Taryn, all the sector dynamics, and land on M&A predictions for the rest of 2023 and into ‘24?

Taryn Nasr 9:38 That's a great question, Jen. So one of the problems that we saw at the latter half of 2022 and continue to see at the beginning of 2023 is an increase in transactions that were member substitution models. So cashless or minimal cash being transferred during the transaction, and the lack of the cash being transferred leads to difficulties in determining the transaction’s value. So, a lot of this M&A activity that we're seeing in the market, we can't necessarily put a multiple on or a value on due to the way that the transactions are structured. I will say that what we have seen in 2022 and seems to be continuing so far in 2023, is a lower number of deals. However, a higher dollar being exchanged for any deal that is not member substitution, it is being transacted at a higher amount. So, that is continuing, we saw that at the end of 2022 and we've seen that continue through 2023. Another interesting dynamic that we've seen at the end of 2022, and the beginning of 2023, is this antitrust regulation and pushback continues to be prevalent. There are certain transactions that are continuing to be blocked, specifically in this acute care hospital space. So, the blocking of these transactions is just postponing some of the activity, and I think not encouraging more activity in this market. So, just to kind of summarize this industry, I think what we're gonna see is more pushback from regulatory firms, as well as the emergence of more transactions involving distressed hospitals, as the hospitals do continue to experience cost, pressure, staffing pressure, reimbursement pressure, and just general underlying financial performance.

Jen Johnson 11:21 Yeah, that one seems like the hardest to predict. There's just a lot going on and, you know, but we'll keep an eye on it and keep reporting on it. We also have, that's probably a good place to plug that we've got Pulse on the Public Market, which is shown on our VMG Health website. And we show quarterly reports, they're just like little one-page summaries of all the public health systems out there and what their C-suite is saying and talking about in the earnings calls, which is another way to kind of track all the activity out in the acute care hospital space. So moving on, I'd like to go back over to John and touch on a sector everyone's interested in, physician medical groups. There are many challenges across this sector prompting physicians to sell their practice. I personally think one of the more recent trends is the value-based care movement, which tends to really hit the smaller practices since they don't typically have the capital to be set up with data reporting and care coordination. So, that's one of the things, but that said, I understand you all expect strong consolidation across the entire medical group sector for several reasons. So, John, could you provide listeners with some other reasons for this prediction?

John Meindl 12:28 Yeah, absolutely. So the value-based care, you're absolutely right, it's been a driver of transactions, forcing sellers to sell and incentivizing buyers to buy, but really the physician practice transaction market is currently structurally set up to continue an ongoing perpetual consolidation pattern. And the reason is that from a buy side, the industry is just set up for large companies to want to buy smaller ones, hospitals still do, always have and always will, want to align with physicians. Buying a practice, and employing a doctor is one of the easiest ways to align with physicians. Private equity, from a financial standpoint, private equity has figured out the friendly PC MSO model and private equity can be nimble and there's a lot of money to be made in the physician practice market, and private equity has figured out how to do that. So, PE can move between sub-sectors, but they have been and will continue to be interested in the physician practice industry. So, from a buyer's perspective, it's a great market to consolidate in, but from a seller's perspective, it's also a great market to sell in. And Jen, one of those reasons is, like you just mentioned, value-based care is making it administratively more and more difficult to run a practice. And so we're seeing that physicians are wanting to exit that, they want to stop running a business and focus more on their clinical side. We're also seeing that the percentage of physicians that are employed has been increasing every year, that number is still going up. And so we're seeing, you know, that's an outcome of consolidation. And then lastly, like you already mentioned, value-based care, it's putting a lot of financial risk on small practices that some doctors aren't willing to take anymore. So, from a supply side, the M&A market is supplying a lot of doctors that want to consolidate. And then all of that is within a backdrop of every single year we graduate a lot of physicians, a lot of them go into private practice. And we have built a model, a system that just puts in a bunch of new entrepreneurs every single year into the market. So from an M&A perspective, when you look at the demand side of the equation, or you look at the supply side of the equation, we're gonna see that it's a market that's just structured towards perpetual consolidation.

Jen Johnson 14:37 Yep. I mean, it's, you know, everyone wants to align with physicians, they pretty much run the show. They're the ones that write the prescriptions, and send folks to hospitals, to rehab, they are the ticket and the beginning of what moves in healthcare. So, there's always a lot of activity and a lot of interest there and it's crazy to see the peak in the private equity play in that sector. So, I find that one super interesting, our clients are all trying to be strategic and look at different ways to align with physicians and we keep watching that evolve. And it's one of the neatest things I think about our job, is getting to see what folks are trying to come up with to align with docs. So, let's move on to another sector, let's go with post-acute. So, to set the stage post-acute includes a lot of settings, we've got inpatient rehab facilities, long-term acute care hospitals, skilled nursing facilities, home health agencies, and hospice agencies. So, each of these obviously has its own unique reimbursement changes and regulatory updates, as well as players. So, John, you lead our Post-Acute Care Affinity Group. So, I'd like to get some M&A insight from what you're seeing. I know there's a big trend, hospitals are incentivized to direct patients to post-acute care, obviously, it's lower cost. But within all these post-acute care settings, what do you expect to see as far as M&A trends among all these different settings?

John Meindl 15:59 Yeah, it's really interesting. If you isolate the M&A trends within the post-acute sphere, it's definitely heavily dominated in the outpatient side, home health, and hospice. Way more transaction activity in the outpatient space and in the inpatient space. That said, the inpatient space is highly active from a partnership model, the joint ventures, we see a ton of joint ventures and I guess we could quibble about the definition of transactions within a joint venture space. But it is a different type of alignment and we're seeing a ton of that with inpatient rehab, even some LTACS. And then, of course, there are still a lot of joint ventures with home health and hospice, so we do see more transaction volume in the outpatient space. But we absolutely see a ton of interest all over the post-acute space. And from a valuation standpoint, it's still very frothy, home health and hospice multiples are still very strong. And I would say there's been a little bit of a shift away from home health and towards hospice in the past 12 to 18 months. But we're still talking about what was one of the hottest sectors is now maybe the third hottest sector, so it’s still extremely, extremely hot. Hospital-at-home, you cannot talk about post-acute without talking about hospital-at-home. And that whole concept is absolutely in my opinion, here to stay. A lot of people are trying to read the crystal ball to figure out how is it going to stay. Where's it going to fit in? It doesn't really align with any of the standard transaction models. We saw Amedisys by Contessa. So, we do see some transactions, but it's kind of too new to have one player that's consolidating a bunch. But that concept is here to stay, has a lot of regulatory risks right now, but everyone's trying to figure out what is the interplay between post-acute, and hospital-at-home, whether it's high acuity or low acuity patients. So, from a more general perspective, Jen, I would say that when we see referral patterns continue to shift away from LTACs and ERFs, I would still expect to see the M&A market focus on higher growth and lower capital-intensive sites of care, like home health and hospice. But that said ERFs, LTACs, home health, hospice, all over post-acute we're going to continue to see joint venture activity with acute care hospitals.

Jen Johnson 18:04 Yep, I think that makes a lot of sense, just the push toward lower costs. And I love to see all the innovation with the home health. I think that's going to continue to evolve and will be super cool to watch. So, thank you for that. I'm going to switch back over to Taryn now and touch on oncology. So, oncology remains one of the more complicated sectors and we get a lot of questions around strategy in this space. You know, everything from medical oncology, rad onc, proton therapy, there's just a lot going on. And we've got this 2022 Oncology Market Report by Precedence Research, which expects the global oncology market to grow at 8.2% annually from 2021 to 2030. So, that's pretty heavy growth. So, Taryn, can you tell listeners a little bit about what VMG Health expects to see as it relates to M&A in this high-growth sector?

Taryn Nasr 18:50 Sure. Yes, thanks, Jen. So, oncology remains poised for further consolidation. And there are a couple of factors that we can attribute to this continued focus on the oncology area. I think for one is PE involvement. So, PE involvement in this space is rapidly increasing. Half of all the acquisitions over the last 20 years involving PE platforms have occurred in the last four years and that's continuing in 2023. So, just the emergence of these PE platforms into this industry a couple of years ago, we're just seeing more interest, more tuck-in acquisitions as well as more recaps, these investments are starting to hit their five to seven-year hold. And so we're seeing more recaps with those platforms as well. Another reason for oncology being poised for further consolidation is the value-based care model is starting to gain traction in this space. There has been a recent trend of some larger high-profile cancer providers expanding their region to new areas through some of these value-based care partnerships and affiliations. I would also say there's increasing demand in this industry, reimbursement headwinds, some more complex regulatory environments that are also helping people show more interest and in terms of M&A for the oncology market. I think the last point that I would make for oncology is, as you hit at the beginning, just the growth in this industry, so an 8.2% growth rate over the next few years, as there's more volume, there's gonna be more transactions. And so I think that's a big reason why we're seeing so much activity here. One notable transaction that occurred earlier this year that I would be remiss if I didn't mention is just the transaction between TBG and AmerisourceBergen, regarding acquiring OneOncology, so OneOncology is a large network of leading oncology practices, and this transaction values OneOncology at $2.1 billion dollars. It also has a very interesting transaction structure that I think we may continue to see similar structures occurring in future transactions at this dollar amount.

Jen Johnson 21:02 Perfect. Thank you, Taryn. Always been a complicated sector. So, let's go to a very popular sector, which would be behavioral health. Now in this sector, we've got a few large players, but we also have private equity in this space. Plus, we're seeing the JV model as a major strategy more and more health systems are pursuing. So, Taryn, what can you tell listeners about the types of transactions you expect to see and what might make a behavioral health company attractive to be a target or a partner?

Taryn Nasr 21:31 Yeah, sure. So, the recent transactions within behavioral health can continue to be grouped into two trends, PE investments and JV strategies with for-profit operators. From a PE perspective, they are continuing to lead M&A activity in behavioral health, we did see a bit of a slowdown in 2022 in terms of the number of transactions, although still above historical levels, just not as high as in 2021. But the PE deal activity is expected to rebound this year and I think we have seen that increase in the first half of 2023. We have increased funding at federal, state, and local levels due to the worsening behavioral health crisis that we've seen with the pandemic. So, more money in the industry is going to lead to more PE activity as well, that's typically what we would see. From a for-profit operater JV strategy, we've seen a couple of deals announced one notable would be at the very beginning of this year Lifepoint announced a JV with Mercy Health to develop a 75,000 square foot inpatient hospital in Ohio, 72-bed behavioral health hospital in Youngstown. So, a couple of already bigger deals from a JV and PE perspective. In terms of what makes behavioral health facilities a prime candidate what we've seen is certain behavioral health facilities are adopting virtual healthcare delivery. And I think companies with this ability to provide these virtual services will make a popular acquisition target for both PE and strategic buyers.

Jen Johnson 23:01 Yep, that's a huge thing this year, all thanks to COVID really.

Taryn Nasr 23:06 Right. And I think just overall behavioral health deal flow has slowed since its peak in 2021. So, while it is still strong, I think what the experts are seeing in this area is that it just might not be as good as it was in 2021. So strong, still good, but not quite up to those 2021 levels.

Jen Johnson 23:25 Okay, we'll keep on watching that one. And let's switch to, I'll call them simpler sectors. I don't know if that's the right word for it, but just a little bit less intense, a little bit fewer players, and move over to John. So, let's go to the laboratory sector. So, we've really just got, for major players we've got LabCorp and Quest as the two most prominent players in acquiring independent labs. So John, what are these guys saying about their 2023 and maybe even 2024 acquisition plans?

John Meindl 23:53 Yeah, I like that, simpler areas. I'm sure operationally it's not simpler, but from an M&A perspective, these are definitely simpler markets. In M&A activity, lab had a big slowdown in 2020 through 2022, because all of the focus operationally was on COVID testing. And so they didn't have any appetite, desire, or capacity to look at M&A. And frankly, they were busy, they were busy with COVID. So that said, we've started to see more activity return in 2023. I'd expect that to continue to go up, particularly amongst outreach labs. And what's driving that is reimbursements in lab are tough. This is one of the few industries where it's pretty common for commercial to actually pay below Medicare and there's been significant reimbursement cuts over time coming from Medicare. And so the revenue growth thesis for lab, in order to grow revenue in the lab industry, M&A is one of the more viable ways. So, there have been some significant proposed reimbursement cuts through PAMA, and that decision has been delayed to 2024 which benefited the industry this year, but it's put a lot of uncertainty next year. So overall, we expect to see a continued increase in M&A activity, particularly in outreach lab as the COVID is impacted lessening, but I would still expect to see a muted level of lab M&A, just given the pending potential PAMA cuts.

Jen Johnson 25:13 Okay, makes total sense, kind of still simple. But I'm not saying again, good point, not from a business side simple, but from an M&A side simple. I want to switch to a little bit more fragmented sector, which is diagnostic imaging centers. So, I understand you guys expect to see more transaction activity over last year. So, could you maybe touch on some of the reasons for this? 

John Meindl  25:31 Yeah, absolutely. So, imaging has always been a muted industry. Last year was even more so, last year was even maybe a down year from an M&A perspective. So, the reason why last year was so down from an M&A perspective is because of the interest rates. And imaging is a capital-intensive industry, there are reimbursement cuts in imaging as well. So, it's heavily heavily heavily impacted by an increasing interest rate environment. So, last year, we definitely saw an impact from that. That said, we are seeing a lot more joint ventures and a lot more roll-ups in imaging. RadNet has announced that they expect to see up to half of their centers to be in hospital JVs, they see a path towards that. RadNet is not the only player in the industry but it is a really good example of how important JVs are going to be. And then the last thing I'll say on imaging is that the amount of interest in AI, and imaging centers that have adopted or can use AI and even radiology practices as well, it is growing exponentially, it is still a tiny thumbnail of the total market. But in terms of impact, I would look for that in the next two to three years to be a major part of the M&A market from a value perspective. So, we would see M&A activity to stay kind of muted relative to other healthcare industries, but certainly a pickup over last year.

Jen Johnson 26:46 Okay, perfect, great recap. So, let's move over to urgent care. Now, I kind of love this sector, because volume continues to outpace other sites of service for lots of reasons, which are all outlined in our M&A Report. But what I'd like to cover here is what's expected on the M&A front for urgent care. And I'd like to switch back over to Taryn and see if you can talk a little bit about the types of transactions you expect to see and what would make a prime target for an urgent care acquisition.

Taryn Nasr 27:12 Sure, yeah, thanks, Jen. So, within urgent care, the players that we see that are active in M&A are going to be across the board. We've got health systems, PE groups, and just other buyers that are active in this industry. For health systems, these urgent cares offer an access point that is less costly than an emergency room. Also, due to patient consumerism, they're more interested in going to an urgent care than a hospital department when they can. I would also say that market fragmentation offers players in the M&A space the opportunity to generate greater financial returns through economies of scale. To your point, Jen, the number of urgent cares continue to increase potentially to the point of oversaturation in some markets. However, because of those high number of buildings, and a high number of operations, they're able to have those economies of scale if they are able to consolidate them in the same marketplace. PE groups, as I said in the beginning, are also involved in this market, they accounted for almost half of the transactions in 2022. And so far in Q1 of 2023, or Q1 and Q2 of 2023, we've not seen that activity slow down for PE buyers, also of note is that there are multiple PE-backed operators that are currently exceeding the typical five to seven years investment window or vintage. So, I think we are in prime time for these potential exit opportunities for at least five of these large groups. One notable transaction that we saw in 2023 already, it was last month, was HCA announced the agreement to purchase 41 urgent cares in Texas from FastMed. So, while the activity has been pretty steady in the first half of 2023, that's not to say that we aren't going to see more of these maybe larger transactions from health systems such as HCA, Tenet, or other players.

Jen Johnson 29:11 Okay, good deal, and there's PE popping up again, right? Pretty much hitting all the sectors here. Well, I've got one more sector for you, Taryn. And I find this one fascinating because it's dialysis and the reason I like it is it's always been ahead of the curve on value-based care, due to the long-standing government programs. So, like when we're valuing, you know, quality or shared savings, we're always looking at what the government is saying and we're able to look at the dialysis programs as one of the ways to start. So, I like it from an FMV perspective, because it gives us good insight on how these things are structured. Here we've only got two major players really, so it's a bit easier to track. So Taryn, can you just touch on what these two guys are doing and their expected M&A activity?

Taryn Nasr 29:55 Sure, and you're right, Jen. So, there are only two big players in the dialysis market, we've got DaVita and Fresenius. And we have not seen any changes in this activity in 2023 from 2022. To bring up kind of what you said earlier, these are maybe not the most interesting or active markets in the M&A space. So there's not a lot to talk about within dialysis. The industry remains bullish about their future growth prospects, they have continued ongoing challenges from COVID, as well as the main operators believe that drivers of growth are going to remain internal, not necessarily through M&A. It's not a fragmented market, and so when you have a market that is controlled by two players, you just aren't going to see that much activity. So, not a lot to discuss in this industry, other than continuing to see what those two big players do.

Jen Johnson 30:52 Yep, that makes a lot of sense. Easy to track, right? Okay, well, good. Great. That was a ton of great information, all six sectors, you just covered six. So, well done, that was excellent. And what I'd like to do is piggyback off just the value-based care movement that we touched on right there. We've seen it in years for dialysis, but risk-bearing entities are really evolving in the market. So, this sector is super fascinating. I mean, this represents companies seeking to capitalize on the shift from fee-for-service to value-based care. We've got a wide range of players. We've got payers, health systems, provider groups, technology-enabled primary care platforms, we've got retailers like CBS and Amazon, and even financial investors. So, I think everyone would agree this is the most complex and emerging sector we have here in healthcare. So, John, you guys did a fantastic job covering this sector in the M&A report. Could you provide just a few thoughts on what you expect as it relates to future M&A activity in this sector?

John Meindl 31:53 Yeah, absolutely. So you know, what I would look for is strong activity in 2023 and 2024. As MA lives continue to grow significantly, and as there are major investments in technology and data analytics. And so at its broadest risk-bearing entities, they're, as their name says, they're targeting at-risk contracts. So within that, what we do at VMG Health is we tend to take a very MA-centric view of risk-bearing entities because it is the most trackable data set out there. And if you look at MA lives, they're projected to grow 10% per year through 2025 versus 1% per year for the overall insured population. And the share of Medicare beneficiaries enrolled in MA has increased two and a half times since 2007. It's a percentage basis, so there's so much organic growth in this value-based industry if you look at it from an MA perspective. And Jen, as you mentioned, all the different types of buyers out there, the new payvider concept too, they're all entering this market, they're all trying to come at it from a different way but they're all trying to cut costs. So, each of these groups are going to come in, because they believe they can optimize care coordination and improve patient experiences, and I would expect to see M&A continue to grow in this area.

Jen Johnson 33:11 Okay. Yeah, me too. It's got to, right? There's just no other choice. So, lots of opportunities out there. And we spend a lot of time, our strategy division, like coding division, like we're all talking about risk-bearing organizations and how they work and how we can help our clients. It's an ongoing topic here at VMG Health. So, that was technically our last healthcare sector. But what we've done is we've added private equity as its own sector in the M&A Report due to its growing prevalence in healthcare, although it's technically really just an industry participant or a buyer versus a sector, it's obviously here to stay and we're touching on. So, just like personally, when I started back in 2006 at VMG Health, we had virtually no PE clients. And now they are a significant portion of our client base and they have some interesting strategies, and they're involved in most sectors. So, in fact, what we've learned is over the last decade, PE involvement within the healthcare industry has experienced an annual growth rate of approximately 12% so they are not slowing down. We've got countless stats by sector we could cover related to PE. But what I'd like to do here is just ask John, kind of just an overarching question. What do you think our listeners would find most interesting as it relates to PE involvement in the healthcare space over the next 12 months?

John Meindl 34:31 Yeah, great question. And PE is so interesting, because, as you mentioned, they're just a market participant just like anyone else, but they are a massively disruptive market participant and I can't tell you how many times all of us here at VMG Health will get a client who calls and says, “Hey, how come this PE firm can do that? Well, how come they can pay so much? Where are they making their money? You know, what are they doing?” And so PE is on everyone's mind in healthcare and what's really you know, driving all that is that PE has been intensely interested in healthcare for a long time, for a decade more or plus. And they can be nimble and move between sectors. So, if you're in a vertical of healthcare, and that's where you operate, you might see PE come in one year, and then they exit and you think, “Wow, that was a weird wave.” I promise you, they just exited that vertical and they moved on to another one. They're just rotating within healthcare. And the reason why they can do that is that healthcare is such a fragmented industry, they can pay a high price for a platform company, a high multiple, and then they can go buy a bunch of bolt-ons for a low multiple. And when they take that earnings and that bolt-on, integrate it into their platform, they can then sell that earnings for their platform multiple, and it's just an immediate arbitrage. So, I would expect to see that continue. PE dry powder is staying high, so they're very incentivized to deploy that dry powder, I would not expect them to go away. They've slowed down quite a bit over the past couple of months, lending standards have tightened, it's hard. The PE model is not really built for tight credit markets, but the markets are going to loosen and when they do I'd expect to see a flood come back. And then the last thing I'd say, Jen, you know you ask what are some interesting things we can look forward to in the PE market, PE transactions are different than a strategic market participant transaction. And that's the other major question I get is, “Why is this a different transaction?” And when a private equity firm buys a business, let's call it a physician practice, they're going to restructure that compensation. Jen, I know you and your team do tons of work with MSO roll-ups, they're going to restructure that compensation for that physician, that physician will roll a bunch of equity and then they'll get some cash upfront. And then in five years, hopefully, they get to sell the company and they make a lot of cash. When a hospital or strategic buys a practice, they're not really doing all that. They're going to employ the doctor day one, take all the administrative burden off of the doc and move forward. So, they're very different transactions. So, a PE firm might have, what they're buying what they have post transaction is a different company than what a strategic player happens post-transaction. And I think that's a really important evolution in the way the PE model has grown in healthcare and I would expect to see that to continue.

Jen Johnson 37:05 Yeah, I think understanding their strategy and the sectors they’re targeting should be a really important part of any healthcare leader’s education, you know, they're now legitimate market participants with a different strategy, you just got to know what they're doing. So, that was a lot but it was a really great way to get up to speed on 12 healthcare sectors. I do think it's worth noting at this point that what these nearly 40 professionals at VMG Health do to get this report out each year is so valuable for us internally here at VMG Health, and the industry at large. So I want to give a big thank you to the entire VMG Health M&A Report team. And I always like to recap our episodes. This one's a little bit harder to put into four tiny points, but I'm gonna go ahead and say first, we've got all sectors are seeing a recovery from the pandemic. Second, some sectors are evolving more than others due to both telehealth, AI advancements, and value-based care reimbursement. Third, acquisition activity is predicted to be strong for most sectors. And fourth, private equity companies have become a real buyer in the healthcare industry, and sometimes with very unique strategies. So, as far as all these sectors this is also a good time to note that we have affinity groups at VMG Health for each of these sectors. Each has a web page on our website that you can check out with all the content and thought leadership we have by sector. So, Taryn and John again, we appreciate you both for the excellent insight and want to make sure listeners know they can reach out to either of you anytime with questions, and be sure to download VMG Health's Annual Healthcare M&A Report through VMG Health's website, everybody take care.

Taryn Nasr 38:41 Bye, thanks, Jen.

John Meindl 38:42 Thanks, everyone.

Outro 38:48 Thank you for listening to the Healthcare Download with VMG Health. Make sure you subscribe to the show wherever you listen to podcasts to receive new episodes when they release the first Wednesday of each month. You can also go to vmghealth.com or visit the episode notes to follow VMG Health’s monthly newsletter and to learn more about this conversation.