M&A in the Healthcare Industry and What To Consider For Consolidation

There has been a noticeable increase in healthcare mergers over the past decade, and that number is only increasing. But what’s driving this trend? Equally important, what should investors and healthcare organizations consider when consolidating? We will explore all that and more here.

Landscape Overview: What’s Driving Healthcare Mergers?

The healthcare industry is complex. So are the reasons behind this spike in mergers over the last decade:

Shifting Demand

COVID certainly exacerbated the trend of rising healthcare costs. But spending was going up long before the pandemic. A study by the Commonwealth Fund suggests healthcare spending as a percentage of GDP rose from 8.2% in 1980 to 17.8% in 2021.

These costs push more patients toward outpatient care options, which are generally more affordable than traditional hospital stays. In response, larger health systems are merging with smaller healthcare providers that offer outpatient services or clinic networks. The goal? To extend a broader range of healthcare services, stay cost-effective, and meet consumer demand for more outpatient care.

Rising Costs

We mentioned rising healthcare costs, but we didn’t mention that many hospitals are struggling because of them. Inflation is driving up rent, utilities, medical supplies, equipment, and labor that is cutting into the healthcare system’s revenue, just like it is for everyday Americans.

While other industries offset these costs by raising prices, healthcare is heavily regulated by government agencies and insurance providers who pay most patient bills.

This leaves healthcare providers in a tricky situation: They can’t raise prices; worse, their payments often do not fully cover the actual cost of care.

Value-Based Care Initiatives

More and more healthcare providers are adopting value-based care initiatives, which focus on improving patient outcomes while controlling costs. This is a shift from the traditional fee-for-service model, which incentivizes healthcare providers to deliver more services and procedures—often without considering the effectiveness or necessity of those treatments.

The Benefits of Healthcare Mergers

Given the current healthcare landscape, it's becoming clear why an increasing number of healthcare organizations are looking to merge or be acquired.

Lower Healthcare Costs

By merging and combining resources, healthcare organizations can reduce cost redundancies and streamline operations. And because they are larger, they can leverage more bargaining power with suppliers and insurers, allowing them to negotiate better prices and pass those savings on to patients.

Higher Quality Care

When healthcare organizations merge, they combine their expertise, resources, and infrastructure. This directly impacts patient outcomes and leads to more collaboration and innovation.

Expansion Possibilities

When healthcare organizations join forces, they bring together their resources, staff, and assets, strengthening their overall infrastructure. This creates new possibilities for growth. Often, we see this happening when larger urban-based healthcare organizations acquire smaller clinics and hospitals in rural areas. This helps expand healthcare access for people in underserved communities.

The Challenges of Healthcare Mergers

At this stage, you may already be able to anticipate some of the challenges associated with healthcare mergers. But they are less obvious than you might think.

Monopolization

While healthcare organizations often merge to cut costs, they sometimes experience the opposite effect. This can occur for a few reasons, typically reduced competition or because private equity ownership prioritizes profit margins over patient care. When this happens, costs may rise for both patients and insurance companies.

Disruption

Mergers can streamline workflows, communication channels, and workplace culture as quickly as they can disrupt them. When the latter happens, quality begins to slip, negatively impacting patient experiences and outcomes.

Centralization

Ironically, mergers can also limit rather than expand healthcare access. This happens when larger organizations acquire smaller urban hospitals and clinics and decide to centralize their locations, making it harder for rural patients to access medical services.

Over Three Decades of Driving Healthcare Growth

The healthcare industry is complex, so you need the expertise of an industry veteran like Managing Director of Medical Practices Randy Krivo. With over 35 years of hands-on experience in building, buying, and selling businesses within the healthcare sector, Randy brings a wealth of knowledge and insight to every transaction.

Throughout his career, Randy has facilitated over 100 medical practice transitions, has a 100% medical spa industry closing ratio, and has overseen transactions totaling a combined enterprise value of $44M in the last year alone. Contact Randy today!