We’ve experienced unbelievable change over the past year in the way we think about and consume healthcare. We witnessed the quickest vaccine delivery in history. Many of us likely had our first virtual health encounter. And along the way, payers, providers, tech companies, and life sciences organizations collaborated to integrate a range of new patient-centric technologies—increasing engagement, improving value-based care, and contributing to better outcomes.
It’s no wonder, then, that when surveyed earlier this year, nearly half of healthcare CFOs said the pandemic will drive an increase in partnerships across the healthcare ecosystem. Following a stall in deal volume with the onset of COVID-19, deal volume rebounded with renewed interest in 2020, culminating in a high-velocity fourth quarter with deal volume 3% higher than in 2019’s record-setting year.
The momentum hasn't slowed in 2021, particularly as special purpose acquisition companies (SPACs) and private equity firms—which had a staggering $2.9 trillion in capital by the end of 2020—continue to fuel dealmaking.
Whether you’re a strategic or financial investor—or a healthcare business leader—understanding what’s driving M&A and investment is critical to developing strategies that meet the needs of today’s consumers. We’ll discuss the trends and drivers for three vital segments of the healthcare deal landscape: providers, payers, and life sciences.
A number of system-wide trends are driving consolidation in the provider space, including a growing demand for:
Through consolidation, providers can achieve the economies of scale and market expansion they need to succeed in this shifting landscape. This entails bringing together services that widen their spectrum of care, venturing into areas such as personal, ambulatory, inpatient and acute, post-acute, and community and home care.
Four emerging and rapidly changing areas for providers, however, are virtual care, primary care, behavioral health and ambulatory surgical centers (ASCs).
COVID-19 necessitated a widespread shift to virtual care, prompting consolidation of digital health platforms. In a survey held last September, we found that 82% of U.S. residents were extremely or somewhat open to using telemedicine as an alternative to in-person appointments.
Meanwhile, nearly one in five Americans relocated during the pandemic—with more than half citing moving as a reason to change providers—incentivizing physicians to offer geographically flexible care options.
Increased competition from new market entrants—like employer-based healthcare and value-based provider groups—has sharpened the focus on differentiating primary care models.
While there will be a short-term increase in demand for fee-for-service care (based on non-use in 2020), primary care providers will look to expand into upside or fully capitated models down the line. Medicare Advantage (MA) populations, for instance, can open the door for providers to expand into such arrangements, but only if providers can manage this aging population across the continuum. That requires enhanced technology such as improved preventative care analytics and patient experience platforms.
The stress wrought by the pandemic underscored the need for accessible behavioral health support. At the same time, there’s been a growing push for early intervention screenings (e.g., for autism) as well as a heightened demand for substance abuse treatment amid the opioid crisis.
This focus on behavioral health is part of a broader provider shift away from acute care toward holistic and preventative health and wellness services. These drivers appear permanent, and we expect the volume of behavioral health deals and investments to remain above pre-COVID levels in the long-term.
Patients looking to minimize their time in the hospital during the pandemic began gravitating to ASCs for elective procedures—if they chose to go through with them at all. As we emerge from the pandemic, that shift—combined with a healthy backlog for elective procedures and a move towards value-based contracts that require lower-cost care settings—are pushing continued interest in ASCs from PE groups and large health systems.
Payers are increasingly leveraging ancillary benefits to differentiate themselves in a crowded marketplace. The portion of health insurers offering dental and other ancillary insurances has grown substantially, from 68% in 2018 to 80% in 2020.
The competitive advantages of offering and bundling these benefits are particularly significant in the budding Medicare Advantage space, where ancillary benefits give payers the opportunity to drive lead generation. The number of such plans offering specialty benefits has increased 64% year-over-year, while a recent survey indicated that 62% of MA members cited dental benefits as their reason to enroll.
For members—especially among MA’s aging populations—it’s also become increasingly important to meet patients in their homes. Advancements in technology and analytics, increasing healthcare costs, and the shift to at-risk and delegated care models only add to this push—and software companies and tech-enabled providers are looking to capitalize.
We saw the number of deals in the life sciences industry hold steady last year, but the total value dropped by half compared with 2019. This makes sense given that COVID-19’s unpredictability meant fewer mega-mergers, while other factors spurred numerous technology-related small-to-midsized transactions.
Looking ahead, the disruption of in-person patient encounters, expedited FDA approval for vaccines, bipartisan support for lower drug prices, and the increasing adoption of artificial intelligence and machine learning will drive deals aimed at transforming clinical trials, as well as drug/therapy development and administration.
Orphan drug sales will constitute one-fifth of all prescription sales in 2024—and with the increasing availability of genetic testing, more opportunities have opened up to identify patients with the rare diseases those drugs treat.
The pandemic completely halted clinical trials because of the disruption to patient encounters and access, further igniting the need for decentralized trial features. It also called attention to inefficiencies in the drug development cycle, as we saw COVID-19 vaccines produced and approved in months rather than years.
At the same time, bipartisan scrutiny of U.S. drug prices – which are, on average, four times higher than in similar countries – has catalyzed the need for tech-enabled processes that can help lower costs.
There are pressing and unmet needs for effective rare disease treatments, as well as other therapeutic areas requiring precision medicine. New technologies can help. For instance, advancing artificial intelligence and machine learning are accelerating drug discovery and better identifying patient recruitment parameters – while the ever-growing adoption of mobile apps, remote-monitoring devices, and wearables will continue to improve disease management.
As Roy Jakobs, Chief Business Leader for the Connected Care business of Royal Philips, put it last summer: “Healthcare is an industry that usually moves slower. But the COVID-19 outbreak has forced health systems and innovators to pivot and adapt quickly. We’ve made 10 years of progress in three months.”
That progress carries significant consequences for every aspect of the healthcare deal landscape, driving consolidation and new collaborations to offer the latest technologies, broaden the spectrum of care, lower costs, and cater to patients’ evolving needs.
With rapid change continuing to hover along the horizon, it’s an exciting time for healthcare dealmakers and business leaders. By forming new partnerships, they have the power to create a brighter future for our healthcare system and the patients it serves.
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