Slow but Steady: Experts Report on 2023 Mergers and Acquisitions Trends

June 23, 2023 - What will happen to the volume and value of mergers and acquisitions in 2023? This is a question at the forefront of payers’ minds as the healthcare industry emerges from the uncertainties of the coronavirus pandemic.

The twelve months ending in May 15, 2023 witnessed strong merger and acquisition volume despite various challenges, according to a report from PwC. At the end of the report’s timeframe, the volume of deals was nearly twice as high as the period of 2018 to 2020.

Still, health services deals dipped slightly, dropping by four percent from 2022. Volume dropped from 1,738 in 2022 to 1,661 as of May 15, 2023.

Deal values declined significantly by 15 percent. In 2022, deal value amounted to $100 billion. In the study’s timeframe, deal value totaled $85 billion. Megadeal values, specifically, have been more than halved in the last two years since 2021, a trend which might continue due to rate hikes.

The decline in deal value was a trend that started in 2022 along with the trend that a strong share of deal value came from megadeals that amounted to $5 billion or more, such as the CVS Health acquisition of Oak Street Health.

Deals were driven by efforts to adapt businesses after economic and geopolitical disruptions and as the US entered a post-coronavirus pandemic reality.

PwC experts maintained a positive outlook for the rest of 2023. Nick Donkar, health services deals leader at PwC, US, told HealthPayerIntelligence that the mergers and acquisitions deal process might be slower for the remainder of the year and that the most competitive payers would be the ones that conducted portfolio reviews to inform their dealmaking.

Expect policy changes to slow, but not halt, dealmaking

Donkar expected policy changes in Medicaid and Medicare Advantage to slow the process for healthcare deals, but not axe them.

Medicaid redeterminations will have some ripple effects. Payers can anticipate some member growth on the exchange and in employer-sponsored health plans due to disenrollment from Medicaid. Separately, experts have predicted that as many as 18 million individuals might be disenrolled during redetermination

The Medicare Advantage 2024 announcement might diminish concerns that have swirled around Medicare Advantage plans, if only temporarily. The report projected that the regulation might shift attention toward benefit management, point solutions, and managed care programs.

At a high level, these policy changes may lengthen the processes for certain joint ventures and investments.

Payers will grow more creative in structuring their deals, Donkar anticipated. The policies will not impact the types of deals that payers seek out, but they may cause payers to tweak contractual elements, including board composition, governance, and other details.

However, Donkar emphasized that, for Medicaid redetermination, the Medicare Advantage 2024 rate announcement, and other Medicare Advantage policies, it is too early to determine confidently what the downstream effects will be on costs, enrollment, and strategic reviews.

Certain policy changes may drive growth in employer-sponsored health plan membership, along with increases in exchange plan enrollment. Donkar expected that payers would look to attract new members into their employer partners' plans or enter the employer-sponsored health plan space, but the strategies will look different for each insurer.

Payers will need to evaluate their portfolios and assess their markets and geographies to see what the opportunities or threats are related to surges in employer-sponsored health plan enrollment. If their markets are expecting to see increases in this activity, payers must decide whether to partner to combat the growth or to partner with the growth.

Employer-sponsored health plan services is where payers are most likely to think outside of the box and where deals with nontraditional players might be most pervasive.

“We're seeing some non-traditional players come in and provide services to these employer-sponsored plans," Donkar explained. "Insurers are looking at…’how do we crack that code?’ And I think it's going to be through innovative partnerships and joint ventures that they are attracting additional members and/or partnering with those that are already in the space.”

Review portfolios, divest assets that do not align with business goals

There has been a clear distinction between payers and providers that have leverage and those that do not, as both parties seek to create fully integrated health systems. This dichotomy will continue to affect dealmaking throughout the remainder of 2023.

Balance sheet strength, access to capital, or market erosion are key factors determining whether a payer or provider’s efforts to become a fully integrated health system will succeed. Payers and providers will continue to dabble with these attempts, but only the ones that are well-positioned and well-informed will have the leverage to expand their services and make deals.

The differentiator between payers that will make the most of the current environment and those that will not have a successful dealmaking season in the latter half of 2023 revolves around portfolio renewal and divestitures, Donkar said.

Payers had to reassess their deals during the coronavirus pandemic and as the country emerged from the pandemic. Companies undertaking a strategic review to assess their core assets and divest non-core assets will be well-positioned for dealmaking for the remainder of 2023.

Divesting of non-core assets will allow payers to refocus on their core business of providing affordable, accessible, high-quality coverage for members. And, with that goal in mind, they will have the chance to consider how they can strategically reinvest the funds from selling non-essential assets.

Antitrust litigation is not just for megadeals

In the scramble to seize opportunities, payers cannot minimize the power of regulatory reviews and antitrust litigation.

“Once it had to be on the front of the Wall Street Journal or a large publication or a certain dollar threshold to be reviewed with any certainty. That level has obviously dropped. And so, especially when you think about large health systems, both payer and providers expanding into different geographies, there's obviously a concern from the federal regulators that they want to make sure nothing is disrupted from a care delivery and care and insurance perspective,” Donkar stressed.

“This is not going away, the regulatory reviews, at any level—both state and federal.”

Like the other regulatory trends, these regulatory reviews are likely to slow down the process, forcing payers to test their deals and ensure they can withstand scrutiny. Certain states are also trying to tighten their regulatory processes. If there is any concern that a deal might limit consumer choice, drive up costs, or impact quality of care, regulators will get involved.

However, this trend is not new. Regulatory reviews have been high, but deal volume has persisted, relatively unfaltering. As long as payers have reviewed their deal structures and arranged their efforts around their business objectives, they will be well-positioned for the rest of 2023.