WWW.IBISWORLD.COM April 2013 1 April 2013 By IBISWorld Analysts Douglas Kelly & Anna Son A changing healthcare landscape and increasing demand are spurring potential deal opportunities in related industries. Uncertainty and cost pressures will bring more attractive healthcare companies to the deal table The healthcare sector continues to be a hotbed of merger and acquisition (M&A) activity since the passage of the Patient Protection and Affordable Care Act (PPACA) in 2010. Expanded consumer access to affordable healthcare coverage under the PPACA is projected to significantly boost healthcare demand. An aging population with increasing life expectancies and rates of chronic disease will further underpin rising demand, creating strong prospects for sector growth over the next five years. Although many of its provisions have yet to be fully implemented, the law is drastically changing the healthcare landscape by driving consolidation among healthcare payers, most notably health and medical insurance providers. This consolidation activity, along with industry-specific provisions of the PPACA, is spurring downstream consolidation among healthcare supplier and services provider industries. IBISWorld anticipates that the PPACA will create significant opportunities for middle-market dealers among downstream healthcare supplier industries (e.g. medical device manufacturers, generic pharmaceutical manufacturers and medical laboratories) and service provider industries (e.g. hospitals, physicians and retirement communities) over the next five years. Uncertainty over the effect of regulatory demands from the PPACA, low capital costs and a high number of aging healthcare business owners will create a larger supply of potential deal opportunities. These opportunities will be met by higher demand from strategic buyers, including private equity-backed companies, which will look for bolt-on acquisitions to achieve scale, enter new geographic markets or expand existing product and service portfolios in anticipation of higher healthcare demand. Investors will also be drawn to these opportunities by attractive valuations, low capital costs and a number of exit options. Healthcare payers To meet higher demand and cost pressures stemming from the PPACA, larger health insurers are acquiring smaller regional players to achieve scale and diversify their customer base and service offerings. This is particularly true in the government-sponsored plan market, which is poised for strong growth due to the expansion of coverage under Medicare and Medicaid. For example, health insurance giants WellPoint, Cigna and Aetna all acquired smaller providers focused on Medicaid coverage to expand www.ibisworld.com 1-800-330-3772 info@ibisworld.com
WWW.IBISWORLD.COM April 2013 2 their government business in 2012. These recent acquisitions indicate that health care companies are seeking new opportunities to take advantage of healthcare reform, under which 16 million low-income adults and children will gain health coverage through Medicaid. In addition, to meet new rebate requirements, insurers will likely change their pricing and modify product features and benefits, which will have a significant impact on the product and service mix in downstream healthcare supplier and provider industries. Three provisions of the PPACA may potentially limit revenue and profit margin growth for private insurers. First, insurers will no longer be able to deny coverage to Americans with preexisting conditions, potentially resulting in higher claims costs. Second, as of January 2011, the PPACA set minimum loss ratios (i.e. the percentage of premiums that must be spent on benefits and healthcare quality improvement) for insurers at 85.0% for larger employer and government-sponsored plans and 80.0% for individual and small employer plans. Insurers that do not meet these goals must provide rebates to consumers, which may cut into profit margins. Third, the US Department of Health and Human Services (HHS) will conduct annual reviews of premium rate Pricing pressure Insurance Providers Pricing and procedure pressure Healthcare Suppliers Healthcare Providers Medical Device Manufacturing (IBISWorld Report 33451b) Size (2012): $64.7 billion Five-year growth (2012-2017): 6.40% Number of firms (2012-2017): -5.80% Diagnostic and Medical Laboratories (IBISWorld Report 62151) Size (2012): $48.0 billion Five-year growth (2012-2017): 4.48% Number of firms (2012-2017): -1.6% Generic Pharmaceutical Manufacturing (IBISWorld Report 32541b) Medical Instrument and Supply Manufacturing (IBISWorld Report 33911a) Health and Medical Insurance (IBISWorld Report 52411b) Size (2012): $707.4 billion Five-year growth (2012-2017): 5.12% Number of firms (2012-2017): -0.3% Pharmacy Benefit Management (IBISWorld Report OD4620) Size (2012): $226.6 billion Five-year growth (2012-2017): 4.49% Number of firms (2012-2017): 1.9% Hospitals (IBISWorld Report 62211) Size (2012): $785.7 billion Five-year growth (2012-2017): 4.00% Number of firms (2012-2017): -0.9% Emergency and Other Outpatient Care Centers (IBISWorld Report 62149) Size (2012): $82.7 billion Five-year growth (2012-2017): 7.04% Number of firms (2012-2017): -0.4% Primary Care Doctors (IBISWorld Report 62111a) Size (2012): $171.8 billion Five-year growth (2012-2017): 4.5% Number of firms (2012-2017): --1.0% Ambulance Services (IBISWorld Report 62191) Retirement Communities (IBISWorld Report 62331)
WWW.IBISWORLD.COM April 2013 3 increases, which could potentially cut into profitability if insurers cannot raise premiums in line with rising medical costs. Additionally, the law will likely result in higher administrative, compliance and other operating expenses for insurers. These cost pressures will continue to drive consolidation among operators that will create a smaller base of large, national insurers with increased bargaining power to exert stronger pricing pressure on downstream healthcare supplier and provider industries. Healthcare suppliers Increased healthcare demand as a result of the PPACA, even with accompanying cost pressures from belt-tightening healthcare payers, is generally good for healthcare suppliers. However, these pressures are coinciding with falling research and development productivity and a wave of patent expirations, most notably for innovation-dependent companies like prescription drug and medical device manufacturers. For example, the number of new drugs approved per billion dollars spent on R&D has halved roughly every nine years since 1950, falling about 80-fold in inflation-adjusted terms. In response, pharmaceutical companies are likely to increase strategic M&A activity to bolster thinning product pipelines, focusing in particular on acquiring established companies in the middle-market space with specialized, high-margin lines that complement their existing product portfolios. Middlemarket M&A activity will also heat up in the highly fragmented device and instrument manufacturing space, especially for companies that develop consumer-oriented and cost-saving products for healthcare providers. Within this space, medical device manufacturers will consolidate to improve their pricing power in order to offset a 2.3% excise tax imposed by the PPACA, and pricing pressure and declining procedure volumes caused by healthcare payers. The diagnostic and medical laboratories industry is also a fragmented and growing space that is ripe for consolidation. Consolidation among the industry s payers and customers will pressure reimbursement rates and testing volumes, encouraging more laboratory owners to sell their businesses over the next five years. For example, Genzyme was acquired by Laboratory Corporation of America, Clarient by GE Healthcare, Athena Diagnostics by Quest and Genoptix by Novartis. These acquired companies are prominent leaders in the fields of genetic disease and cancer. Life science companies, device manufacturers, pharmaceutical companies, healthcare providers and private equity firms will increasingly active in this space to acquire access to patient samples (e.g. blood samples), which are critical development of new healthcare tests and therapies. Healthcare providers With new healthcare product innovation subdued, the PPACA is shifting the focus in healthcare innovation toward healthcare delivery, which will benefit healthcare providers and create ample opportunities for middle-market dealmakers. In part, this will come by applying information technologies to develop new ways of delivering care and improving clinical outcomes to reduce costs and meet higher demand. Cost pressures and incentives in the PPACA will drive increased cooperation and consolidation among healthcare providers to improve healthcare quality for end-consumers. Hospital M&As are continuing at a rapid pace. For example, in 2012, Ascension Health the nation s largest
WWW.IBISWORLD.COM April 2013 4 About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit www.ibisworld.com or call 1-800-330-3772. Contact: Savannah Haspel VP, Public Relations IBISWorld Phone: 1-310-866-5044 savannahh@ibisworld.com www.ibisworld.com Catholic hospital network agreed to acquire the Daughters of Charity Health System and the Marian Health Alliance in order to expand its geographic reach and scale. By consolidating, hospitals are able to increase their negotiating clout with a smaller base of larger healthcare suppliers and payers. Larger hospital systems are able to spread fixed costs over a broader revenue base and have better access to capital needed to integrate high-cost technologies, such as electronic health records. Furthermore, healthcare reform encourages hospital consolidation through accountable care organizations (ACOs), which will allow hospitals to share cost savings or payments to achieve quality measures. However, to successfully develop and manage ACOs, hospital will need a high level of sophistication. For example, ACOs must provide integrated information access across providers, settings and activities through collaboration and coordination among providers and use of health information technology solutions. Large hospital systems with greater resources can more easily achieve this increased level of sophistication, which further promotes integration. Hospitals are also exploring vertical integration opportunities by acquiring private physician practices, which will open up new opportunities for investors and strategic buyers. In the previous wave of acquisitions in the 1990s, many physicians went back to their practices. This time, it will be harder for physicians to opt out of the hospital system due to changes in payment structures and healthcare information technology. Physicians benefit from joining hospitals because they are paid for services at the hospital systems rates, which are usually much higher than what insurers pay independent practitioners. Furthermore, hospitals are expanding their outpatient care units to improve patient care and reduce unnecessary costs, representing a potential opportunity for investors, as hospitals are seeking partnerships to gain access to the capital they need. Conclusion While not yet fully implemented, the PPACA is a game-changing piece of legislation that will continue to reshape the healthcare landscape. Several major provisions for health insurers have already been implemented, but their ultimate impact on downstream healthcare suppliers and providers has yet to be fully realized. Innovation and growth will shift from new product development to a focus on healthcare outcomes and delivery. Uncertainty and cost pressures will bring more attractive healthcare companies to the deal table, while a wide range of strategic buyers and investors will be waiting to acquire them to position themselves for future growth or earn high investment returns. Consequently, IBISWorld anticipates that middle-market dealmakers who stay ahead of the PPACA s changes will be well positioned to profit in the healthcare sector over the next five years.
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