Expect more healthcare and life sciences mergers, and more hospital closures, KPMG says

Investors are expressing optimism about increased merger activity in healthcare and life sciences, according to a new report from KPMG.

Looking at the new year, 61% of investors say they expect dealmaking in healthcare and life sciences companies to increase, according to KPMG’s 2024 outlook. Only 9% say they expect to see fewer mergers and acquisitions.

While there have been a host of high-profile hospital deals in the past year, merger activity across the broader healthcare and life sciences industries fell to the lowest level since 2019. According to KPMG, there were 1,776 announced deals in healthcare and life sciences, down from the 2,134 transactions in 2022 (and even below the 1,914 deals in 2019).

Ash Shehata, KPMG’s U.S. sector leader for healthcare, tells Chief Healthcare Executive® that a host of factors are contributing to expectations of more merger activity. He talked about expectations for the hospital industry, including the push for some hospitals to look for mergers to stay afloat, and his fears that more hospitals will close or reduce services.

The prospect of lower interest rates and inflation should spur more deals, Shehata says. The Federal Reserve has sent signals that its key interest rate could drop in 2024, and policymakers are encouraged about inflation pressures easing, the Associated Press reported this week, citing minutes from the December meeting.

“The data is actually trending in the right direction,” Shehata says. “The economic moves that we're going to see from the feds are going to help improve the cost of capital, which will likely start to move those folks on the sidelines into the buying or selling position.” (See part of our conversation with KPMG's Ash Shehata in this video. The story continues below.)

Shehata says he expects to see more consolidation in the primary care area, and payers are expressing more interest in mergers and partnerships. Shehata says he expects to see more activity in the specialty pharmacy market, “as it becomes a bigger and bigger share of wallet for the healthcare expenditures.”

Hospitals and health systems may be looking to make more deals as they shift to more ambulatory surgical care to supplement their inpatient beds, Shehata says.

Looking at hospital systems, Shehata expects organizations operating in single states to look at moves into adjacent states. He also expects more deals in Florida, a high-growth state that no longer has a “certificate of need” requirement for hospital construction. He also projects more hospital mergers in Texas, which continues to see strong population growth.

More hospitals and health systems may need to consider finding partners to keep their doors open, KPMG projects. Some may also look to find partners to help provide services.

Many analysts are expecting hospitals to continue to struggle with low margins in the coming year. Some health systems, particularly those in the Northeast, could face a difficult road, and some may not make it, Shehata says.

“In the Northeast, where you're seeing more cost pressures, more issues around profitability, you'll likely see more acceleration of closures,” Shehata says. “And even if we don't see closures, you're going to see what are called realignment of services.”

Hospitals may look to reduce some costly services, including obstetric services, he says. “Whether we call it mergers and acquisitions or recalibration of services, that's going to be, I think, a big headline going into ’24,” Shehata says.

Health systems and hospitals are going to have to focus on the cost of care overall, especially with more rate pressure from payers, including Medicare Advantage plans, Shehata says.

“A lot of focus is going to continue on unit cost management, and being able to recalibrate the cost of labor, cost of infrastructure, and strategic costs of investments, which I believe is going to drive more and more M&A,” Shehata says.

Hospitals also need to be open to new areas of innovation to serve their communities, he adds.

“We've seen huge demands on things like post-acute care, mental health, health equity,” Shehata says. “These continue to be kind of the big societal shifts of our times. And imagine, we're going through these changes right now, and massive margin compression and massive changes in our economy, yet we're seeing these huge areas that require new and innovative funding mechanisms.”

“So I think the idea of working across public-private partnerships is going to be a really important way for the health systems to position themselves for success.”

Shehata says he would like to see more robust discussion about “the underlying model of our healthcare system.” He adds that while many support moving to value-based care, which focuses on keeping patient populations healthy, some leaders he talks to are looking to stay with the fee-for-service model, while aiming to remain as efficient as possible.

“When I talk to CEOs about this, and CFOs, and boards, it’s split,” Shehata says. “Some organizations are like, ‘I do believe in value based care, but I don't see a path forward.’ And some organizations are saying, ‘I'm all there, I'm going to make it happen. I’m going to put it all on the line.’”

“So I do think this is a public discourse, that needs to happen a bit more,” he says. “And it really will help determine the types of incentives and financing models for years to come.”

Read more: Hospitals in 2024: Healthcare leaders identify trends to watch