Healthcare Trends & Transactions Q2 2024

Firm Publication

Deal volume across the healthcare industry generally appears to have steadied despite headwinds. The general sentiment is that buyers have adapted to the current interest rates and are gritting their teeth and pressing forward—especially private equity (PE) investors who need to deploy their “dry powder.”

Physician Practice Management

Continued Private Equity Backlash

As detailed in previous reports, PE’s investment in healthcare has seen increased regulatory scrutiny at both the state and federal levels. While this increased scrutiny (primarily the growing number of states proposing pre-closing notice requirements in connection with transactions involving management services organizations, including those that are PE-backed) has certainly left many investors on their heels, investors were able to take a momentary sigh of relief in Q1 after House Bill 4130, which would have put heavy limitations on PE investment in Oregon, failed to pass. However, all eyes have shifted to California, whose Senate Health Committee passed Assembly Bill 3129 on June 26, 2024, as further amended on June 27, 2024 (California Bill). If enacted, the California Bill would grant sweeping approval power to the state’s Attorney General for certain healthcare transactions involving PE groups or hedge funds effective January 1, 2025. The stated goals of the proposed legislation are to address healthcare practice acquisitions by PE groups and hedge funds that, in the view of legislators, lead to higher prices, lower quality, and less efficiency, and restrict access to and the choice of consumers’ healthcare services.

Most notably, the California Bill would outright prohibit certain arrangements. A PE group or hedge fund involved with a physician or psychiatric practice doing business in California would not be able to “control or direct” such a practice, which per the text, includes but is not limited to the following:

  1. Influencing or entering into contracts on behalf of the practice or the physicians or psychiatrists of the practice, with any third party.
  2. Influencing or setting rates for the practice or the physicians or psychiatrists of the practice, with any third party.
  3. Influencing or setting patient admission, referral, or physician or psychiatrist availability policies.

While these concerns are already addressed by California’s long-standing corporate practice of medicine prohibition, the “including but not limited to” could mean trouble for many types of management arrangements. In addition to the California Bill, Oregon, and Minnesota have also proposed similar legislation.

While PE investors have faced several regulatory headwinds over the last few years (e.g., state transparency laws, updated Hart-Scott-Rodino guidelines, and now potential outright prohibitions), the physician practice management (PPM) space remains a key sector for investment and will likely continue to be given the Federal Reserve recently alluded to several potential interest rate cuts for 2024. PE investors will need to deploy their “dry-powder,” and once interest rates are curt, we expect they will deploy it quickly.

Deal Activity

Q2 saw a notable uptick in activity, with May seeing several significant PE transactions in particular. According to LevinPro, 36% of healthcare deals announced during the month (53 of 146) involved PE acquirers and/or their portfolio companies.

Dental practice acquisitions continue to set the pace among specialties. KKR-backed Heartland Dental announced two transactions in May. First, Heartland Dental acquired Macedonia Dental Arts, a one location Macedonia, Ohio-based practice. It followed up later in May by purchasing Lake West Dental, a family and cosmetic dental practice located in Willoughby Hills, Ohio.

Charlesbank Capital Partners-backed MB2 Dental Solutions announced six additional acquisitions in May. MB2 acquired Scheich Family Dentistry (Castle Pines, Colorado), Potach & Mitchell Dental Clinic (Austin, Minnesota), Cosmetic & Implant Dentistry of La Jolla (La Jolla, California), CopperMine Dental Studio (two locations in Arizona), Graig D. Brown Periodontics & Implant DDS (Tucson, Arizona) and Lowry Endodontics (Denver, Colorado). More recently, MB2 announced its entrance into South Carolina by adding Pray Family Dentistry in June, bringing its total presence to 42 states.

Smile Partners USA (backed by Silver Oak Services Partners) also expanded its footprint by adding Family Dental Group, a family dental practice in Decatur, Georgia, and its four providers.

Outside of the dental space, Ivy Fertility (backed by InTandem Capital Partners) announced its acquisition of Dallas IVF in April. Dallas IVF is a nationally ranked practice that specializes in advanced reproductive technology, in-vitro fertilization, and third-party reproduction. The Ivy Fertility network now includes 52 reproductive endocrinologists in 27 locations across nine states.

Additionally, another Silver Oak-backed company, Integrated Oncology Network (ION), announced its acquisition of Urology Partners, which provides care in the Cleveland, Ohio, area. ION now has grown to more than 60 centers across the country and provides many types of care, including diagnostic testing, radiation oncology, medical oncology, urology and other ancillary services.

Meanwhile, we are seeing the slowdown—or wind-down—of healthcare retailers. Walmart announced on April 30 that it will be closing both of its healthcare service platforms, Walmart Health and Walmart Health Virtual Care. Walmart, which has 51 centers across five states, cited “the challenging reimbursement environment and escalating operating costs [resulting in] a lack of profitability that make the care business unsustainable for us at this time.” Walmart’s announcement is in step with other large retail giants. Walgreens (Nasdaq: WBA) is also in the process of downsizing its VillageMD clinics. In April, Optum (a subsidiary of UnitedHealth Group (NYSE: UNH)) shuttered its virtual care business. And in February, Amazon (Nasdaq: AMZN) laid off hundreds of employees at its primary care subsidiary, One Medical. Potential sellers should keep these developments in mind as many had predicted large retail chains would serve as potential buyers for the inevitable PE exits due in the next few years, but that may no longer be the case.

Clinical Research Organizations

Following a steady amount of investment in clinical research organizations (CROs) at the start of the year, Q2 continued to see momentum in this space. Clinical research is particularly interesting to dealmakers, including PE investors, because there is a lot of opportunity to improve the highly fragmented and inefficient clinical trial system. CROs allow for collaboration and organization amongst trial sites, which benefits patients through more efficient clinical trials that can reach more rural and underrepresented areas. According to Global Market Insights, the global CRO market was estimated to be worth $48 to $82 billion in 2023, and it is expected to reach up to $148 billion by 2028. Industry advisors suggest that CROs, like Parexel, IQVIA, Pharmaceutical Product Development (PPD), and ICON, are among the “ones to watch” for M&A activity this year.

In April, WindRose Health Investors, LLC, a New York-based PE firm, acquired SubjectWell, which is a patient access marketplace that connects people with health conditions to care options. With WindRose’s investment, SubjectWell intends to develop new solutions and leverage its marketplace of connecting patients in less accessible areas with healthcare companies in need of qualified patients for clinical trials and treatments. Furthermore, Warburg Pincus, another PE firm, acquired a majority interest in South Texas Accelerated Research Therapeutics (START). The investment will allow START to accelerate its clinical operations globally and increase its impact on clinical research for cancer patients. Rounding out April acquisitions, Alcanza Clinical Research, an investigator site network backed by Assured Healthcare Partners, acquired FDI Clinical Research, a multi-specialty research organization based in San Juan, Puerto Rico. FDI specializes in Phase I-IV clinical trials, focusing on endocrine and metabolic conditions, immunology, hepatology, infectious diseases, oncology, respiratory, and rheumatology. Alcanza hopes that the addition of FDI will allow more patients, particularly those not traditionally represented in research, to participate in clinical trials.

We expect interest in CROs will accelerate through 2024.

Ambulatory Surgery Centers

While PE activity has remained somewhat steady in the ambulatory surgery center (ASC) space, especially in connection with PPM acquisitions, an increasing number of health systems have turned to acquiring outpatient centers in recent years. California-based health systems have been particularly active in the sector.

SCA Health recently sold its stakes in two surgery centers. On March 28, Antelope Valley Surgery Center, a 12,500 square foot facility located in Lancaster, California, was re-opened by Kaiser Permanente after being set to close in January. SCA Health was the most recent owner of the facility and sold it to Kaiser for an undisclosed amount. On April 15, MarinHealth Medical Center and UCSF Health, both based in California, announced they are joining forces to purchase the formerly SCA Health-backed Marin Specialty Surgery Center.

UCLA Health acquired West Hills Hospital and Medical Center, which includes a freestanding ASC, from HCA Healthcare (NYSE: HCA) on March 28. Finally, Sutter Health recently broke ground on a 129,000 square foot medical office (estimated to cost $442 million) which will host an ASC.

California is not the only state that saw significant health system investment in ASCs. The New York Eye and Ear Infirmary of Mount Sinai Health System is nearing completion on a $13 million ASC in New York City. The University of Kansas Health System also announced plans to open a $90 million clinic and ASC in Olathe, Kansas. The facility is expected to be fully operational by the end of 2025.

Hospitals & Health Systems

The first quarter of 2024 marked the strongest deal activity in the hospital and health system sector since before the pandemic. Although M&A activity tapered off in Q2, several large and strategic deals were announced and completed.

Academic medical centers have continued to make investments in hospitals and health systems, slowly expanding capacity and transforming into more traditional health systems. For example, in Q2, the University of Kansas Health System signed a definitive agreement with Liberty Hospital for the hospital and its clinics to join the health system—the parties officially closed the deal on July 1. UVA Health similarly announced it had reached an agreement to acquire Virginia-based Piedmont Family Practice. Further, Oregon Health & Science University and Legacy Health signed a definitive agreement to combine as one health system under OHSU Health, comprising 12 hospitals.

Cross-market transactions involving hospitals and health systems also continued in Q2. On March 31, Risant Health, a nonprofit organization created by Kaiser Foundation Hospitals, announced the completion of its acquisition of Geisinger Health, which serves urban and rural communities across Pennsylvania. Shortly thereafter, Risant signed a definitive agreement to acquire North Carolina-based Cone Health, which would operate independently as a regional and community-based health system under Risant. Elsewhere, California-based Prospect Medical Holdings received approval from the Rhode Island Attorney General to sell its two safety net hospitals to The Centurion Foundation.

There were also several regional transactions involving hospitals and health systems in Q2. For example, after announcing the deal earlier in the quarter, on July 1, Med Center Health, a Kentucky-based health system, acquired Logan Memorial Hospital, which will become the health system’s seventh hospital. Washington-based health systems Overlake Medical Center & Clinics and MultiCare Health System also signed an affiliation agreement for Overlake to become the flagship health system for MultiCare’s new North Sound region. Pennsylvania-based entities Jefferson and Lehigh Valley Health Network have signed a definitive agreement to merge into a 30-hospital system.

Several other notable deals in the sector occurred in Q2. For example, Community Health Systems (NYSE: CYH) entered into a definitive agreement to sell Tennova Healthcare-Cleveland to Hamilton Health Care System for $160 million, highlighting the recent trend of both nonprofit and for-profit systems to engage in transactions aimed at realigning their portfolio. Similarly, Universal Health Services entered into an agreement to sell an 80-bed behavioral health facility to Texas-based Shannon Medical Center. The Federal Trade Commission (FTC) and state regulators also continue to be key factors influencing deal-making in the sector. For example, in June, Novant Health called off its planned acquisition of two North Carolina-based hospitals from Community Health Systems for $320 million after an appellate court granted the FTC an emergency injunction blocking the deal.

Home Health, Hospice Care & Personal Care Services

Last quarter, we reported on the possibility of a sale of home health and hospice provider Enhabit (NYSE: EHAB). As of June, Enhabit’s strategic review process concluded, and—despite apparent interest based on potential buyers’ engagement in the process—the company did not receive any formal proposals for a transaction. Enhabit’s CEO stated on an earnings call that the company believes this was largely due to macro headwinds, including, among other things, uncertain regulatory developments, an evolving antitrust landscape, a difficult healthcare and operating environment, and persistently high interest rates.

In another significant development that may well permit antitrust approval for the long-awaited closing of UnitedHealth Group’s previously announced agreement to acquire Amedysis (Nasdaq: AMED), both parties have agreed to divest assets to Vital Caring Group, led by industry veteran April Anthony, with backing from The Vistria Group and Nautic Partners.

Zenyth Partners, a New York-based investment firm focused on growing healthcare companies from early-stage businesses into larger platforms, announced on June 6 that it has made an investment in LifeCare Home Health Family. LifeCare provides skilled home health and private duty care through 10 affiliated branches spanning Texas, Florida, and Nevada. Financial details about the investment were not disclosed.

Once a popular area of investment for PE firms, increased regulatory scrutiny and the recent expansion of the “36-month rule” to hospice transactions have resulted in much lower hospice deal volume. Experts believe that much investment opportunity still exists in the hospice space, but investors are now considering sale prices more scrupulously than they did a few years ago during the 2021 economic boom.

Recognizing the need to scale, nonprofit hospice providers are increasingly affiliating with each other or pursuing acquisitions themselves. For example, in April, Empath Health announced its affiliation with Trustbridge and its affiliates, including Hospice of Palm Beach County and Hospice by the Sea. The partnership solidifies Empath Health’s position as the largest not-for-profit post-acute care organization in Florida.

Meanwhile, Addus HomeCare Corporation (Nasdaq: ADUS) disposed of its New York assets to HCS-Girling, citing the well-documented program challenges and start-and-stop changes in the state’s approach to funding. Addus then announced, on June 10, that it had signed a definitive agreement for the $350 million purchase of Gentiva’s personal care business. Based in Atlanta, Georgia, Gentiva is a dedicated hospice, palliative, and personal care services company. This transaction relates only to Gentiva’s personal care operations, which serve over 16,000 patients per day in a seven-state service area comprised of Arizona, Arkansas, California, Missouri, North Carolina, Tennessee and Texas, and is expected to close the transaction following completion of regulatory approvals and upon satisfaction of customary closing conditions. There has been no further update on a potential transaction regarding Help at Home, mentioned in our last report, perhaps because of valuation expectations or the aforementioned New York challenges that would relate to a larger portion of its business.

Providing a segue into the digital health section of our Q2 report, healthcare investment firm Altaris is set to acquire Sharecare (Nasdaq: SHCR), a digital health provider that owns the home-based care platform CareLinx, for $518 million. CareLinx provides consumers access to both medical and non-medical home care service, and boasts a network of over 450,000 caregivers and clinicians. It works directly with payers, providers, employers and consumers to deliver home-based care. The acquisition’s price at $1.43 per share represented a premium of 85% on Sharecare’s closing price as of June 20.

Digital Health & Health Information Technology

In the wake of the high-profile Change Healthcare data breach from February and March earlier this year, Microsoft (Nasdaq: MSF) and Google (Nasdaq: GOOG) will partner with the White House to offer free or low-cost cybersecurity tools to rural hospitals to combat cyberattacks. Cyberattacks can severely compromise hospitals’ ability to provide organized and efficient patient care, and rural hospitals—which serve over 60 million Americans—are particularly vulnerable given their often limited resources.

Artificial intelligence (AI) continues to dominate investments in digital health. In a June 11 report, Silicon Valley Bank shared that venture capital investments in AI in healthcare have expanded at twice the pace of the overall tech industry over the past five years. The report found that a record 25% of healthcare investment dollars are now being allocated to companies utilizing AI. Interestingly, 60% percent of healthcare AI investments are directed toward administrative applications. Investors are especially keen on the administrative applications of AI because they face fewer regulatory and adoption challenges than clinical uses of AI.

There is no shortage of examples of digital health transactions involving AI companies from Q2 across a range of use cases. Humata Health, a company revolutionizing prior authorization review with AI, has raised $25 million in a fundraising round led by Blue Venture Fund and LRVHealth with participation from Optum Ventures, .406 Ventures, Highmark Ventures, and VentureforGood. The Humata Health engine analyzes vast amounts of data to recommend the documents that should be included in submissions, translating into less work for payers, faster approvals for providers, and, ultimately, better patient care. Efficiency in completing prior authorizations is especially needed after the Centers for Medicare & Medicaid Services (CMS) passed a rule in January 2024 requiring insurers to provide authorization decisions in 72 hours for urgent requests and seven calendar days for standard requests.

Knownwell, an integrated primary and metabolic care provider offering both in-person and virtual patient care, has acquired Alfie Health, a previous competitor in the obesity treatment market. This acquisition follows Knownwell’s $20 million fundraising round at the end of 2023. Knownwell plans to integrate Alfie’s AI-powered “ObesityRx” platform into its current primary and obesity care model. Again, this deal is timely considering the recent focus on obesity treatment, fueled by the dramatic uptick in the usage of GLP-1 medications such as Ozempic.

On the innovation front, GE HealthCare and MediView XR announced the successful launch of their augmented reality-based OmnifyXR Interventional Suite at North Star Vascular and Interventional in Minneapolis, Minnesota. This marks the first-ever clinical use of augmented reality technology for interventional radiology. The GE Press Release issued June 20, describes the technology as combining a holographic heads-up display streaming live medical imaging, 3D anatomy model visualization, and advanced imaging technologies while enabling the opportunity for remote collaboration to help advance the delivery of precision care across a variety of interventional procedures. Dr. Jafar Golzarian of North Star called the technology “game-changing,” explaining that the views possible through OmnifyXR, especially the 3D anatomical view offered by the hologram scan, allow for new perspectives into treatment that providers have not seen before.

Behavioral Health

M&A activity in the behavioral health sector is down this year compared to 2023, according to PwC’s US Deals 2024 midyear outlook, with deal volume from January to April down 2% from the same time period in 2023, and deal value down by 18% from 2023. Despite these statistics, behavioral health remains attractive for investors, given the high demand and lack of access.

PE investors continue to be the primary drivers of deal activity in the behavioral health sector. In June, Shore Capital Partners announced the sale of Behavioral Innovations, an applied behavior analysis therapy provider with 77 locations across Texas, Oklahoma, and Colorado, to Tenex Capital Management, another PE firm. Your Behavioral Health (backed by Comvest Partners) announced it acquired Insight Treatment Programs, a teen mental health and substance use disorder treatment provider.

In addition to PE firms, venture capital firms have increasingly engaged in “growth equity” deals in the behavioral health space, buying a minority stake in companies with scalability. In Q1, venture capital accounted for $350 million in behavioral health deal-making. In Q2, venture capital remains active. For example, Talkiatry, a telehealth behavioral care provider, secured a $130 million funding round led by venture capital firm Andreessen Horowitz.

Other notable deals in Q2 included activity in the mental health and substance and use disorder subsectors of behavioral health. For example, Optum acquired Minnesota-based CARE Counseling, an outpatient mental health group. Acadia Healthcare (Nasdaq: ACHC) also acquired three comprehensive treatment centers in North Carolina. The treatment centers combine behavioral therapy and medications to treat opioid use disorders. T&R Recovery Group also finalized its acquisition of Origins Behavioral Health facilities in Texas from the Hanley Foundation. The facilities offer both inpatient and outpatient gender-specific recovery for addiction and mental health, intensive outpatient programs, and extended care. Tennessee-based Tulip Hill Recovery merged with two Kentucky-based substance use disorder treatment providers, Louisville Addiction Center and Lexington Addiction Center, to form Tulip Hill Healthcare. Lastly, an outpatient behavioral health facility, which is a joint venture between Acadia and Tower Health, was acquired by Silas Realty Trust, a healthcare real estate company, for $10.5 million.

Managed Care

In Q2, there were few major deals in the managed care sector. CVS Health (NYSE: CVS) grabbed some headlines for its purchase of Hella Health, a Medicare Advantage (MA) broker based in New York City, for an undisclosed amount. Hella Health utilizes an online shopping platform to offer MA plans and other products through its insurance agency, licensed in all 50 states. MA plan brokers like Hella Health are growing in popularity as the population continues to age—indeed, according to some reports, one in three Medicare beneficiaries use insurance brokers or agents to choose a plan. Interestingly, however, this comes at a time when MA brokers are coming under increased scrutiny. On April 4, the CMS issued a final rule that, among other things, caps the amount MA plans can compensate brokers in order to—as CMS describes it—“stop anti-competitive steering.” CMS expressed that this rule advances the Biden administration’s goal of promoting competition in the health insurance marketplace, as articulated in President Biden’s July 2021 Executive Order. On July 3, however, a Judge for the United States District Court for the Northern District of Texas ordered a stay on the effective date of certain of the caps and prohibitions on contract terms set forth in the rule pending their further consideration. It remains to be seen, then, when those aspects of the rule will take effect—if at all.

In other news, CMS announced in April that it was slightly decreasing MA benchmark payments for 2025, causing some payers, who believe the new rates are insufficient to cover increasing costs, to forecast potential cuts to benefits and an exit from certain MA markets in 2025. It is unclear to what extent this will affect M&A activity in the sector. This, combined with the upcoming presidential election and possible change in administration, will no doubt make for an interesting year in the managed care sector.

Pharma Services, Pharmacy & Pharmacy Benefit Managers

In our last report, we noted that Mark Cuban Cost Plus Drug Company partnered with its first health system, Community Health Systems in Q1. A little over a month later, Cost Plus Drugs announced a second health system partnership with ScionHealth, a 94-hospital system based in Louisville, Kentucky, and in May, Cost Plus Drugs announced it would be incorporated into technology company RxLink’s drug find and comparison platform.

On March 11, Elevance Health (NYSE: ELV) announced the closing of its acquisition of Paragon Healthcare, a provider of infusion and other specialty pharmacy services. A month later, in a move aimed at boosting its healthcare service offering and bolstering its bottom line, Walgreens announced it is launching Walgreens Specialty Pharmacy. According to Walgreens, it is expanding its specialty pharmacy services, with the integration of a new dedicated gene and cells services pharmacy and its existing specialty pharmacy and home delivery business, AllianceRx. Walgreens’ move reflects a growing need for specialty pharmacy services—indeed, in its own press release, Walgreens cited that specialty medications today account for more than 50% of prescription drug spend in the United States due to the increasing prevalence of chronic disease.

Players in the pharmacy space operating in California should be mindful of California Assembly Bill 853, which went into effect on January 1 and, similar to the legislation we see in the PPM space, requires parties to a transaction involving retail grocery chains and retail drug firms to file a notice with the California Attorney General at least 180 days in advance of the transaction. The legislature cited as a need for the bill, among other things, the increasing consolidation of chain retail pharmacies, “which are primary points of medicine distribution through California,” which could impact the public health of Californians, and therefore bestowed upon the Attorney General “certain and specific tools to review these mergers.”

Pharma

In Q1, biopharma M&A deals more than doubled from the first quarter of 2023. Activity is only expected to accelerate as several pharma companies have major patents expiring. A report from Leerink Partners reported 13 biopharma deals from Q1 of 2024, compared to six in Q1 of 2023. In Q1, there was an uptick in private investments in public equities, with 48 privately negotiated fundraising efforts totaling $4.4 billion. Additionally, follow-on offerings were also on the rise, with 48 deals coming in at $10 billion. This is the most activity in one quarter since 2021. Venture capital was also active—investing $12.4 billion through 306 deals—matching 2019 levels. According to Morgan Lewis, it is anticipated that deals in the $5 billion to $15 billion range will be in the sweet spot for pharma deal activity this year.

In Q2, Novartis (NYSE: NVS), a Swiss pharmaceutical company, acquired DTx Pharma for $500 million in cash plus $500 million in future payments. DTx is a San Diego-based, pre-clinical biotech company that develops RNA therapies to treat neuromuscular and central nervous system functions. On June 21, Johnson & Johnson (NYSE: JNJ) acquired Proteologix, a biologics company specializing in treatments for immune-mediated diseases, for $850 million. This acquisition will broaden Johnson & Johnson’s atopic dermatitis treatment offerings. In an unexpected move, Moderna (Nasdaq: MRNA) is leaving its partnership with Metagenomi—leaving up to $3 billion in biobucks on the table. In 2021, Moderna entered a four-year partnership with Metagenomi to research gene editing. The deal involved $70 million cash from Moderna and offered Metagenomi $3 billion in potential biobucks.

As its first partner, Pfizer and Flagship Pioneering have targeted ProFound Therapeutics to develop new obesity drugs. The financial details of the collaboration have yet to be released, but previously, the companies committed $50 million each to develop 10 programs. It is projected that each successful drug from the partnership could be worth $700 million. Furthermore, adding to its portfolio related to eye diseases, Merck & Co. (NYSE: MRK) acquired Eyebiotech Limited (EyeBio), a privately held ophthalmology-focused biotech company) for $3 billion ($1.3 billion cash upfront and $1.7 in potential milestones). As a Merck subsidiary, EyeBio will be able to expand its pipeline of preclinical and clinical candidates for the prevention and treatment of vision loss associated with retinal diseases.

Conclusion

Although buyers may be reluctantly accepting the new normal for interest rates, unfortunately, interest rates are not the only obstacle, as buyers—particularly those in the PPM sector—face an evolving regulatory landscape. As noted in our previous report, however, that regulatory landscape may very well shift with a change in the presidential administration. As we draw closer to the election over the course of this next quarter, we should get more insight into the outlook for healthcare M&A for the end of 2024 and beyond.

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Deal volume across the healthcare industry generally appears to have steadied despite headwinds. The general sentiment is that buyers have adapted to the current interest rates and are gritting their teeth and pressing forward—especially private equity (PE) investors who need to deploy their “dry powder.”

Physician Practice Management

Continued Private Equity Backlash

As detailed in previous reports, PE’s investment in healthcare has seen increased regulatory scrutiny at both the state and federal levels. While this increased scrutiny (primarily the growing number of states proposing pre-closing notice requirements in connection with transactions involving management services organizations, including those that are PE-backed) has certainly left many investors on their heels, investors were able to take a momentary sigh of relief in Q1 after House Bill 4130, which would have put heavy limitations on PE investment in Oregon, failed to pass. However, all eyes have shifted to California, whose Senate Health Committee passed Assembly Bill 3129 on June 26, 2024, as further amended on June 27, 2024 (California Bill). If enacted, the California Bill would grant sweeping approval power to the state’s Attorney General for certain healthcare transactions involving PE groups or hedge funds effective January 1, 2025. The stated goals of the proposed legislation are to address healthcare practice acquisitions by PE groups and hedge funds that, in the view of legislators, lead to higher prices, lower quality, and less efficiency, and restrict access to and the choice of consumers’ healthcare services.

Most notably, the California Bill would outright prohibit certain arrangements. A PE group or hedge fund involved with a physician or psychiatric practice doing business in California would not be able to “control or direct” such a practice, which per the text, includes but is not limited to the following:

  1. Influencing or entering into contracts on behalf of the practice or the physicians or psychiatrists of the practice, with any third party.
  2. Influencing or setting rates for the practice or the physicians or psychiatrists of the practice, with any third party.
  3. Influencing or setting patient admission, referral, or physician or psychiatrist availability policies.

While these concerns are already addressed by California’s long-standing corporate practice of medicine prohibition, the “including but not limited to” could mean trouble for many types of management arrangements. In addition to the California Bill, Oregon, and Minnesota have also proposed similar legislation.

While PE investors have faced several regulatory headwinds over the last few years (e.g., state transparency laws, updated Hart-Scott-Rodino guidelines, and now potential outright prohibitions), the physician practice management (PPM) space remains a key sector for investment and will likely continue to be given the Federal Reserve recently alluded to several potential interest rate cuts for 2024. PE investors will need to deploy their “dry-powder,” and once interest rates are curt, we expect they will deploy it quickly.

Deal Activity

Q2 saw a notable uptick in activity, with May seeing several significant PE transactions in particular. According to LevinPro, 36% of healthcare deals announced during the month (53 of 146) involved PE acquirers and/or their portfolio companies.

Dental practice acquisitions continue to set the pace among specialties. KKR-backed Heartland Dental announced two transactions in May. First, Heartland Dental acquired Macedonia Dental Arts, a one location Macedonia, Ohio-based practice. It followed up later in May by purchasing Lake West Dental, a family and cosmetic dental practice located in Willoughby Hills, Ohio.

Charlesbank Capital Partners-backed MB2 Dental Solutions announced six additional acquisitions in May. MB2 acquired Scheich Family Dentistry (Castle Pines, Colorado), Potach & Mitchell Dental Clinic (Austin, Minnesota), Cosmetic & Implant Dentistry of La Jolla (La Jolla, California), CopperMine Dental Studio (two locations in Arizona), Graig D. Brown Periodontics & Implant DDS (Tucson, Arizona) and Lowry Endodontics (Denver, Colorado). More recently, MB2 announced its entrance into South Carolina by adding Pray Family Dentistry in June, bringing its total presence to 42 states.

Smile Partners USA (backed by Silver Oak Services Partners) also expanded its footprint by adding Family Dental Group, a family dental practice in Decatur, Georgia, and its four providers.

Outside of the dental space, Ivy Fertility (backed by InTandem Capital Partners) announced its acquisition of Dallas IVF in April. Dallas IVF is a nationally ranked practice that specializes in advanced reproductive technology, in-vitro fertilization, and third-party reproduction. The Ivy Fertility network now includes 52 reproductive endocrinologists in 27 locations across nine states.

Additionally, another Silver Oak-backed company, Integrated Oncology Network (ION), announced its acquisition of Urology Partners, which provides care in the Cleveland, Ohio, area. ION now has grown to more than 60 centers across the country and provides many types of care, including diagnostic testing, radiation oncology, medical oncology, urology and other ancillary services.

Meanwhile, we are seeing the slowdown—or wind-down—of healthcare retailers. Walmart announced on April 30 that it will be closing both of its healthcare service platforms, Walmart Health and Walmart Health Virtual Care. Walmart, which has 51 centers across five states, cited “the challenging reimbursement environment and escalating operating costs [resulting in] a lack of profitability that make the care business unsustainable for us at this time.” Walmart’s announcement is in step with other large retail giants. Walgreens (Nasdaq: WBA) is also in the process of downsizing its VillageMD clinics. In April, Optum (a subsidiary of UnitedHealth Group (NYSE: UNH)) shuttered its virtual care business. And in February, Amazon (Nasdaq: AMZN) laid off hundreds of employees at its primary care subsidiary, One Medical. Potential sellers should keep these developments in mind as many had predicted large retail chains would serve as potential buyers for the inevitable PE exits due in the next few years, but that may no longer be the case.

Clinical Research Organizations

Following a steady amount of investment in clinical research organizations (CROs) at the start of the year, Q2 continued to see momentum in this space. Clinical research is particularly interesting to dealmakers, including PE investors, because there is a lot of opportunity to improve the highly fragmented and inefficient clinical trial system. CROs allow for collaboration and organization amongst trial sites, which benefits patients through more efficient clinical trials that can reach more rural and underrepresented areas. According to Global Market Insights, the global CRO market was estimated to be worth $48 to $82 billion in 2023, and it is expected to reach up to $148 billion by 2028. Industry advisors suggest that CROs, like Parexel, IQVIA, Pharmaceutical Product Development (PPD), and ICON, are among the “ones to watch” for M&A activity this year.

In April, WindRose Health Investors, LLC, a New York-based PE firm, acquired SubjectWell, which is a patient access marketplace that connects people with health conditions to care options. With WindRose’s investment, SubjectWell intends to develop new solutions and leverage its marketplace of connecting patients in less accessible areas with healthcare companies in need of qualified patients for clinical trials and treatments. Furthermore, Warburg Pincus, another PE firm, acquired a majority interest in South Texas Accelerated Research Therapeutics (START). The investment will allow START to accelerate its clinical operations globally and increase its impact on clinical research for cancer patients. Rounding out April acquisitions, Alcanza Clinical Research, an investigator site network backed by Assured Healthcare Partners, acquired FDI Clinical Research, a multi-specialty research organization based in San Juan, Puerto Rico. FDI specializes in Phase I-IV clinical trials, focusing on endocrine and metabolic conditions, immunology, hepatology, infectious diseases, oncology, respiratory, and rheumatology. Alcanza hopes that the addition of FDI will allow more patients, particularly those not traditionally represented in research, to participate in clinical trials.

We expect interest in CROs will accelerate through 2024.

Ambulatory Surgery Centers

While PE activity has remained somewhat steady in the ambulatory surgery center (ASC) space, especially in connection with PPM acquisitions, an increasing number of health systems have turned to acquiring outpatient centers in recent years. California-based health systems have been particularly active in the sector.

SCA Health recently sold its stakes in two surgery centers. On March 28, Antelope Valley Surgery Center, a 12,500 square foot facility located in Lancaster, California, was re-opened by Kaiser Permanente after being set to close in January. SCA Health was the most recent owner of the facility and sold it to Kaiser for an undisclosed amount. On April 15, MarinHealth Medical Center and UCSF Health, both based in California, announced they are joining forces to purchase the formerly SCA Health-backed Marin Specialty Surgery Center.

UCLA Health acquired West Hills Hospital and Medical Center, which includes a freestanding ASC, from HCA Healthcare (NYSE: HCA) on March 28. Finally, Sutter Health recently broke ground on a 129,000 square foot medical office (estimated to cost $442 million) which will host an ASC.

California is not the only state that saw significant health system investment in ASCs. The New York Eye and Ear Infirmary of Mount Sinai Health System is nearing completion on a $13 million ASC in New York City. The University of Kansas Health System also announced plans to open a $90 million clinic and ASC in Olathe, Kansas. The facility is expected to be fully operational by the end of 2025.

Hospitals & Health Systems

The first quarter of 2024 marked the strongest deal activity in the hospital and health system sector since before the pandemic. Although M&A activity tapered off in Q2, several large and strategic deals were announced and completed.

Academic medical centers have continued to make investments in hospitals and health systems, slowly expanding capacity and transforming into more traditional health systems. For example, in Q2, the University of Kansas Health System signed a definitive agreement with Liberty Hospital for the hospital and its clinics to join the health system—the parties officially closed the deal on July 1. UVA Health similarly announced it had reached an agreement to acquire Virginia-based Piedmont Family Practice. Further, Oregon Health & Science University and Legacy Health signed a definitive agreement to combine as one health system under OHSU Health, comprising 12 hospitals.

Cross-market transactions involving hospitals and health systems also continued in Q2. On March 31, Risant Health, a nonprofit organization created by Kaiser Foundation Hospitals, announced the completion of its acquisition of Geisinger Health, which serves urban and rural communities across Pennsylvania. Shortly thereafter, Risant signed a definitive agreement to acquire North Carolina-based Cone Health, which would operate independently as a regional and community-based health system under Risant. Elsewhere, California-based Prospect Medical Holdings received approval from the Rhode Island Attorney General to sell its two safety net hospitals to The Centurion Foundation.

There were also several regional transactions involving hospitals and health systems in Q2. For example, after announcing the deal earlier in the quarter, on July 1, Med Center Health, a Kentucky-based health system, acquired Logan Memorial Hospital, which will become the health system’s seventh hospital. Washington-based health systems Overlake Medical Center & Clinics and MultiCare Health System also signed an affiliation agreement for Overlake to become the flagship health system for MultiCare’s new North Sound region. Pennsylvania-based entities Jefferson and Lehigh Valley Health Network have signed a definitive agreement to merge into a 30-hospital system.

Several other notable deals in the sector occurred in Q2. For example, Community Health Systems (NYSE: CYH) entered into a definitive agreement to sell Tennova Healthcare-Cleveland to Hamilton Health Care System for $160 million, highlighting the recent trend of both nonprofit and for-profit systems to engage in transactions aimed at realigning their portfolio. Similarly, Universal Health Services entered into an agreement to sell an 80-bed behavioral health facility to Texas-based Shannon Medical Center. The Federal Trade Commission (FTC) and state regulators also continue to be key factors influencing deal-making in the sector. For example, in June, Novant Health called off its planned acquisition of two North Carolina-based hospitals from Community Health Systems for $320 million after an appellate court granted the FTC an emergency injunction blocking the deal.

Home Health, Hospice Care & Personal Care Services

Last quarter, we reported on the possibility of a sale of home health and hospice provider Enhabit (NYSE: EHAB). As of June, Enhabit’s strategic review process concluded, and—despite apparent interest based on potential buyers’ engagement in the process—the company did not receive any formal proposals for a transaction. Enhabit’s CEO stated on an earnings call that the company believes this was largely due to macro headwinds, including, among other things, uncertain regulatory developments, an evolving antitrust landscape, a difficult healthcare and operating environment, and persistently high interest rates.

In another significant development that may well permit antitrust approval for the long-awaited closing of UnitedHealth Group’s previously announced agreement to acquire Amedysis (Nasdaq: AMED), both parties have agreed to divest assets to Vital Caring Group, led by industry veteran April Anthony, with backing from The Vistria Group and Nautic Partners.

Zenyth Partners, a New York-based investment firm focused on growing healthcare companies from early-stage businesses into larger platforms, announced on June 6 that it has made an investment in LifeCare Home Health Family. LifeCare provides skilled home health and private duty care through 10 affiliated branches spanning Texas, Florida, and Nevada. Financial details about the investment were not disclosed.

Once a popular area of investment for PE firms, increased regulatory scrutiny and the recent expansion of the “36-month rule” to hospice transactions have resulted in much lower hospice deal volume. Experts believe that much investment opportunity still exists in the hospice space, but investors are now considering sale prices more scrupulously than they did a few years ago during the 2021 economic boom.

Recognizing the need to scale, nonprofit hospice providers are increasingly affiliating with each other or pursuing acquisitions themselves. For example, in April, Empath Health announced its affiliation with Trustbridge and its affiliates, including Hospice of Palm Beach County and Hospice by the Sea. The partnership solidifies Empath Health’s position as the largest not-for-profit post-acute care organization in Florida.

Meanwhile, Addus HomeCare Corporation (Nasdaq: ADUS) disposed of its New York assets to HCS-Girling, citing the well-documented program challenges and start-and-stop changes in the state’s approach to funding. Addus then announced, on June 10, that it had signed a definitive agreement for the $350 million purchase of Gentiva’s personal care business. Based in Atlanta, Georgia, Gentiva is a dedicated hospice, palliative, and personal care services company. This transaction relates only to Gentiva’s personal care operations, which serve over 16,000 patients per day in a seven-state service area comprised of Arizona, Arkansas, California, Missouri, North Carolina, Tennessee and Texas, and is expected to close the transaction following completion of regulatory approvals and upon satisfaction of customary closing conditions. There has been no further update on a potential transaction regarding Help at Home, mentioned in our last report, perhaps because of valuation expectations or the aforementioned New York challenges that would relate to a larger portion of its business.

Providing a segue into the digital health section of our Q2 report, healthcare investment firm Altaris is set to acquire Sharecare (Nasdaq: SHCR), a digital health provider that owns the home-based care platform CareLinx, for $518 million. CareLinx provides consumers access to both medical and non-medical home care service, and boasts a network of over 450,000 caregivers and clinicians. It works directly with payers, providers, employers and consumers to deliver home-based care. The acquisition’s price at $1.43 per share represented a premium of 85% on Sharecare’s closing price as of June 20.

Digital Health & Health Information Technology

In the wake of the high-profile Change Healthcare data breach from February and March earlier this year, Microsoft (Nasdaq: MSF) and Google (Nasdaq: GOOG) will partner with the White House to offer free or low-cost cybersecurity tools to rural hospitals to combat cyberattacks. Cyberattacks can severely compromise hospitals’ ability to provide organized and efficient patient care, and rural hospitals—which serve over 60 million Americans—are particularly vulnerable given their often limited resources.

Artificial intelligence (AI) continues to dominate investments in digital health. In a June 11 report, Silicon Valley Bank shared that venture capital investments in AI in healthcare have expanded at twice the pace of the overall tech industry over the past five years. The report found that a record 25% of healthcare investment dollars are now being allocated to companies utilizing AI. Interestingly, 60% percent of healthcare AI investments are directed toward administrative applications. Investors are especially keen on the administrative applications of AI because they face fewer regulatory and adoption challenges than clinical uses of AI.

There is no shortage of examples of digital health transactions involving AI companies from Q2 across a range of use cases. Humata Health, a company revolutionizing prior authorization review with AI, has raised $25 million in a fundraising round led by Blue Venture Fund and LRVHealth with participation from Optum Ventures, .406 Ventures, Highmark Ventures, and VentureforGood. The Humata Health engine analyzes vast amounts of data to recommend the documents that should be included in submissions, translating into less work for payers, faster approvals for providers, and, ultimately, better patient care. Efficiency in completing prior authorizations is especially needed after the Centers for Medicare & Medicaid Services (CMS) passed a rule in January 2024 requiring insurers to provide authorization decisions in 72 hours for urgent requests and seven calendar days for standard requests.

Knownwell, an integrated primary and metabolic care provider offering both in-person and virtual patient care, has acquired Alfie Health, a previous competitor in the obesity treatment market. This acquisition follows Knownwell’s $20 million fundraising round at the end of 2023. Knownwell plans to integrate Alfie’s AI-powered “ObesityRx” platform into its current primary and obesity care model. Again, this deal is timely considering the recent focus on obesity treatment, fueled by the dramatic uptick in the usage of GLP-1 medications such as Ozempic.

On the innovation front, GE HealthCare and MediView XR announced the successful launch of their augmented reality-based OmnifyXR Interventional Suite at North Star Vascular and Interventional in Minneapolis, Minnesota. This marks the first-ever clinical use of augmented reality technology for interventional radiology. The GE Press Release issued June 20, describes the technology as combining a holographic heads-up display streaming live medical imaging, 3D anatomy model visualization, and advanced imaging technologies while enabling the opportunity for remote collaboration to help advance the delivery of precision care across a variety of interventional procedures. Dr. Jafar Golzarian of North Star called the technology “game-changing,” explaining that the views possible through OmnifyXR, especially the 3D anatomical view offered by the hologram scan, allow for new perspectives into treatment that providers have not seen before.

Behavioral Health

M&A activity in the behavioral health sector is down this year compared to 2023, according to PwC’s US Deals 2024 midyear outlook, with deal volume from January to April down 2% from the same time period in 2023, and deal value down by 18% from 2023. Despite these statistics, behavioral health remains attractive for investors, given the high demand and lack of access.

PE investors continue to be the primary drivers of deal activity in the behavioral health sector. In June, Shore Capital Partners announced the sale of Behavioral Innovations, an applied behavior analysis therapy provider with 77 locations across Texas, Oklahoma, and Colorado, to Tenex Capital Management, another PE firm. Your Behavioral Health (backed by Comvest Partners) announced it acquired Insight Treatment Programs, a teen mental health and substance use disorder treatment provider.

In addition to PE firms, venture capital firms have increasingly engaged in “growth equity” deals in the behavioral health space, buying a minority stake in companies with scalability. In Q1, venture capital accounted for $350 million in behavioral health deal-making. In Q2, venture capital remains active. For example, Talkiatry, a telehealth behavioral care provider, secured a $130 million funding round led by venture capital firm Andreessen Horowitz.

Other notable deals in Q2 included activity in the mental health and substance and use disorder subsectors of behavioral health. For example, Optum acquired Minnesota-based CARE Counseling, an outpatient mental health group. Acadia Healthcare (Nasdaq: ACHC) also acquired three comprehensive treatment centers in North Carolina. The treatment centers combine behavioral therapy and medications to treat opioid use disorders. T&R Recovery Group also finalized its acquisition of Origins Behavioral Health facilities in Texas from the Hanley Foundation. The facilities offer both inpatient and outpatient gender-specific recovery for addiction and mental health, intensive outpatient programs, and extended care. Tennessee-based Tulip Hill Recovery merged with two Kentucky-based substance use disorder treatment providers, Louisville Addiction Center and Lexington Addiction Center, to form Tulip Hill Healthcare. Lastly, an outpatient behavioral health facility, which is a joint venture between Acadia and Tower Health, was acquired by Silas Realty Trust, a healthcare real estate company, for $10.5 million.

Managed Care

In Q2, there were few major deals in the managed care sector. CVS Health (NYSE: CVS) grabbed some headlines for its purchase of Hella Health, a Medicare Advantage (MA) broker based in New York City, for an undisclosed amount. Hella Health utilizes an online shopping platform to offer MA plans and other products through its insurance agency, licensed in all 50 states. MA plan brokers like Hella Health are growing in popularity as the population continues to age—indeed, according to some reports, one in three Medicare beneficiaries use insurance brokers or agents to choose a plan. Interestingly, however, this comes at a time when MA brokers are coming under increased scrutiny. On April 4, the CMS issued a final rule that, among other things, caps the amount MA plans can compensate brokers in order to—as CMS describes it—“stop anti-competitive steering.” CMS expressed that this rule advances the Biden administration’s goal of promoting competition in the health insurance marketplace, as articulated in President Biden’s July 2021 Executive Order. On July 3, however, a Judge for the United States District Court for the Northern District of Texas ordered a stay on the effective date of certain of the caps and prohibitions on contract terms set forth in the rule pending their further consideration. It remains to be seen, then, when those aspects of the rule will take effect—if at all.

In other news, CMS announced in April that it was slightly decreasing MA benchmark payments for 2025, causing some payers, who believe the new rates are insufficient to cover increasing costs, to forecast potential cuts to benefits and an exit from certain MA markets in 2025. It is unclear to what extent this will affect M&A activity in the sector. This, combined with the upcoming presidential election and possible change in administration, will no doubt make for an interesting year in the managed care sector.

Pharma Services, Pharmacy & Pharmacy Benefit Managers

In our last report, we noted that Mark Cuban Cost Plus Drug Company partnered with its first health system, Community Health Systems in Q1. A little over a month later, Cost Plus Drugs announced a second health system partnership with ScionHealth, a 94-hospital system based in Louisville, Kentucky, and in May, Cost Plus Drugs announced it would be incorporated into technology company RxLink’s drug find and comparison platform.

On March 11, Elevance Health (NYSE: ELV) announced the closing of its acquisition of Paragon Healthcare, a provider of infusion and other specialty pharmacy services. A month later, in a move aimed at boosting its healthcare service offering and bolstering its bottom line, Walgreens announced it is launching Walgreens Specialty Pharmacy. According to Walgreens, it is expanding its specialty pharmacy services, with the integration of a new dedicated gene and cells services pharmacy and its existing specialty pharmacy and home delivery business, AllianceRx. Walgreens’ move reflects a growing need for specialty pharmacy services—indeed, in its own press release, Walgreens cited that specialty medications today account for more than 50% of prescription drug spend in the United States due to the increasing prevalence of chronic disease.

Players in the pharmacy space operating in California should be mindful of California Assembly Bill 853, which went into effect on January 1 and, similar to the legislation we see in the PPM space, requires parties to a transaction involving retail grocery chains and retail drug firms to file a notice with the California Attorney General at least 180 days in advance of the transaction. The legislature cited as a need for the bill, among other things, the increasing consolidation of chain retail pharmacies, “which are primary points of medicine distribution through California,” which could impact the public health of Californians, and therefore bestowed upon the Attorney General “certain and specific tools to review these mergers.”

Pharma

In Q1, biopharma M&A deals more than doubled from the first quarter of 2023. Activity is only expected to accelerate as several pharma companies have major patents expiring. A report from Leerink Partners reported 13 biopharma deals from Q1 of 2024, compared to six in Q1 of 2023. In Q1, there was an uptick in private investments in public equities, with 48 privately negotiated fundraising efforts totaling $4.4 billion. Additionally, follow-on offerings were also on the rise, with 48 deals coming in at $10 billion. This is the most activity in one quarter since 2021. Venture capital was also active—investing $12.4 billion through 306 deals—matching 2019 levels. According to Morgan Lewis, it is anticipated that deals in the $5 billion to $15 billion range will be in the sweet spot for pharma deal activity this year.

In Q2, Novartis (NYSE: NVS), a Swiss pharmaceutical company, acquired DTx Pharma for $500 million in cash plus $500 million in future payments. DTx is a San Diego-based, pre-clinical biotech company that develops RNA therapies to treat neuromuscular and central nervous system functions. On June 21, Johnson & Johnson (NYSE: JNJ) acquired Proteologix, a biologics company specializing in treatments for immune-mediated diseases, for $850 million. This acquisition will broaden Johnson & Johnson’s atopic dermatitis treatment offerings. In an unexpected move, Moderna (Nasdaq: MRNA) is leaving its partnership with Metagenomi—leaving up to $3 billion in biobucks on the table. In 2021, Moderna entered a four-year partnership with Metagenomi to research gene editing. The deal involved $70 million cash from Moderna and offered Metagenomi $3 billion in potential biobucks.

As its first partner, Pfizer and Flagship Pioneering have targeted ProFound Therapeutics to develop new obesity drugs. The financial details of the collaboration have yet to be released, but previously, the companies committed $50 million each to develop 10 programs. It is projected that each successful drug from the partnership could be worth $700 million. Furthermore, adding to its portfolio related to eye diseases, Merck & Co. (NYSE: MRK) acquired Eyebiotech Limited (EyeBio), a privately held ophthalmology-focused biotech company) for $3 billion ($1.3 billion cash upfront and $1.7 in potential milestones). As a Merck subsidiary, EyeBio will be able to expand its pipeline of preclinical and clinical candidates for the prevention and treatment of vision loss associated with retinal diseases.

Conclusion

Although buyers may be reluctantly accepting the new normal for interest rates, unfortunately, interest rates are not the only obstacle, as buyers—particularly those in the PPM sector—face an evolving regulatory landscape. As noted in our previous report, however, that regulatory landscape may very well shift with a change in the presidential administration. As we draw closer to the election over the course of this next quarter, we should get more insight into the outlook for healthcare M&A for the end of 2024 and beyond.

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