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Healthcare merger and acquisition (M&A) numbers have been setting records over the past several years. The anticipation for 2020 was that the record pace of Healthcare M&A and the dollars associated with it would continue to set records. What has happened, however, due to the COVID-19 pandemic, is that health system leaders have been forced to reconsider potential deals. Whether a merger or acquisition deal was in place or planned before the pandemic, plans are being put on hold, for the most part.

According to a report published by James Burgdorfer and Alexandra Normington at Investment Bank Juniper Advisory, this crisis will permanently change the way hospitals approach partnerships. The report outlines seven observations on the impact the pandemic will have on the healthcare M&A market. They are:

“We are entering a buyers’ market: Hospitals and health systems are experiencing financial strain during the pandemic. The loss of revenue from non-urgent procedures, along with the increase in supply and workforce costs, is dramatic. The burden is being felt most acutely by hospitals that were near or in financial distress pre-pandemic. Stressed hospitals are already seeking infusions of cash and other support to keep their doors open. In the aggregate, there will be more sellers than buyers in the market post-pandemic. As a result, sellers will need to be more flexible as the composition of transaction consideration will change. Hospitals that seek relationships with academic medical centers should also be aware of the anticipated consolidation in higher education, including medicine and the allied sciences, as partnerships are developed.

Priorities are shifting: Hospitals that manage to maintain some degree of solvency may also have an increased appetite to pursue growth strategies. The pandemic response has underscored the need for access to capital, supplies and equipment, and operational expertise that is often afforded to hospitals in health systems. As part of a system, a hospital may find itself better positioned to respond to their community’s needs and more resilient in a deep recession. After experiencing a global pandemic, hospital boards may choose to prioritize operational and clinical effectiveness over independence, trading some of their “nimbleness” for stability.

Disruptors are taking center stage: While hospitals are consumed by COVID response, existing and emerging competitors are growing rapidly. Private equity groups are investing heavily. Policies are being amended to incentivize telemedicine and the provision of complex procedures in ambulatory settings. When they emerge from the pandemic, hospitals will be challenged by a more competitive environment. However, they may also find new opportunities to partner with disruptors.

In-market collaborations are permitted—for now: Health systems are capitalizing on their scale by transferring patients, staff, and supplies between their hospitals. They are sharing institutional know-how amongst facilities to optimize care. Independent hospitals are coordinating with their in-market peers to achieve similar benefits; the FTC is not obstructing such relationships during the crisis. However, there is no indication that restrictions regarding business combinations The COVID-19 Impact on Healthcare M&A JUNIPER ADVISORY May 2020 2 involving the exchange of ownership will be similarly loosened. Hospitals that wish to continue relationships that were developed during the pandemic should carefully evaluate whether these would hold-up under FTC scrutiny after the crisis.

Recovery planning is important: Well-capitalized providers and new field hospitals are attracting frontline caregivers away from community facilities with above-market compensation. Retaining staff has proven difficult due to recruitment competition and burnout. It has also been exacerbated by the need for some hospitals to furlough staff. Taken together with the financial losses caused by the pandemic, resuming “business as usual” will be challenging. Buyers and sellers that are able to demonstrate the ability to ramp-up clinical services as soon as permissible will be attractive M&A partners.

Transactions are moving forward: Transaction counsel and advisors have been able to support their hospital clients in advancing announced transactions during this time. While some health systems have hit pause on strategic initiatives during the pandemic response, business combinations are expected to close as planned once recovery begins.

Strategic discussions are ongoing: Development teams at large non-profit and investor-owned health systems are continuing to look for opportunities. Some prudent health system leaders are laying the necessary groundwork now to consider exploring partnerships when the pandemic ebbs.”

As the healthcare environment continues to rapidly involve due to COVID-19, it is more crucial than ever for IT executives to stay closely connected to their counterparts in the c-suite and across the organization. IT priorities and roadmaps need to shift to accommodate the needs of the business, which likely look very different today than they did in February. In an acquisition or merger, consolidation of IT teams, functions, and systems should drive long term savings, but IT needs to be included in preliminary conversations to ensure any existing technical debt is well understand and to define a concrete integration plan and budget.

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