3 Major Themes from Public Healthcare Firms during COVID-19 – Part 3: Mergers & Acquisitions

October 19, 2020

Contributors: Anthony Metke and Spencer Coronado

VMG Health has completed its review of healthcare Q2 earnings season, which was one of the most unpredictable quarters for providers and payors to-date. Given that the pandemic impacted the entirety of the second quarter, insights and experiences from the provider sector are particularly interesting.

In this three-part series, VMG Health has summarized key observations and common themes regarding the following three major themes from public healthcare firms:

Part 3: COVID-19’s impact on Mergers & Acquisitions

Payors: Increased TeleHealth Presence

With the advent of telehealth technology in recent years, and the increased need for socially distant treatment methods during the COVID-19 pandemic, UnitedHealthcare (through OptumHealth) have acquired telehealth firm AbleTo, which positions them well for the continued need of virtual healthcare services as the pandemic continues into the latter half of 2020:

“We’re also very pleased to welcome the team from AbleTo. And as you allude, there is enormous capabilities there in providing digital health tools to those suffering from mild; moderate; and in some cases, even severe behavioral and substance use disorder conditions. And what you’ll see is we’ll leverage the capabilities of AbleTo in a more comprehensive fashion with other capabilities, including telehealth, for behavioral care, which we have seen an enormous uptick in as well.

Today, for behavioral health and visits, over half are being provided in the outpatient setting using digital capabilities. And AbleTo have very sophisticated tools that allow individuals to address their behavioral health care needs. So we’re very pleased about the partnership, and we look forward to continuing to build out both their and our capabilities.

Finally, to your point about embedded solutions in primary care. We have begun that journey. And in fact, within OptumCare, you’ll find a number of our practices are — have embraced us today, and AbleTo provides more advanced capabilities to use digital tools in that setting as well. So yes, we will continue that integration.”

Wyatt W. Decker, Chief Executive Officer of OptumHealth – UnitedHealthcare Q2 2020 Earnings Call Transcript

Providers: Measured Hesitation, Optimistic Outlook

Throughout the second quarter, providers have displayed measured reticence regarding M&A activity. Due to the operational challenges seen in recent months and the lack of certainty going forward as a result of COVID-19, many healthcare operators indicated a ‘stand by and evaluate’ strategy regarding capital opportunities through the remainder of CY 2020 and into 2021 as the path of recovery from COVID-19 becomes more clear.

Despite this cautious approach, providers in several healthcare sectors indicated robust pipelines of acquisition opportunities are currently available. Furthermore, many executives expressed an expectation of increasing consolidation in the market due to the continuing pressures of COVID-19 on smaller facilities unable to weather the pandemic’s storm.


“I think everybody is scrambling in many markets to deal with COVID-19 possibilities appropriately, and the likelihood of any strategic decisions being made during this particular period in time, I think, is probably not that high. We will continue to explore. We have a very robust pipeline for outpatient facility development and/or acquisitions that we’re very excited about, and they’re complementing of our existing networks … I don’t know, though, at this point in time that we’re going to see anything in the short run. I think it’s going to take systems a while to get through this period and then start to determine what their appropriate steps are.”

Samuel N. Hazen, CEO & Director – HCA Q2 2020 Earnings Call Transcript

“Key capital investment projects were completed, including new freestanding emergency departments to support our operations in Laredo, Texas and to expand Northwest Health, our health care network in Northwest Arkansas. And we opened new AFCs in North Carolina and in Birmingham, Alabama. We have other active projects underway, including a de novo micro hospital to extend the geographic reach and strength of our Tucson, Arizona market. That hospital is scheduled to open in the fourth quarter. We have an active pipeline of new access points and service line expansions across the portfolio, and we are still actively recruiting new physicians to our markets.”

Tim L. Hingten, Executive Chairman & CEO – Community Health Systems Q2 2020 Earnings Call Transcript

“With respect to capital expenditures, I want to emphasize again that our planned reduction this year of about 40% was based on a very specific project-by-project analysis. This is the target approach with individual projects evaluated at the senior level of our company. We want to ensure you that we reduce spend in the right places to allow for continued investments that position us for growth as we recover and get past the pandemic. We also continue to evaluate other opportunities to enhance our liquidity, including our expectation that the sale of our Memphis facilities will close by the end of the year as well as pursuing the potential sale-leaseback of certain medical office buildings if the economics make sense.”

Daniel J. Cancelmi, CFO & Executive VP –  Tenet Healthcare Q2 2020 Earnings Call Transcript

Post-Acute Care

“Throughout this pandemic, we’ve continued to expand our national footprint. We’ve opened 3 new hospitals in 2020, including 2 added in the second quarter in 2 states that are new for us, Iowa and South Dakota, and we expect to open a new 40-bed hospital in Toledo, Ohio in the fourth quarter. In addition, we expect to add at least 120 beds to existing hospitals in 2020 with 53 of these beds already operational. Recall that at our Investor Day earlier this year, we discussed a growth target of 6 to 10 de novos per year starting in 2021. For 2021, we’ve already announced plans to build 8 new hospitals, and we’ve announced 5 new hospitals planned for 2022. Specifically, at our Investor Day, we announced we had identified 15 high-potential de novo markets in Florida. As of today, our expected 2021 and 2022 hospital openings include 5 new Encompass Health IRFs in Florida. And we’re not done. In Florida or in other under-bedded markets across the country, you can expect more announcements in the coming months.

… We continue to believe PDGM will result in consolidation of the home health industry, current M&A activity is minimal as even small agencies are focused solely on their response to COVID-19 pandemic and are being supported by the PPP and Cares Act funds. Thus far, in 2020, we have opened or acquired 2 new home health locations and 1 new hospice location.”

Mark Tarr, Executive VP & CEO – Encompass Health Corporation Q2 2020 Earnings Call Transcript

“Well, I think from — I’ll comment on the broader M&A. I mean, I think we feel in the 4 business segments that we’re in that we have a lot of great development opportunities. And that’s really where we’re going to allocate capital. So I’ve said that if you look at the inpatient rehab or the outpatient or the critical illness recovery or even Concentra, there’s probably not a significant acquisition in any of those segments.

The way we think about M&A is really the acquisition of the remaining minority interests of Concentra. We probably won’t have any puts from the minority owners for 2020. And so that will be probably a total clean up at the end of ’21 that we’ll do in early 2022, and where we’ll pick up the 33% plus or minus of Concentra that we don’t own now. We — our plan is to do that mainly out of cash flow and accumulated cash on the balance sheet, and that will — that’s the other reason why we’re really not that interested in other M&A activities. That’s really the M&A that we are looking forward to.”

Robert A. Ortenzio, Co-Founder & Executive Chairman, Select Medical Corporation Q2 2020 Earnings Call Transcript


“Well, I think right now, we’re focused on capital conservation. And while I think the M&A opportunities will present themselves to us, and we will look at them very carefully, I think we need to be very targeted as we have always been in making certain that those M&A activities primarily occur inside of the regions in which we currently operate … We’re comfortable in our current position, both with the highest liquidity that the company has ever experienced and confidence in our future operating results.”

“I also believe that the post-COVID environment will provide us with opportunities to accelerate our growth. As difficult as this period has been for RadNet, smaller operators have had even more challenging time. Most of our competitors lack the scale, capital and union resources to emerge from the COVID with financial and operating strength. As a result, we expect more M&A activity for us in the post-COVID period at multiples that are consistent with that we have paid in the past.”

Howard G. Berger, Chairman, President, CEO & Treasurer, RadNet Q2 2020 Earnings Call Transcript

Outpatient Care

“Technological improvements, cost savings and patient safety have been the primary drivers of this shift pre-COVID, and we believe that patient and physician sentiments in our current environment will further propel this shift for 2020 and beyond. This has been our company’s differentiation. And now more than ever, due to COVID-19, this value proposition is resonating with key stakeholders in the health care environment, patients, physicians and payers.

To help capitalize on this trend, on July 22, we raised an additional $115 million of gross proceeds via an add-on offering to our 2027 notes. With the proceeds from this most recent offering, we plan to focus on growth related activities, including the following: service line expansions, where our teams are working to capitalize on the accelerated transition of orthopedic and spine cases in the short-stay surgical facility setting as well as broader cardiology and robotic migration trends; physician recruiting and technology infrastructure investments, to further improve the effectiveness of our lead generation and ROI, as well as to make improvements in our data and analytics that will enhance our managed care and revenue cycle efforts; and importantly, to help fund a robust M&A pipeline of transactions heavily focused in orthopedics, cardiology and other key specialties across the country.

Clearly, we — the pipeline has been fantastic. But we remain focused on those end market and de novo opportunities. They’re extremely attractive. So we kind of have both going for us now, but I would just reiterate, we certainly love the in-market de novo and roll up transactions, and those continue to be very accretive, and they continue to be available to us.”

Eric Evans, CEO & Director – Surgery Partners Q2 2020 Earnings Call Transcript

“First and foremost, the M&A pipeline is as robust as we’ve ever seen it. I think that is both a function of the value creation that SP is able to show to potential partners, the independence of our value creation. And candidly, COVID has really put a spotlight on those stand-alone facilities that are struggling in this environment, and they can see what we can do to actually help them during this time. And so when you think about that, I would tell you that — a couple of things to hone in on. One is we are very focused on those facilities that are heavy MSK and cardiovascular. We think cardiovascular is the next wave, and we don’t want to wait 2 or 3 years to start hitting that wave. In fact, we’ve got a number of facilities now that are doing that. We think MSK has got a good 5 to 10-year run in it still. And it’s just starting the growth trajectory, but we actually want to start the next run as well. I would tell you that our pipeline has several transactions under LOI currently that we could close between now and the end of the year, subject to our due diligence and final procedures. And in terms of size and scale, I think they take on kind of all shapes and forms. We will not do a bet-the-farm transaction. There’s no need to bet the farm. Things are going well. Our process works well. We’re able to plug-and-play these things in efficiently. But we are looking at some slightly larger transactions than maybe we’ve done over the last couple of years, but focused on a multispecialty of cardiovascular and MSK. But again, not much bigger than what you’ve seen historically, but things that will really drive value creation to where we see the growth trajectory going.”

Wayne Scott DeVeydt, Executive Chairman, Surgery Partners Q2 2020 Earnings Call Transcript

Behavioral Health

“Through the first half of 2020, we have added 106 beds to our U.S. operations, and we expect more than 400 additional beds to come online in the second half of the year. These new beds include a continuation of our strategy of expanding our reach through joint venture partnerships. Along with our joint venture partner, Tower Health, we opened 144 bed behavioral health facility, Tower Behavioral Health, in July.”

Debra K. Osteen, CEO & Director, Acadia Healthcare Company Q2 Earnings Call Transcript

Clinical Laboratories

“The M&A environment understandably slowed. But despite that, we were able to complete the acquisition of Memorial Hermann outreach business in April and are pleased with early progress. We also recently announced our plan to acquire all of mid-America clinical laboratories for MACL. Once we complete this transaction expected this quarter, Quest will wholly own MACL Laboratory in Indianapolis and about 50 patient service centers across Indiana. MACL will provide professional lab services under a long-term agreement to 30 hospital labs owned and operated by MACL founding hospitals, […] in Community Health Network.

Our M&A pipeline remains strong, given the many challenges that hospitals will face we expect many more to be open to discussions about how Quest can help them achieve their last strategy. At the same time, we know that smaller regional laboratories have had their own challenges. This could also produce more opportunity for tuck-in acquisitions. If anything, the pandemic could be in an additional catalyst to help drive immunity consolidation. Some transactions in the pipeline that were paused because of the pandemic are being revisited based on the new realities that this health care system is experiencing at the start.”

Stephen H. Rusckowski, Chairman, President & CEO – Quest Diagnostics Incorporated

Real Estate

“Earlier this month, we had the opportunity to convert the last Steward mortgaged hospitals into sale-leasebacks for an additional $200 million investment. Today, we announced the signing of an agreement on the acquisition of St. Francis Medical Center, a large acute care hospital campus located in Southern California to be operated by Prime Healthcare.”

Edward K. Aldag, Founder, Chairman, President & CEO, Medical Properties Trust, Inc. Q2 2020 Earnings Call Transcript

Watch the Market for Opportunities

While Q2 earnings season has provided some clarity related to current provider M&A activity, future forecasts remain limited due to the unknown impact COVID-19 will have going forward on the various segments of healthcare. Due to this uncertainty, many providers remain focused on capital conservation, but are optimistic opportunities will arise related to the consolidation of smaller facilities unable to weather the pandemic’s financial or operational requirements.

Entering the back half of 2020, providers appear to be cautiously optimistic regarding merger and acquisition opportunity through year end and into 2021.