Digital Drives Health Care Investing, Fueling Legacy Deal Space, Too

Updated on October 14, 2021

By Matt Wolf, Director, Health Care Senior Analyst at RSM US LLP

Health care private equity firms as well as payers and providers are doubling down on mergers and acquisitions as the pandemic reshapes the health care ecosystem. Expectations for the future of health care are changing, which is forcing many organizations to rethink their strategies and balance sheets. Meanwhile, investor appetite for health care companies has never been higher. This confluence of factors will sustain deal activity for some time. Much of the future activity will be driven by the digital health sector and so-called more traditional health care light businesses, such as health care suppliers and other non-technology vendors.  

Digital campaigns further growth

The pandemic proved health care has digital legs. While digital health solutions are not right for every patient in every instance, patients and providers have largely embraced new-to-them solutions like telehealth and remote patient monitoring. Telehealth volumes have declined as social distancing requirements and concerns relax, but the genie is out of the bottle: telehealth and digital health have a place in the future of health care and investors and companies are responding. 

According to Rock Health, digital health companies received $14.7 billion in venture capital funding in the first half of 2021, an increase over 2020’s total investment of $14.6 billion. If we expand our look at digital health to include private equity- and corporate-backed M&A, we see the first eight months of 2021 had $80.7 billion of activity in North America compared to $67.2 billion in the prior year, according to Pitchbook data. This record year was driven by several large deal announcements, including:

CompanyDeal Size
($ USD Billions)
Change Healthcare$13.0
Inovalon Holdings$7.3
Butterfly Network$2.4

Private equity and corporate investors aren’t done yet. Industry tailwinds and the macro environment suggest we will continue to see elevated heath care deal activity, particularly within the digital health space, over at least the medium-term.

Many observers believe digital health solutions are key to managing expanding health care costs. The U.S. spends approximately double on per-capita health care as other advanced nations; insurance premiums and out-of-pocket expenses have doubled over the past decade or so; and Centers for Medicare and Medicaid Services forecasts 23% and 27% increases in out-of-pocket and private payer increases, respectively, by 2027. By leveraging the disinflationary power of digital technology, these same observers and many investors hope to rein in health care expenditures. New ideas, technologies and solutions must come from somewhere and corporate and private equity investors are racing to invest in and provide them. 

Equating capital to carriers

Investors have responded to this ripe deal environment by raising record sums of capital. According to Bloomberg data, health care private equity buyout funds in the U.S. have $148 billion of dry powder to deploy and have raised another $35 billion in commitments for future investments, with a collective goal of raising $79 billion total. For context, $148 billion could buy about 12 Ford-class aircraft carriers.

Large public health care payers and providers are also sitting on impressive cash balances, the largest of which have about $60 billion in aggregate cash and cash equivalents on hand, according to their most recent filings. These corporate investors also have the value of their stock to include in deals, which can provide an edge when trying to outbid some private investors. The S&P 500 Health Care index is up 78.4% since the pandemic began.

Fueling traditional deal environment

Digital health and health technology are in focus for many of these investors, however, their insatiable appetite for deals within the health care ecosystem means we continue to also see deal volumes in traditional provider businesses and health care light companies. Investors want exposure to health care as the industry disrupts itself and cash remains available.

In fact, this more traditional space has seen investment growth since the onset of COVID-19, after stalling out somewhat in 2018 and 2019. The following chart summarizes significant volume and investment in 2020 and year-to-date 2021.  

Traditional Deal Volume Remains; Buoyed by Medline Mega Deal

MXqZ3nnVBtLXzh08tN99MpGrDnZD6ZWL7hdn4RemtfDa6OM29IVO8t6CBGuPN8N4RPn94eVlvV3e UhxmEjE6rQk6uojN NEB8J0ResGuBlVekjJAa Fv0fXSv0RlAPqzH0IN3i7XtcaOlFXoA=s0

Source: PitchBook, RSM US LLP

The $34 billion buyout of health care supply company Medline, led by private equity giants Blackstone and Carlyle, underpins investor appetite for all health care deals. While many private equity and corporate investors may be hungrier for disruptive health technology deals, there remains meaningful investment and acquisition opportunities within the legacy health care ecosystem. 

As health care organizations navigate ecosystem disruption and invest in new businesses, they are also rapidly divesting non-core assets. Last year, health care companies divested $9.5 billion of assets, the highest on record. So far, 2021 has seen $5.5 billion of similar divestitures. For example, Acadia divested its U.K. behavioral health unit for $1.5 billion. Only 2014 and 2018 reported higher levels of divestitures at $6 billion and $8.8 billion, respectively. 

Health care’s shuffle

A great shuffle within health care is underway. Forward-thinking strategic and financial investors, i.e., hospital systems and private equity, respectively, are leaning into new physical and digital modes of delivering care and supporting health. The pandemic has pulled forward the demand for mass customization of consumer experiences that have long permeated other industries. Think of how you interact with your bank: you can take care of almost all your needs with an app, web page, phone call, branch visit or whatever combination works for you. Health care is heading in the same direction, which creates tremendous investment opportunities. At the same time, there is movement to examine and cast off outmoded assets paving the way for renewed vision and growth. For example, many providers are rethinking their portfolio of physical assets in specific markets. When they divest an existing location or abandon a build-out, they aren’t abandoning markets or growth strategies. Rather, they’re approaching it with a mix of investment in physical and virtual capabilities.

As society continues to navigate the challenges brought on by the pandemic, one thing appears clear: the health care ecosystem will continue to evolve rapidly, and private equity and corporate investors will raise and deploy capital to capitalize on that evolution. All signs point to elevated deal activity across the ecosystem over the next few years, if not longer.

The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.