This M&A Insights briefing paper provides a brief overview of M&A activity in the health and aged care sector (particularly for private equity firms and their portfolios) in the 2021/22 financial year, a summary of the proposed key legislative and policy changes affecting the sector and some thoughts on the path ahead for market participants.
Australian health and aged care M&A activity in 2021/22
Despite the Covid-19 pandemic (or perhaps because of it), dealmaking in the health and care services market during the 2021/22 financial year was robust and seen as a core sector of focus for international and local private equity funds looking to deploy capital in growing and disrupted sectors in Australia.
The pandemic highlighted workforce shortages and funding shortfalls which forced many industry participants to re-evaluate their operations and look to non-organic growth (i.e. growth through acquisitions) or emergency funding. The need for economies of scale saw smaller participants exit or merge with others and many larger firms acquire smaller firms, particularly in the home care sector where there was a significant uptick in M&A activity during the time period.
The first quarter of 2022 saw a reduction in the number of transactions compared to the historically strong growth during 2021 and throughout the pandemic. During this time, private capital sources reduced their interest in hospitals and health systems and refocussed on other areas. In addition, macroeconomic factors (such as higher inflation and corresponding rising interest rates) and disruptions to global supply chains because of geo-political unrest also led to a slower M&A environment generally.
However, the health sector has continued to be a key area of focus for private equity (and private capital generally) with substantial transactional activity in digital care, home care, and, as the digitisation of health continues, software as a service and cloud-based platform technologies and infrastructure. We have seen significant market consolidation of various specialist outpatient care service providers and healthcare facilities (for example, diagnostic imaging, cancer care, surgical and specialist hospitals, and medical centres).
Some recent key transactions (and potential transactions) include:
KKR’s on-again, off-again pursuit of Ramsay Health (and Ramsay’s acquisition of Elysium);
Livingbridge’s acquisition of Everlight Radiology;
BGH’s bid for Virtus Health; and
CSL’s acquisition of Vifor Pharma.
The “five pillars” of legislative and policy reform
Australia’s healthcare market offers a number of key strengths, including a stable regulatory and funding regime, an ageing population and good prospects for long-term growth. The introduction of new reforms by the Commonwealth government following the Royal Commission into Aged Care Quality and Safety is set to further change the industry and, as a likely side effect, create opportunities for M&A activity, particularly in the mid-market space.
The Commonwealth government announced reforms across five “key pillars” of health and care reform to be delivered within five years:
Home care – supporting senior Australians who choose to remain in their home;
Residential aged care services and sustainability – improving and simplifying residential aged care services and access;
Residential aged care quality and safety – improving residential aged care quality and safety;
Workforce – supporting a growing and better‐skilled care workforce; and
Governance – new legislation and stronger governance underpinned by a new consumer-focused Aged Care Act.
The five-year plan includes the replacement of the current Aged Care Act to account for a framework to underpin the development of the new Support at Home program (which consolidates the current home care programs including the Home Care Package Program, the Commonwealth Home Support Program and the Short-Term Restorative Care Program). Commencing in July 2024, the new reform initiatives will result in more regulatory activity and significantly increased compliance requirements for stakeholders in the residential aged care and healthcare industries. Providers will need to ensure that Aged Care Quality Standards are being followed and be prepared for any audits that may be conducted.
Possible market responses to reforms
Uncertainty about impending regulatory changes, as well as costs and other difficulties associated with complying with the new requirements, will continue to contribute to further consolidation of Australia’s fragmented health sector (particularly home care).
Several trends in the health and aged care sector over the past few years are likely to pick up speed because of these reforms. The reforms are likely to lead to more consolidation, with larger participants benefiting greatly from scale advantages from technology investments, efficient administrative systems, lower procurement costs, and more flexible staffing rosters, while smaller participants may find it difficult to keep up with the heightened regulatory and reporting requirements. The larger potential buyers are likely to be home care specialists looking to scale and other aged-care (and related) players like residential and retirement care companies looking for synergies and efficiencies.
Because of increased government support, rising consumer demand for relevant services, and technology improvements that make remote health care delivery possible, the in-home care segment of the aged care industry will continue to expand. Despite regulatory change, the demand for high-quality healthcare and aged care services persists, and the industry will continue to be exposed to M&A activity and expansion in the near future.
Participants will likely concentrate on strategic bolt-on acquisitions to meet their operational and financial needs or to acquire capabilities (like digital) that will be required for longer-term growth. Responding to significant legislative changes, safeguarding secure supply chains, advancing technology capabilities, and expanding into adjacent markets will be areas of focus for these companies.
Given the general attention being paid to environmental, social, and governance issues, we also anticipate increased scrutiny of the performance of health and care providers on key ESG issues and buyers will give careful thought to integration plans that take issues like supply chain management and patient data and privacy protections into account.
For more information, please contact Gordon McCann, James Tannock or Ally Frizelle