Intensive legislative measures increase pressure on hospital sector
In recent years, the German healthcare system has been characterized by a high number of legislative activities, which have also put pressure on the financial situation of many hospitals. The COVID 19 pandemic has exacerbated the funding bottleneck at all levels. But the digitization of hospitals also necessitates further investment – despite funding from the KHZG. In short, many different factors have contributed to a tense situation on the hospital market in Germany. Oberender AG’s M&A Trend Report evaluates these current developments and highlights their impact on transaction activity. This blog post summarizes the five most important findings.
1) Crisis year 2020 does not stop at the M&A industry.
While there was an increase in transactions in the hospital sector until 2018, the volume of transactions has been declining since 2019. The year 2020 has been impacted by the COVID-19 pandemic. Many of the deals were targeted ahead of time and then closed in 2020. While the focus in 2019 was more on the sale of individual hospital sites, 2020 was dominated by the sale of Malteser and Rhön-Klinikum AG with a correspondingly large number of sites.
2) Single-operator transactions dominate the market
As in previous years, a dominance of single-owner transactions, in which there is no change of ownership, can be observed for 2020. In line with the trend in recent years, the majority of transactions took place in the non-profit sector. When looking at the average development in the past, a clear decline in the share of private unitary transactions is noticeable. In contrast, the share of public transactions involving the same entity experienced an increase. A possible outlook for the future could be that cross-area mergers of municipal primary and secondary care providers and focal point providers will increase.
3) Sale of medium-sized hospitals as a new trend?
With regard to transactions by bed cluster, the development in the area of mergers corresponds to the trend of recent years: mergers tend to take place in the area of larger hospitals with more than 200 beds. While it was actually the small hospitals with fewer than 100 beds that were the subject of transactions over the past few years, 2020 represents an exceptional year: Comparatively many hospitals with 200 to 499 beds were sold. However, this was due in particular to the sale of Malteser Krankenhäuser. It remains to be seen whether a similar trend will continue in the coming years, or whether there will be a return to transactions involving small hospitals.
4) Innovations in merger control could bring about upward trend
With the passing of the GWB Digitization Act (in force since Jan. 19, 2021), the legislature has created new framework conditions for mergers in the hospital sector. In the case of merger-related structural changes with a notice pursuant to Section 11 (1) No. 2 of the Hospital Structure Fund Ordinance (KHSF-V), a merger can be implemented without a review by the German Federal Cartel Office (BKartA). Instead, the state health ministries act as review bodies through their role in the structural fund, which is why less restrictive action is expected. Despite a time commitment until 2024 (notification) or 2027 (execution of the merger), the innovation in merger control has the potential to trigger substantial merger activity, particularly in the area of regional associations. However, it should not be forgotten that mergers require a certain lead time, which makes an immediate boom unlikely.
5) Synergy evaluation as a future challenge
The developments mentioned at the beginning are endangering the financial situation of many hospitals in Germany. In this context, the question arises as to how a purchase price that is reasonable and justifiable for the buyer can be determined for loss-making hospitals. One possible approach here is to evaluate the strategic synergy potentials that are being pursued with a purchase. This can be done, for example, on the basis of opportunity costs, economies of scale, investments and personnel synergy potential. When evaluating these synergies and various strategic options, a good understanding of sector specifics is required. For example, the omnipresent and ever-increasing shortage of skilled workers must be fully taken into account in the assessment. Due to the high density of regulations in this area (PPuG, care budget, various G-BA guidelines, etc.), it is imperative that appropriate specialist knowledge be included for this purpose.
Quo vadis M&A?
The COVID-19 pandemic highlights structural weaknesses and has exacerbated the economic situation of hospitals in particular and the healthcare system in general (especially payers). Against the backdrop of an overall tight financial situation and impending deterioration in earnings, many hospital operators will have to face the question of sale or closure in the next few years, which is why an increase in M&A business is expected from the end of 2021. The role of private operators will be less relevant than a few years ago. A privatization wave is not expected to occur. However, increased involvement of public / municipal carriers is expected.
In contrast, during the COVID 19 pandemic, there were increased calls for the preservation of hospital sites. Despite the pandemic, the discussion about reducing hospital capacities is being conducted with great intensity and is characterized by topics such as quality improvement and centralization/specialization. According to the DKG, however, the pandemic in particular has made it clear that the provision of services of general interest cannot be guaranteed by centralization. However, healthcare policy does not appear to be backing down from its efforts to force a structural shakeout “across the board”. Even if there is a fundamental reform of hospital remuneration after the German parliamentary elections, a change in strategy currently seems unlikely, also due to the increasingly difficult underlying conditions.
Our forecast for the future of M&A in the hospital market is therefore: the market will remain dynamic, but the changing framework conditions will require existing strategies to be adapted.