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 a strain on the financial situation of many hospitals. The COVID-19 pandemic has exacerbated funding shortages 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 tight 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 key findings.
1) Crisis year 2020 does not stop at the M&A sector either
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 is impacted by the COVID-19 pandemic. Many of the deals were targeted ahead of time and then completed in 2020. While the focus in 2019 was more on the sale of individual hospital sites, 2020 was characterized by the sale of Malteser and Rhön-Klinikum AG with a correspondingly large number of sites.
2) Unitary carrier transactions dominate the market
As in previous years, a dominance of single-entity transactions, where 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 significant decrease in the share of private carrier-unit transactions is noticeable. In contrast, the share of unitary public transactions experienced an increase. A possible outlook for the future could be that cross-area mergers of community-based primary and specialty care providers will increase.
3) Sale of medium-sized houses 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 in sales 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 houses.
4) Innovations in merger control could bring about upward trend
With the resolution of the GWB Digitization Act (in force since January 19, 2021), the legislature has created new framework conditions for mergers in the hospital sector. In the case of structural changes accompanying a merger with a notice pursuant to § 11 para. 1 No. 2 of the Hospital Structure Fund Ordinance (KHSF-V), a merger can be implemented without being reviewed by the Federal Cartel Office (BKartA). Instead, state health ministries act as review bodies through their role in the Structural Fund, and therefore are expected to act in a less restrictive manner. Despite the time commitment until 2024 (notification) or 2027 (execution of the merger), the innovation in merger control has the potential to trigger substantial merger activity, especially 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 jeopardizing the financial situation of many hospitals in Germany. In the context of this, the question arises as to how a purchase price that is reasonable and justifiable for the purchaser can be determined for loss-making hospitals. Here, one possible approach lies in the evaluation of strategic synergy potentials pursued with an acquisition. This can be done, for example, on the basis of opportunity costs, economies of scale, investments and personnel synergy potential. A good understanding of sector specifics is required when evaluating these synergies and various strategic options. 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 the relevant specialist knowledge be involved.
Quo vadis M&A?
The COVID-19 pandemic highlights structural weaknesses and has exacerbated the economic situation of hospitals in particular and the health care system in general (especially payers). Against the backdrop of an overall tight financial situation and the threat of deteriorating earnings, many hospital operators will have to face the question of sale or closure in the coming years, which is why an increase in M&A business is expected from the end of 2021. The role of private sponsors will be less relevant than it was a few years ago. A wave of privatization is not expected to occur. However, increased participation of public / municipal agencies is expected.
In contrast, during the COVID 19 pandemic, there were increased calls to preserve hospital sites. Despite the pandemic, the discussion about reducing hospital capacities is being conducted with great intensity and is dominated by topics such as quality improvement and centralization/specialization. However, the DKG believes that the pandemic in particular has made it clear that the provision of services of general interest cannot be guaranteed through centralization. However, health policymakers do not appear to be backing away from their desire to force a structural shakeout “across the board.” Even if there were to be 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 environment will require existing strategies to be adapted.