BenefitsPRO reached out to Torrey McClary, partner specializing in health care M&A at King & Spalding, to get her perspective on the market forces shaping our industry now and in the years ahead.

How has the COVID outbreak impacted the market for health care M&A deals?

Things were very robust last year; maybe not record-breaking, but a hot M&A market. The beginning of the year was also on trend; we were all feeling like Q1 was off to a blazing start, tons of deals in the pipelines.

What came to be was not what we expected. On the hospital side, they were preparing for the crisis, getting ready to treat the community, getting overflow, PPE, cuts in staffing and elective care. Everyone was kind of reorganizing themselves to weather the crisis.

Once things leveled out toward April and May, we saw an uptick in conversations again, and we'll probably see additional announcements in Q3. I've recently noticed an uptick in people picking back up conversations that were in motion pre-pandemic, or looking at new opportunities. We're dealing with surges and market disturbances that might derail or delay some of these conversations, but strategically, hospitals are continuing to think about partnering and growth, for all the reasons they were exploring pre-pandemic.

What's driving M&A activity in the health care space?

The pressure to control and reduce costs. Like M&A in any industry, the sense is that if you have more scale, you have the ability to centralize services and create more leverage with vendors and service providers and potentially payors.

The other thing is focusing on population health, value-based care, and data-sharing across broader patient populations. More resources, more sharing of data—if you do that successfully, you'll provide higher quality care for patients.

And how has the pandemic impacted those priorities?

This might just be a scenario where bigger is better. Smaller health systems are going to be facing a lot more challenges that may drive increased partnership and consolidation. That includes some targets that in the past might have been willing to go it alone through joint ventures and affiliations. They now might be looking for more comprehensive solutions, a partner who can invest capital to give them resources they need to be successful in the future.

What outside competitors are hospital systems worried about?

We're talking about competition from pharmacies, commercial walk-in clinics, urgent care, those kinds of settings. Sometimes they try to partner, sometimes they come in as competitors. I think the health care systems understand there is some potential competition, but I haven't seen them feeling like it's a true fundamental threat to their model.

We're also seeing an increase in private equity involvement, particularly in the physician area. Health systems do see these private equity firms as competitors in terms of physician alignment strategies. They'd prefer to have a relationship with their physicians without the equity firms getting involved.

I think health systems are managing the competition; they're aware of the change in delivery models, but if anything, in the market-by-market sector, when things were easing up I was seeing a lot of my clients have very quick return to patient volumes and getting back to normal.

How has the pandemic affected public perception of health systems?

Health systems and hospitals got a lot of government support. Hospitals and their workforces have stepped up, done the right thing, canceled elective procedures. You're already seeing some scrutiny around what executives are being paid and where the money is going. Like the bailout with banks, if the hospitals recover, if execs are paid well, there will be a lot of focus on how they've utilized those funds. How has the community benefited?

Health systems have to be very mindful of that perception and remain thoughtful about how they behave in the aftermath. As they structure deals and partner, they're going to have to be very cognizant of why they're doing these deals and the messaging around it. In a scenario with furloughed employees, or asking people to take pay cuts, you can't just come in and have somebody get a sweetheart asset package. You have to think about how these deals are structured and what benefit you're bringing to the table.

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