Healthcare information technology M&A is being vaulted to new heights by a confluence of factors: initial public offerings, companies flush with cash, inspiring deals, consumer demand, pricing pressure, drives for efficiency, data analytics and, of course, the pandemic.

Marty Felsenthal, managing partner of Health Velocity Capital, a San Francisco private equity firm focused on healthcare software and services businesses, calls it “the most robust environment for M&A amongst innovative healthcare services and software companies” in his 25-year career.

Several factors have contributed: The Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH Act, expanded the adoption of health information technology. The Affordable Care Act and the Covid-19 pandemic accelerated M&A trends, with the “uber-large” healthcare players looking to reposition themselves in the new environment, Felsenthal says. “They’re sitting on large piles of cash that are earning next to nothing, so the cost of making an acquisition is relatively low in that regard,” he says.

Another force driving up demand for healthcare IT companies are the 25 to 30 new healthcare services and software companies that are aggressively making acquisitions to either fill out product holes or meet street expectations for growth. “It’s a combination of healthcare changing extraordinarily quickly and the adoption of innovation occurring at a pace unlike anything we’ve ever seen,” Felsenthal says.

One key to success for healthcare IT companies will be proving that their solutions offer a decent return on investment to the providers or payors that are their potential customers, says Lenard Marcus, general partner and co-leader of healthcare IT investments for Edison Partners, a growth equity firm based in Princeton, New Jersey.

Lenard Marcus

Telehealth companies gained acceptance from healthcare providers during the pandemic largely because their solutions offered a definitive ROI. “The industry finally adopted a technology that helped it become more efficient,” Marcus says.

Among private equity firms, the trend is to look for platform acquisitions—companies that can add solutions for broader appeal—rather than point solutions, Marcus says. “The lack of connectivity and the silos currently in healthcare offer great opportunities to invest, make acquisitions and create an even stronger entity with greater breadth,” he says.

Another trend driving healthcare IT businesses is the increasing number of patients coupled with a flat number of healthcare providers, which means efficiencies have to be wrung out of the system, says Grant Jackson, managing general partner at Council Capital, a healthcare PE and venture capital firm in Nashville.

The landmark deal that seemed to draw a lot of attention to the promise of healthcare IT investing was the Teladoc Health’s (NYSE: TDOC) $18.5 billion acquisition last year of Livongo, provider of diabetes monitoring and remote monitoring, which combined two of the largest publicly traded virtual care companies. “The speed of Teladoc’s rise in valuation surprised a lot of people and brought to the fore what investment in healthcare IT can look like,” Jackson says.

Two recent deals also exemplify some areas of healthcare IT garnering the most M&A interest:
Carlyle-backed Grand Rounds Health, provider of medical opinions and healthcare navigation services, merged with telehealthcare provider Doctor on Demand in May. The combined telehealth company offers a nationwide practice of providers in primary care, advanced specialty care, chronic condition management and behavioral health.

• Healthcare services company Optum, a healthcare services company owned by UnitedHealth Group (NYSE: UNH), announced a $13 billion deal in January to buy Change Healthcare (Nasdaq: CHNG), a healthcare technology that would provide Optum with software and data analytics, technology-enabled services and research, advisory and revenue cycle management services.

Despite the broad enthusiasm among PE firms for the healthcare IT sector, Christian Michalik, managing director at Kinderhook Industries, a New York PE firm, sees a few good reasons to dampen expectations. The main factor: A lot of telemedicine ventures, for example, seem to overlook the basic nuts and bolts of whether the government payers that largely drive the payment system are willing to pay for their solutions and, if yes, how much they will reimburse.

“I think that people’s perception of how much market share there really is to gain and what the price per unit of economics is going to be in the future is way too robust,” Michalik says. “Like any new frontier, a lot of these virtual health businesses are going to disappear.”

For more on healthcare M&A, see:

Healthcare Tech Goes Public

Care Management, Consumer Health Are Hot Subsectors in Healthcare IT Deals