What 2021 Tells Us About Public Sector Healthcare M&A in 2022 and Beyond

 In Healthcare Pulse

A Year of Change

The healthcare industry is constantly being reshaped by M&A activity, and 2021 was no exception.

Some of the year’s largest healthcare M&A deals – Blackstone and Carlyle’s $30B+ Medline buyout, Microsoft’s $19B+ Nuance buy, Datavant’s $7B merger with Ciox Health, and Humana’s $5B+ acquisition of Kindred – provide a snapshot of where the industry might be going next.

From optimizing supply chains in the wake of COVID (Medline), to finding new ways to bring AI and advanced analytics to healthcare (Nuance, Kindred), to shifting priorities and preferences in care delivery (Kindred), these larger deals are emblematic of trends that cut across the healthcare world.

While the commercial healthcare sector may receive the lion’s share of capital flows and corresponding attention, deal activity in the public sector can’t go unnoticed.

And for companies that serve public sector customers, transactions have major import on not only capabilities, but also on customer and contract vehicle access, partner/competitor relationships, and customer buying behavior.

When a handful of contract wins can make or break a strategic vision, it can pay to buy in – at the right place, right time, and right price.

Major Healthcare M&A Deals in the Public Sector

2021 gave us a mix of pure-play healthcare deals and diversified federal service acquisitions. To name a handful of notable healthcare M&A transactions:

  • Peraton’s $3.4B acquisition of Northrop Grumman’s IT and mission support services business was followed up by an even larger $7.1B buy of Perspecta. The combined entity serves most of the federal health space, including major HHS agencies (CMS, FDA, CDC), DHA, and VA. And while Peraton may not be a health specialist, its depth of capabilities and sheer scale could make incumbent specialists nervous, especially in analytics and emerging technology areas.
  • Maximus’ $1.5B acquisition of Veterans Evaluation Services (VES), a provider of Medical Disability Examinations (MDEs) to the VA, offers a platform to both expand the company’s clinical assessments and deepen what had previously been a light presence at VA. Earlier in the year, Maximus acquired Attain’s federal practice for $430M, which broadened the company’s federal customer base but had little impact on the healthcare sector.
  • Booz Allen Hamilton’s $725M acquisition of Liberty IT Solutions, like Maximus’ VES buy, provides coveted access to VA and aligns BAH to customers’ desire for digital transformation via a low code/no code environment.
  • SAIC’s $250M acquisition of Halfaker and Associates was another deal in the digital transformation space with an emphasis on VA. With this deal – and Liberty’s earlier small business graduation – the small and veteran-owned business landscape continues to dwindle as top firms get snatched up by large primes.
  • Guidehouse’s acquisition of Dovel Technologies provides deep credentials in health IT, life sciences, and grants management, and makes Guidehouse a key player at NIH via Dovel’s SOAR position.

Some deals – notably SAIC/Halfaker, Booz Allen Hamilton/Liberty IT, Octo/B3, and WCAS/GovernmentCIO – can also be seen as a vehicle access play for VA’s T4NG IDIQ. However, most other recent M&A has prioritized customer relationships and new capabilities.

In total, these public sector deals reflect similar interests to the commercial sector with investment in emerging technologies (e.g., AI/ML, advanced data analytics) and software approaches (e.g., low code/no code, DevSecOps), alongside a focus on meeting the future of care delivery and medical research.

Other Federal Health deals highlight the growing emphasis on public health and Medicare & Medicaid following the COVID-19 pandemic.

  • AIR buying IMPAQ (2020) and Gainwell buying HMS (2021) reflect expectations that this administration will continue to seek improvements in the efficiency, efficacy, and quality of publicly provided healthcare.
  • Customer Value Partners’ acquisition of Atlas Research (2021) deepens its expertise in health equity, mental health, and rural health especially in veteran and military communities.

A number of other healthcare M&A transactions, while more commercially oriented, may reshape the public sector too.

UHG/Optum’s Change Healthcare acquisition (though yet to close as of this publication) comes with some public sector work, but more importantly points to the value of deep analytics, research, and revenue cycle management.

While Oracle’s record $28.3B cash acquisition of Cerner may not have been driven by federal ambitions, nearly $1B of Cerner’s $5.5B 2021 revenue stems from the US government. The new combined entity will certainly have impacts on the future of care delivery and cloud-based EHR at the DoD, VA, and elsewhere.

Meanwhile, Centene’s acquisition of Magellan shows us that the post-COVID world might be one in which behavioral health finally gets the attention (and funding) it deserves, in both the private and public sectors.

What Will We See Next in Healthcare M&A?

Recent years have shown us that consolidation in public sector healthcare is likely here to stay. Macro-level trends are part of that story – through COVID, we saw increasing interest in serving customers like CDC and NIH, and how to break into those markets quickly.

COVID also rightly put the spotlight on certain functional segments, like emergency preparedness and response and public health analytics. The strain on health IT during the pandemic only further reinforced the need to accelerate modernization of our public health technology and of ways to make data actionable.

We would expect that interest to persist and to drive ongoing healthcare M&A activity in the next few years. Plus, the recent release of Biden’s latest budget (including the $26.9B requested increase in HHS discretionary funding), signals that there should be plenty of room to serve federal healthcare priorities.

2021 healthcare deals also reshaped the industry landscape serving federal health customers. Several of the transactions this past year were of small businesses (or recently small businesses). Those entities, especially ones that have successfully navigated contract set-aside risk and proven themselves in the F&O arena, tend to be attractive healthcare M&A targets.

The combination of these deals may mean some customers have fewer strong small businesses available to them, and industry will need to reexamine current partnerships and assess market positioning and strategies.

Questions for the Government Customer

  • How will customers manage this shift amidst calls to increase small business targets?
  • Will customers need to change their targets?
  • Or change the types of work that are allocated to set-asides?

Questions for Industry

  • How must we readjust our M&A strategies as the available “middle market” shrinks?
  • How do we partner with other large primes as our prior partners get acquired by them?
  • What new small businesses do we want to place our bets on through partnerships, JVs, or M&A?

Furthermore, after recent emphasis on customer access and capabilities in M&A, contract vehicles may have a resurgence in importance for federal health M&A. CIO-SP4 is fast-approaching, and capturing recompetes for T4NG and SPARC will soon (if not already) be top priorities for contractors.

The importance of these vehicles – and even niche IDIQs with high upside like NIH’s SOAR – to the federal health market suggests more M&A activity is just around the corner.

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