Today, a tale of two markets are seen in healthcare mergers and acquisition: the present (as reflected in the data about declining dealmaking) and the future (reflected in the increasingly positive outlook by dealmakers).

While deal data can vary according to how it is defined and who is reporting, it has declined substantially across the board since the high-water mark in late 2021 and early 2022, with a major fall-off in the second quarter of 2023 and again in the third quarter of 2023.

M&A activity in digital health experienced a 44% decline in the third quarter of 2023, hitting a three-year low. The steep decline began in the second quarter of 2022, and in the first quarter of 2023, with only 56 exits seen in digital health in the first, then 36 in the second quarter, and only 20 in the third quarter. However, a promising outlook is emerging that next year will bring a meaningful upswing.

Since the HLTH conference in Las Vegas in October, whispers of optimism are being heard and green shoots are sprouting, which can be attributed to several factors:

• Shrinking valuations: Healthcare companies are experiencing decreasing valuations, which could make them more attractive targets for acquisition. This might be due to various factors, such as slower growth, changes in market multiples, regulatory changes or shifts in investor sentiment. Lower valuations can be a magnet for buyers previously deterred by the sky-high prices prevalent in specific healthcare segments. This shift in valuation can open opportunities for strategic acquisitions and expansions. It's a reminder of the cyclical nature of M&A activity, with opportunities emerging as market conditions evolve.

• Divestitures of non-core assets: Companies in the healthcare sector may look to divest non-core assets. Strategic moves could make them leaner and more focused on their primary businesses, potentially making them more appealing to acquirers.

• Changing dynamics: As healthcare companies adapt to evolving industry dynamics, increased M&A activity is anticipated. This could involve companies restructuring, merging or acquiring others to better position themselves in the changing healthcare landscape.

• New players:  If the recent past is an indication, expect more nontraditional players to enter the health care market, from “big tech” companies like Amazon to technology-focused venture capital firms like General Catalyst, who said publicly on the last day of the HLTH conference that it intends to buy a health care system, an unprecedented move for a VC firm.

A resurgence in healthcare M&A could happen in early 2024. The potential for M&A deals to increase in the first half of 2024 is contingent on the Federal Reserve's decision to cut interest rates, followed by impacts to the global economy, geopolitical conflicts and regulatory hurdles. Once there is stability in the outlook, CEOs and corporate boards should feel safer to reengage in dealmaking. Whether it surges or happens in fits and starts is anyone's guess. An increase in stock-for-stock transactions is expected, allowing buyers to give upside to sellers.

These predictions reflect the dynamic nature of the healthcare industry and how various factors can influence M&A activity. However, it's important to note that these are forecasts and actual developments in the healthcare M&A landscape may vary based on real-world events and market conditions. Let's delve into a few pivotal factors influencing the decisions of healthcare M&A buyers in the upcoming year.

Prioritizing value-based care

The healthcare sector's ongoing transition toward value-based care is steadily gaining traction. This concentrated effort to provide top-tier, cost-efficient healthcare services generates enthusiasm for digital health firms capable of enabling this transformation. Consequently, these companies are poised to be highly sought-after acquisition prospects.

In the fast-evolving M&A landscape, buyers in the upcoming year are set to prioritize a strategic shift toward value-based care. With the healthcare industry undergoing significant transformations, M&A activity is no longer solely about expanding market share or consolidating resources; it's about enhancing the quality of care delivered to patients.

The adoption of value-based care models ensures that healthcare organizations focus on the outcomes and overall health of their patient populations rather than just the volume of services provided. As M&A buyers increasingly seek to align with these principles, a surge in partnerships that facilitate the sharing of data and technologies aimed at improving patient experiences and outcomes can be expected. This shift reflects a commitment to a more patient-centric approach in healthcare, ultimately paving the way for a brighter, more integrated future in the industry.

A rise in remote patient monitoring

In the coming year, M&A buyers in the healthcare sector are expected to show a keen interest in the surging trend of remote patient monitoring. RPM allows healthcare providers to monitor patients' health data remotely using wearable devices or other sensors. RPM is gaining popularity as it enables healthcare providers to detect and manage potential health issues at an early stage, leading to enhanced patient outcomes.

This technology, harnessed through wearable devices and sensors, has revolutionized the healthcare landscape by enabling providers to continuously monitor patients' health data remotely. As a result, it facilitates early problem identification and significantly enhances patient outcomes, making RPM solutions increasingly attractive to prospective investors.

According to healthcare experts and industry reports, this rising demand for RPM-driven solutions underscores the growing importance of preventive and proactive healthcare, ultimately reshaping the M&A landscape in the healthcare sector.

RPM is a covered service under Medicare, Medicare Advantage, most commercial health plans and many state Medicaid programs. Other remote monitoring services, such as remote therapeutic monitoring, chronic care management, transitional care management, behavioral health integration, principal care management, and chronic pain management, are also often covered.

Starting in January 2024, Medicare will expand remote monitoring reimbursement to Federally Qualified Health Centers and Rural Health Clinics (which previously were not authorized to receive separate payment for remote monitoring). Digital health companies that develop and sell RMP solutions will likely be in high demand from buyers in the near-term horizon.  

Mental health takes center stage

The spotlight on mental health is growing, and digital health companies with solutions to address this concern are garnering attention. Teletherapy platforms, mental health apps, and tools for mental health management are likely to attract significant interest from buyers.

In recent years, there has been a shift in the way society perceives and prioritizes mental health. This cultural transformation has placed mental health at the forefront of public discourse. It is influencing individual well-being and shaping the landscape of the healthcare industry and the digital health sector. This shift creates a receptive environment for digital health companies to develop innovative approaches to address mental health challenges.

For example, teletherapy platforms and mental health apps have emerged as a pivotal component of mental health care. The convenience, accessibility, and affordability of teletherapy platforms have made mental health services more available to individuals. They not only offer a bridge to care for those who may face geographical or logistical barriers, but also appeal to the broader population seeking convenient and discreet mental health support.

Many mental health apps have entered the market, catering to various aspects of mental wellbeing. These apps offer a range of features, from mood tracking and self-help resources to meditation and stress management tools. They empower individuals to take control of their mental health and provide a personalized approach to self-care. Many apps incorporate artificial intelligence and machine learning to tailor their content and recommendations to individual user needs.

Reimbursement has also continued to expand for telemental health services, particularly following the Public Health Emergency. Starting in January 2024, marriage and family therapists and mental health counselors are eligible to be paid by Medicare for telehealth-based therapy. And new payments go beyond just therapy and counseling into other social factors. For example, Medicare will now pay for virtual health and well-being coaching services, as well as risk assessments of evidence-based social determinants of health.

As the impact of mental health continues to grow, investors and healthcare organizations increasingly recognize the potential of digital health companies in this space. Venture capital firms are pouring money into innovative mental health startups, and established healthcare providers are seeking partnerships and acquisitions to integrate these technologies into their services. The digital mental health sector is attracting significant interest and investment, reflecting the belief in its potential to revolutionize how mental health care is delivered.

Joining the AI revolution

Artificial intelligence is revolutionizing the digital health landscape and helping create innovative solutions. These include AI-powered diagnostics, drug discovery platforms, and virtual assistants. Companies developing AI-driven health tech are targets for those looking to remain ahead in healthcare's digital transformation.

An increase in M&A activity within the digital health sector could be coming as companies at the forefront of AI integration become coveted targets for strategic buyers aiming to maintain their competitive edge in the ever-evolving healthcare landscape.

Moreover, in October 2023, the White House announced an executive order for forthcoming regulations on AI, already publishing an initial architecture of what those regulations will contain. The announcement was well received in the AI community, not only for its thoughtfulness, but because regulation lends legitimacy to new technologies.

Provided the regulation is not overburdensome, it will ensure transparency and accountability in new AI digital health tools, thereby generating confidence in the end users of those tools (e.g., clinicians, patients). Concurrently, it will generate confidence in investors that the AI tools will be sustainable, scalable and valuable.

Soon, mergers and acquisitions within the digital health sphere will be driven by the escalating importance of AI-powered solutions. Established healthcare companies, technology giants and pharmaceutical firms are likely to actively participate in this acquisition spree, seeking to augment their portfolios with innovative AI-driven capabilities.

This trend may extend to cross-industry acquisitions as companies from various sectors recognize the profound impact AI can have on healthcare. As such, digital health enterprises harnessing AI's potential are poised to be highly sought-after assets, with their expertise and technology becoming vital components of broader healthcare strategies.

Entry of nontraditional players

Nontraditional players, such as tech giants and private equity firms, increasingly assert their presence in the digital health industry. These nontraditional players are making substantial investments in the sector, which is anticipated to catalyze a surge in M&A activities. Their primary objective is to acquire companies boasting cutting-edge technology and promising high growth prospects, which underlines the dynamic evolution of the digital health landscape and the diverse range of stakeholders now participating in it.

Tech giants are already significant players in the health tech arena, and we will be closely watching to see if they further invest in this sector as it is seen as a gateway to expand their reach into fresh markets and unlock new revenue streams.

Startup-centric deals

One can expect more deals involving startups in the next year. Startups are innovation hubs, offering established players access to new technologies and markets with high potential. Healthcare companies powered by technology are teaming up with traditional healthcare providers for more efficient and effective care delivery. Some examples are collaborations between telehealth firms and hospitals or wearables companies joining forces with insurers.

Virtual care M&A

The popularity of virtual care is on the rise, leading to an increase in M&A activity. This is driven by the convenience, cost-effectiveness and enhanced accessibility it offers. Virtual care will be pivotal in the health tech landscape in the coming year.

For three years during COVID Public Health Emergency, the healthcare industry operated under a slew of special waivers allowing telemedicine services to flourish and scale in previously-disallowed ways. These include remote supervision of clinicians, medical exams and prescribing without an in-person exam, nationwide distributed staffing models, virtual-only medical groups and a proliferation of consumer-focused retail medicine.

While these waivers were initially temporary, the federal government has extended some of them through the end of 2024. Other waivers have already been or are expected to be made permanent (e.g., expansion of Medicare coverage for telehealth, DEA special registration for telemedicine prescribing, flexibilities on geographic location of supervising doctors). Most of these flexibilities are expected to remain, which will allow virtual care companies to continue their growth.

Moreover, billions of dollars were raised and invested in virtual care companies in the last five years. That capital has been deployed, but not fully spent by these companies. During the next couple of years, those well-funded companies will either flourish with product-market fit or be targets for acqui-hire, incorporating their technologies and ideas via M&A into the surviving cohort of virtual care providers. Either way, it will result in opportunities for deal-work, investment, and ultimately improved health technology and care access.

The dynamics of M&A activity in the healthcare sector are indeed intriguing. The recent decline in deal numbers might be a temporary phase, but it's important to note that such trends often signal an imminent shift. As the industry adapts to changing situations, it will be interesting to see how these trends unfold and impact the healthcare landscape.

The healthcare industry stands at the cusp of transformation, where adaptation to evolving trends becomes the key to success. Strategic buyers are anticipated to be particularly active as they seek to complement their existing portfolios and expand their offerings in this dynamic and ever-evolving sector. Emerging from COVID, the healthcare industry has undergone fundamental change, transformed by telemedicine and digital health. There is no going back, and M&A will be a critical factor in the next steps of this journey.