Healthcare 2021: Trends, M&A & Valuations

The U.S. healthcare sector is a major contributor to economic output, accounting for 17% of the nation’s GDP—more than any other country, according to the WHO. While most healthcare facilities are privately owned, some operate as non-profit, for-profit, or government-run institutions. Publicly funded programs like Medicare, Medicaid, CHIP, and the Veterans Health Administration play a significant role, with 64% of health spending covered by the government. Most public sector employees receive health insurance through these government programs.

Despite high spending, the U.S. faces serious health challenges, including high rates of obesity, heart and lung disease, and cancer. In 2012, one in four seniors faced bankruptcy or had to mortgage their homes due to medical costs. The Affordable Care Act (ACA) was introduced to address these issues by pushing hospitals and physicians to improve outcomes, reduce costs, and enhance accessibility through financial, technological, and clinical reforms.

What is the healthcare industry and its major subsectors?

The healthcare industry directly influences people's quality of life, encompassing services like diagnosis, treatment, and prevention of illness and injury. Professionals such as doctors, nurses, pharmacists, and dentists provide both preventive and rehabilitative care. The sector is broad, including pharmaceutical services, diagnostics, medical technologies, and managed care. With aging baby boomers increasing demand for healthcare and social security, the industry has seen significant growth. In 2016 and early 2017, payor and pharmaceutical services yielded the highest returns. While payors question the industry’s growth, many are focusing on expanding technological capabilities and serving diverse populations. The pharmaceutical industry, driven by innovation and major acquisitions like GlaxoSmithKline’s purchase of Stifle Laboratories and Grifols' acquisition of Talecris, remains highly valued.

The medical devices sector has struggled due to inconsistent FDA regulations and payor systems, leading to reduced venture capital interest. Many device companies began with a single product and failed to account for clinical and economic value. As personalized medicine and molecular diagnostics gain traction, companies must diversify product lines, though the market will require time to adapt and mature.

The biotechnology subsector is known for rapid innovation, developing patented medicines that generate significant revenue. Unlike more established pharmaceutical firms, biotech companies are younger and more agile, using biological processes to develop treatments. Companies like Amgen are advancing gene therapies and complex treatments. Biotech has shown notable growth, outperforming the S&P 500 in the past year, with the NASDAQ Biotechnology Index exceeding the S&P 500 by over 60% in the past five years.

Major Trends in the Healthcare Industry for 2017

Although President Trump campaigned on repealing the Affordable Care Act (ACA), his administration took a softer stance. Democrats remained united against repeal, and Republicans were divided, especially given the wide-reaching implications. One proposal involved reducing ACA cost-sharing subsidies, a key Republican criticism. However, even Republican alternatives were rejected for maintaining too much government control. The administration instead explored state waivers for Medicaid expansion under certain conditions like work requirements.

Meanwhile, the Medicare and CHIP Reauthorization Act (MACRA) gained bipartisan support. It links Medicare and Medicaid reimbursements to quality metrics, aiming to improve transparency and promote value-based care. Unlike the ACA, MACRA would remain unaffected by any repeal.

Faced with tightening reimbursements and rising demand from an aging population, healthcare providers are relying more on acquisitions than organic growth. The continued use of high-cost acute care models is unsustainable, prompting many systems to restructure. Financial pressure is leading to a wave of consolidation across the sector.

Pharmaceutical and biotech firms are also strained by regulatory hurdles—drug development takes over a decade and billions in investment. High unemployment worsens the issue, as many Americans lose employer-based insurance and reduce healthcare spending.

Lastly, non-traditional disruptors like tech and retail companies are reshaping the industry. Offering innovative care delivery models, these players are challenging established hospitals and insurers, signaling a fundamental shift in the healthcare ecosystem.

How do business valuations differ in Healthcare and across its subsectors?

The healthcare industry consists of various subsectors, each valued differently by consumers. The equipment industry, including manufacturers of medical devices and diagnostic tools, supplies hospitals and doctors with essential tools like cardiovascular devices and drug delivery systems. Medtronic, a leading global medical device firm, produces surgical implants, though it trades at a lower valuation than the sector average, offering affordable stock options for investors. A well-developed distribution network within this subsector could enhance overall efficiency.

‍Healthcare facilities—such as hospitals, doctors’ offices, and nursing homes—serve as primary providers of care. Despite their crucial role, this subsector grows more slowly than the broader healthcare industry due to mounting revenue pressures. The top 50 organizations account for under 30% of total revenue, with the hospital sector alone generating $700 billion annually. High operating costs—driven by expensive technologies like CT/MRI machines and labor expenses for medical professionals—have led many organizations to pursue mergers to reduce costs while maintaining care quality.

Meanwhile, Life Sciences R&D is experiencing a valuation decline in the U.S., Canada, and Europe, while Asian countries are gaining ground. Lower clinical trial costs and easier patient recruitment make Asia a more attractive region for research. In contrast, inflation-adjusted biomedical R&D spending in Western countries has decreased in recent years, further boosting Asia’s dominance in this area.

Political Policy Changes and the Affordable Care Act

President Joe Biden has secured his role as the 46th U.S. President. While Democrats retained control of the House, the Senate is likely to remain Republican, potentially challenging Biden’s ability to implement his full agenda. In terms of healthcare, the Biden administration is expected to expand coverage and reverse many of the Trump administration’s efforts to dismantle the ACA.

Historically, the introduction of the ACA under Obama led to a rise in healthcare M&A activity, as practices merged to strengthen their position in contracting and manage regulated cost structures. Though government spending on ACA exchanges exceeded savings from private insurers, it also raised overall administrative costs.

If Biden’s healthcare plans gain traction, a similar wave of consolidation could follow—though his team has hinted at increasing scrutiny on mergers involving hospitals and pharmaceutical firms.

Covid -19 Acceleration of Telemedicine

Pandemic Disruption

COVID-19 heavily impacted the healthcare sector, with hospitals losing over $1 billion per day during peak shutdowns due to postponed elective procedures and reduced services.

Digital Transformation

By early 2020, many healthcare executives had already started investing in digital initiatives; 75% were actively transforming operations, with 50% allocating a quarter or more of capital budgets to digital technologies.

Rise of Telehealth

The pandemic triggered explosive growth in virtual care, with Teladoc Health recording 2.8 million visits in Q2 2020 — over three times higher than the same period in 2019.

Investment Surge

Digital health witnessed a significant jump in funding and M&A, with global venture capital reaching $10.3 billion in 2020 — a 43% increase from the previous year.

Future of Virtual Care

Telemedicine became a crucial tool during the crisis and now plays a vital role in supporting financial stability for providers. The long-term question remains: will it maintain momentum post-pandemic?

What is the healthcare industry and its major subsectors?

Major Trends in the Healthcare Industry for 2017

How do business valuations differ in Healthcare and across its subsectors?

Political Policy Changes and the Affordable Care Act

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