2023 Midyear Healthcare Review and Outlook

by | 29 August 2023

A year following the historic inflation levels of 2022, the healthcare industry continues to grapple with the reverberations of rising rates and a possible recession. The initial months of this year saw the downfall of major financial institutions (Silicon Valley Bank, Signature Bank), triggering ripples of distress, particularly for startups in the healthcare and life sciences arenas.

Against this backdrop, the healthcare field has remained resilient. While dealing with the impact of economic turmoil, healthcare institutions have embraced technological innovations such as artificial intelligence (AI) to shape their future. In this midyear healthcare outlook, we delve into the intersections of financial turbulence, technological breakthroughs, and merger activity that define the narrative of healthcare during the first half of 2023.

Challenging Economic Circumstances Continue

A year after inflation reached historic levels in 2022, rising rates and a looming recession continue to impact the healthcare sector and beyond. The first half of the year saw the collapse of Silicon Valley Bank, amid other banking troubles, which created hurdles specifically for startups in the healthcare and life sciences fields.

These events took place against the backdrop of the CRE industry’s looming debt crisis.  An impending wave of maturities is on the horizon as the Mortgage Bankers Association estimates $2.6 trillion of loan maturities through 2027. The combination of rising interest rates and tighter credit underwriting standards has made it increasingly difficult for some borrowers to stay afloat and made the financing of medical properties more difficult in some cases.

However, this climate has provided an opportunity for some owners of medical offices to optimize their leases and capitalize on the going demand for space.

AI Explodes on the Scene

Artificial intelligence (AI) has become a headline topic this year.  It was the focus of Colliers Healthcare’s latest research report. While it’s not a new concept, the development of generative AI applications, such as ChatGPT, has had a significant impact on the healthcare industry and its players. Microsoft, Amazon, and others have been “aggressively investing” in healthcare AI solutions.

AI is already being used in healthcare by utilizing data-driven processes to identify a wide range of clinical conditions, as well as generate treatment plans. It’s been reported that ChatGPT is being used by physicians to help determine the proper imaging tests and make decisions regarding screenings.

The application of generative AI in healthcare is still in its infancy, but it’s poised to grow rapidly. Several health systems are already experimenting with generative AI. The potential for generative AI ranges across a wide spectrum of healthcare services and functions.

The excitement and prospect of AI’s utilization for healthcare also helped buoy capital markets for the sector. Healthcare, artificial intelligence, and financial services led global venture funding in Q1 despite a steep drop off everywhere else – which was down 53% from the previous year.

M&A Pace Increases in the Second Quarter

Despite ongoing headwinds and economic instability during the first half of 2023, healthcare dealmaking managed to find its footing in the second quarter. A Kaufman Hall report released in July found that Merger & Acquisition activity for hospitals and health systems rose from Q1, and brought the quarter to align with pre-pandemic levels for both number of transactions and total volume transacted. 

Of the 20 transactions, three fall under the mega deal category, including the Kaiser Permanente and Geisinger partnership, the Froedtert Health and ThedaCare merger announcement, and BJC HealthCare and Saint Luke’s Health System integration.

It’s important to note that while the $13.3 billion in total transacted revenue in Q2 2023 was down from the outsized $19.2 billion in Q2 2022, it was above pre-pandemic levels for the second quarters of 2017, 2018, 2019, and 2020, per the report. Per PwC, M&A will remain a key transformation tool for health and pharmaceutical companies in the second half of 2023, and the company’s latest outlook predicts an “upswing in deal activity in the second half.”

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