M&A Outlook: Future of In-Patient care in Germany

Turbulent times ahead for German hospitals

Even before the formalization of the Hospital Reform Act, the sector has been experiencing a flux of transactions, reflecting the financial challenges faced by many hospitals, particularly smaller ones in rural areas. This financial strain has already resulted in mergers and acquisitions (M&A) as a strategic response to ensure survival.

The anticipated hospital reform act is expected to further catalyze this trend, potentially leading to additional consolidation within the German inpatient sector and increasing investor interest. While the specifics of the reform act remain uncertain, its potential implications are clear and widely discussed. Likely outcomes, as envisioned by the government, include an overall reduction in the number of hospitals, leading to closures and insolvencies, a realignment of specializations towards larger, maximum care providers, and a transformation of many smaller hospitals shifting focus primarily on basic and emergency care services. Moreover, some hospitals are expected to evolve into ambulatory care providers (in German: “Primärversorgungszentren”) following the economically and politically motivated trend to shift volumes towards outpatient care (in German: “Ambulantisierung”).

What are the challenges for the inpatient sector?

The transformation of the hospital sector in Germany – moving towards a more unified and synergistic framework – could lead to widespread consolidation. This shift is propelled by three key factors:

• Economic strains: Many hospitals are currently facing severe financial difficulties, challenging their operational sustainability.
• Optimized resource allocation: There is a concerted effort to reallocate care personnel across a reduced number of institutions, ensuring a nimbler and more efficient workforce.
  
• Political imperatives: The government is actively working to slow the growth in healthcare costs, emphasizing the necessity of reform and smarter resource utilization. This strategy not only aims to achieve financial stability within the healthcare system but also to enhance the quality of care provided to the population.

What are the reforms implications for the inpatient sector and investors?

The consolidation is expected to range from a modest reduction to 1,600 hospitals or a more aggressive drop to 1,200 hospitals, as per healthcare insurance estimates. While the market may numerically contract, the remaining hospitals are projected to expand their service portfolios, fostering a market most likely dominated by larger regional healthcare networks. These entities may encompass broader service scopes, from telemedicine to primary healthcare centers.

As a result, Deloitte anticipates the competitive landscape to undergo a transformation, characterized by the emergence of fewer, yet more dominant entities, propelled by heightened M&A activity. Such consolidation could amplify care quality and trigger a momentary spike in market values as institutions coalesce. Factors such as stringent cartel regulations, a shift towards value-based reimbursement, and a cautious stance from market participants could further influence the pace and nature of this consolidation. In this context, several key considerations come to the forefront:

• Repurposing closed hospitals: Exploring the potential of converting shuttered hospitals into primary care centers could address healthcare accessibility, especially in underserved areas.
• Healthcare workforce dynamics: The reforms may lead to shifts in healthcare personnel. It is critical to understand whether staff will relocate within the industry or leave it altogether, ensuring workforce stability.
• Geographic consolidation effects: The consolidation’s impact on rural healthcare is a concern. It is important to assess if and how these changes will affect medical services in less populated areas.
• Uniformity in medical standards: As hospitals redefine their services, maintaining consistent medical standards across all institutions is essential for ensuring quality patient care.
• M&A as a catalyst for specialization: The role of M&A in developing specialized healthcare centers needs to be evaluated, as it could significantly enhance the care quality and efficiency.

M&A Outlook

The impending reshaping of the German hospital sector is poised to fundamentally alter the market dynamics. We foresee a scenario where larger, M&A-fueled healthcare networks emerge as dominant players in an increasingly competitive environment. Skillfully maneuvering through this transitional phase is imperative to uphold competitive balance, safeguard patient welfare, and guarantee widespread access to top-tier healthcare services. However, it is crucial to acknowledge that this development remains debatable and heavily dependent on the final structure of the reform, which is yet to be finalized.

For more details on the reform act, strategic considerations for investors like private equity or private hospital chains in navigating the period of regulatory uncertainty in the expected market shake-up, please download our  “M&A-Outlook: Future of in-patient care in Germany” here.