Supporting the health of your healthcare organization
2024 brought new considerations for healthcare organizations that are poised to extend into the new year. Below, we outline key areas to watch in 2025.
Private equity
Private equity sponsors and their healthcare portfolio companies are expected to ride the tailwind of an M&A rebound. Long-term capital gains tax rates will likely remain unchanged, or possibly drop. As a result, sellers may be incentivized to explore market opportunities without requiring investors to gross-up purchase multiple premiums. This will likely broaden the number of investment opportunities for investors and sellers alike.
Additionally, many of the regulatory and antitrust headwinds that have disincentivized dealmaking over the past few years are expected to dissipate at the federal level. For instance, the Trump Administration is expected to spur growth through broad regulation cuts and reduced antitrust enforcement activity in the healthcare services sector. Finally, investors are expected to benefit from a continued drop in borrowing costs, which may further incentivize investment in new platforms and add-ons, and even proffer dividend recapitalization opportunities.
With these changes in mind, private equity firms and their portfolio companies are advised to remain vigilant and proactive in addressing state legislative initiatives, which continue to introduce nuanced regulatory hurdles that could impact dealmaking. State-level changes, particularly in areas such as healthcare licensing, noncompete enforcement, and consumer protection, could create unexpected compliance risks, requiring a careful watch on legislative developments to avoid disruption in closing deals, or post-acquisition operations.
At the same time, sellers are encouraged to prioritize strengthening their business operations, particularly when addressing potential compliance issues. As buyers intensify their due diligence processes, ensuring operational readiness and regulatory compliance will be critical for sellers who are aiming to optimize valuations. Maintaining robust operational health and a clean compliance record should not only attract buyers, but also allow sellers to command stronger negotiating positions.
Finally, creative transaction structures and strategic joint ventures will continue to be a valuable tool for bridging gaps between sellers and buyers. Whether through earn-outs, contingent payments, minority recapitalizations coupled with put/call rights, or seller rollovers, these structures can align incentives, mitigate valuation disagreements, and help marginalize uncertainty, enabling deals to move forward despite market fluctuations. This trend is expected to gain further traction as private equity firms and sellers strive to balance risk and reward, while capitalizing on the anticipated M&A rebound.
Government advocacy
The healthcare M&A landscape has entered a new phase following the 2024 election, with federal regulators expected to adopt a more transaction-friendly approach to healthcare consolidation. While the Federal Trade Commission may shift away from the preventive enforcement stance of the Biden Administration, state-level oversight remains robust and increasingly complex. Healthcare organizations may anticipate navigating a dual-track regulatory environment where federal opportunities have expanded, but state-level scrutiny continues to intensify.
While federal oversight has become more predictable, state-level regulatory engagement has emerged as a common success factor for healthcare organizations. States are increasingly asserting their regulatory authority through enhanced oversight of healthcare transactions, particularly focusing on access to care, quality metrics, and local market dynamics. Prudent healthcare organizations are developing sophisticated state-level government affairs capabilities to navigate this evolving landscape.
Healthcare organizations are encouraged to develop integrated approaches to regulatory compliance that balance opportunities in the federal landscape, with robust state-level engagement. Success in this environment may include:
- Sophisticated regulatory navigation capabilities
- Enhanced state-level government affairs programs
- Robust compliance frameworks
- Strategic operational integration planning
- Proactive stakeholder engagement strategies
As the healthcare landscape continues to evolve, organizations that effectively balance these elements, while maintaining operational excellence, are likely better prepared to succeed in 2025.
Strategics
Value-based arrangements and risk-based payments expected to be at the forefront of innovation in managed care arrangements in 2025. Private insurers, along with federal and state healthcare programs, are continuing to implement shared risk arrangements that place increasingly significant risk on provider organizations.
Within Medicare, the Centers for Medicare and Medicaid Services (CMS) are expected to continue to move Medicare away from fee-for-service payments, and are also looking to push its accountable care organizations (ACOs) to accept greater degrees of financial risk. This may also impact ACO’s downstream arrangements as they seek to manage that risk.
At the same time, management services organizations (MSOs) are expected to continue to play a key role in supporting the administrative management of medical practices, ACOs, independent practice associations, and other clinical and financial risk bearing provider organizations. Provided that they are properly structured under state corporate practice laws, MSOs are expected to continue to offer the opportunity for significant investment in healthcare companies, including through the MSOs’ provision of proprietary technology, personnel, and other resources to provider organizations.
Technology and AI
The development and adoption of digital health tools are anticipated to continue in 2025, particularly with the widespread adoption of generative artificial intelligence (AI). Patient-centric care will likely remain a focus, with healthcare and life sciences companies emphasizing direct patient support and engagement. This includes remote patient monitoring, point-of-care diagnostics, chat features, virtual care, and establishment of end-to-end care pathways. Companies are encouraged to adapt in order to remain competitive.
While AI tools are expected to be prominent in the diagnostics space, there may also be a large amount of AI development that is geared toward administrative efficiencies, particularly as the healthcare industry experiences worker shortages and cost cutting. Transcription, medical record summary tools, and the removal of redundancies through interoperability are likely to be key topics in the coming year.
With the rapid adoption of AI tools, the implementation of policies and procedures for ongoing testing and validation will be essential to ensure safety and efficacy standards are met. However, if President Joe Biden’s Executive Order on Artificial Intelligence is repealed by the incoming Trump Administration, it remains to be seen which regulatory oversight approaches will be retained, and which will change. Even if the Trump Administration takes a more hands-off approach, states may act to fill any perceived regulatory gaps. Companies are advised to pay close attention to the complex intricacy of state rules and guidance on AI tools.
The rapid evolution of AI is expected to heighten interest in health data, which is likely to impact data privacy and security regulation, particularly at the state level. Many companies are directing resources towards identifying and analyzing their data sources, dismantling data silos, and integrating their data across company divisions and geographies. These efforts have created opportunities for continued growth and development, which may be balanced by purposeful data governance controls and safeguards. Increasing litigation is expected, as concerns over data use and disclosure, cyber threats, and liability risks associated with AI tools come into greater focus.
Remote healthcare delivery is likely to remain a key focus in 2025, with AI-enabled remote patient monitoring/remote therapeutic monitoring (RPM/RTM) devices playing a key role in healthcare-at-home models. Continued movement at CMS to expand coverage for new therapeutic monitoring devices is expected, while Medicare Administrative Contractors (MACs) will likely increase their auditing of RPM billing, particularly following the Office of Inspector General’s (OIG) report suggesting fraudulent claims in this area.
Additionally, the COVID-19 telehealth flexibilities have been extended into 2025 and are likely to sustain legislative focus as the government assesses whether remote care delivery increases or decreases the cost of care. It also remains to be seen whether Congress will continue to monitor manufacturer-sponsored consumer platforms as potential prescription generating tools. Telehealth platforms, and those partnering with such platforms, are advised to carefully consider such offerings in light of applicable fraud and abuse laws.
Whether through user-friendly digital tools, interoperability enhancements for data sharing, or personalized medicine, healthcare consumerism is expected be a clear industry focus in 2025.
Disputes
A continued heightened level of disputes in the healthcare space is expected in 2025. The ongoing pressures on costs, especially in government programs, will likely increase the tension between payors and providers. As providers seek ways to sustain and grow their reimbursements, payors are expected to continue to be aggressive in enforcing their prior approval processes and challenging claims they deem inflated or improper.
At the same time, providers may pursue unpaid and under paid claims, and challenge other service providers to drive cost reductions. Although changes are expected at the federal level with the incoming presidential administration, robust enforcement of healthcare fraud laws by the Department of Justice is anticipated, given the pressure to contain costs in the Medicare and Medicaid programs.
Restructuring
Over the past several years, healthcare companies have experienced significant financial distress due to factors such as high interest rates, labor shortages, stagnant reimbursement rates, and increased government scrutiny. As a result, many of these companies have turned to in-court and out-of-court restructurings to bolster liquidity, alleviate and restructure burdensome debt obligations, divest unprofitable business lines, and reject underperforming contracts, among other things.
Healthcare companies are expected to continue facing financial and operational pressures in 2025. To maximize value, mitigate losses, and preserve optionality, healthcare companies and their debt and contract counterparties are encouraged to heed the early warning signs of distress, and consider potential restructuring alternatives as early as possible.
Moving forward
These popular insights remain highly relevant as we all move forward into the new year: