M&A activity in the healthcare sector has held up well throughout 2021 despite the challenges that owners and operators have faced. In Q3 we have seen slightly less activity compared with previous quarters but it remains robust with 39 deals in Q3 compared with 56 in Q2 and 62 in Q1.
Strong activity in retail and specialist care
Announced M&A activity in healthcare – quarterly
Retail healthcare (dental, fertility, veterinary and services into the NHS) and specialist care have both seen particularly strong activity. Each of these markets has benefitted from interest from financial investors.
For specialist care, new entrants have emerged in the guise of investment companies and funds. UAE investor Mubadala acquired Witherslack (special educational needs residential schools) and Intriva Capital acquired Sequence Care, a provider of supported living and residential care to adults with learning disabilities.
For Retail Healthcare, private equity (PE) has been particularly active, looking to deploy capital held during the pandemic and embark on building investment platforms. Examples include Livingbridge’s investment in AJM Healthcare, a wheelchair supplier to the NHS, and LDC’s minority investment in PAM, an occupational health and wellbeing provider.
Announced PE activity in healthcare – quarterly
Three key deals
1 Sequence Care acquired by Intriva Capital
We advised Sequence Care’s shareholders and private equity investors Horizon Capital on the sale of the business to Intriva Capital. The specialist care provider attracted strong interest from trade, infrastructure funds and the international private equity community. Sequence Care represents Intriva’s first investment in the social care market.
2 Mubadala Capital acquired a majority stake in Witherslack
Witherslack, which runs 18 specialist schools and 18 children’s homes, is sovereign-wealth-fund-backed Mubadala’s first foray into children’s services. Mubadala’s plan is to roll out the Witherslack model across the UAE, Kuwait, and Saudi Arabia.
3 ICU Medical acquired Smiths Medical
Smiths Group sold UK-based Smiths Medical to US-based ICU Medical for $2.4 billion. The deal value topped that offered by previous front-runner TA Associates. ICU Medical acquired Smiths to enhance their infusion therapy offering.
Healthcare M&A outlook
As corporates and financial investors vie for quality assets, the sector will continue to see much activity. We expect continued traction in the home care market as an increase in custom, (accelerated by COVID-19) has positively impacted such businesses (in stark contrast to that of elderly residential care).
Recent deals in the home care market include Routes Healthcare, in which we assisted in their sale to Palatine Private Equity in June, and City & County Healthcare’s acquisition of MC Care from Apposite Capital in March. There are further suitors waiting for opportunity and we will doubtless see more activity in the coming months.
We also anticipate continued activity in healthtech. There is interest from both corporate acquirers looking to buy in tech capability and create scale, and financial investors keen to jump on the bandwagon of tech-enabled healthcare, which has seen significant uptake as a result of COVID-19.
Some activity has already taken place, such as Marcol’s HealthHero platform making several tech-enabled acquisitions recently including Medvivo, Qare SAS, On Line Health Care, Doctorlink and Alcidion Group's acquisition of NHS patient flow software provider, Extramed.
As the sector adapts and innovates despite (and in many cases because of) the impact of COVID-19, we anticipate investment activity to continue for much of the healthcare sector into Q4.
So, M&A activity suggests that the big picture is looking brighter for the healthcare sector. But, on the other end of the scale, it's important to remember that small errors can cost you. Here's why minimum wage compliance is an issue you need to look at closely.
Healthcare providers, do you know the answers to the following five questions?
If you are unsure about any of the above, you may be unwittingly failing to pay your workers the national minimum wage and be vulnerable to penalties.
Here we look at why HMRC is circling healthcare on the issue of NMW, and what providers can do to ensure their workers are paid their due rate.
Named and shamed for underpayment
In August 2021, HMRC named and shamed 191 companies, including many household names, for failing to pay their workers the national minimum wage. The offensive resulted in £2.1 million of back payments and a further £3.2 million of further fines.
The crackdown aims to create fair conditions for the UK’s lowest-paid workers and is particularly relevant given the ending of the £20-a-week universal credit boost that has hit many households.
Why the national minimum wage is tripping up healthcare
HMRC admits that “not all minimum wage underpayments are intentional”, and this has been the experience of several of our clients. This is because the healthcare sector has several characteristics that make it complex for employers to accurately calculate NMW. Examples include:
The healthcare sector has a disproportionate number of job roles that require an employee to stay overnight. These include care home wardens and night care assistants. In March 2021, the UK Supreme Court ruled that when calculating the NMW, the number of hours worked does not include the hours that a worker is permitted to sleep unless they are awake to work. Employers must therefore have an accurate way of recording when their staff have been awake and working during the night.
Home care workers, who visit several patients in one day, will have travel time between appointments which is working time for NMW purposes and for which they are entitled to be paid. However, the exact journey-parts for which they are allowed to charge is a complex matrix of whether a journey is to home, work, a further appointment or a break. As with sleep-ins, the challenge for home care providers is how to accurately record eligible travel hours.
National minimum wage legislation determines what payments to take into account in a worker's total pay for NMW purposes and also what deductions are allowed to reduce this pay. Any other deductions will breach NMW legislation if they take the pay below minimum wage – this includes deductions from a salary for employment-related training, even if it has been agreed by contract in advance. When training is undertaken prior to commencing work, care must be taken to distinguish whether this is considered employment-related training or part of a pre-selection process. Even then, there is a risk that the deduction could result in a worker’s salary falling below the NMW threshold.
Salary sacrifice and the national minimum wage
Data collected by the charity Skills for Care for its 2021 report showed that an estimated 6.8% of the roles in adult social care were vacant in 2020/21, equal to approximately 105,000 vacancies at any one time. This has been exacerbated by the requirement for all care home workers under the Quality Care Commission to be double-vaccinated.
While better-salaried industries might tackle a staffing shortage by offering employment benefits funded by salary sacrifice, healthcare has its hands tied. From a baseline of typically low wages, it is difficult for healthcare providers to deduct the cost of benefits without breaching NMW restrictions.
For example, a well-intentioned employer deducting travel pass expenses as a salary sacrifice to aid its workers could find itself facing a fine if that deduction takes pay below national minimum wage. This is also the case for other deductions, such as costs for uniforms or a subsidised staff canteen.
Easy mistake, serious consequences
It starts with the HMRC brown envelope, alerting you that you are under review for failing to pay the minimum wage. What follows is an investigation, of potentially up to two years, raking over the last six years of payroll records. If you are guilty, you must pay arrears to impacted workers at current minimum wage rates and face further penalties of up to 200% of arrears (read more details on NMW penalties and pitfalls).
In April 2022, the Health and Social Care Levy will increase National Insurance Contributions for both employers and staff. Although the levy will increase the funding coming into the system in the longer term, initially there will be additional salary and cost pressures. Coupled with the other NMW challenges facing healthcare, this means that providers cannot afford a misstep when it comes to paying the national minimum wage.
To ensure national minimum wage compliance, avoid inadvertent breaches and reduce the risk of an HMRC review, it is vital to have robust compliance and governance systems in place.
Conducting a regular audit of all the factors – including the questions at the start of this piece – will help identify potential underpayment issues. A high-level assessment should also be carried out once a year and on any change in policy or reward structure. NMW assurance can be done independently following HMRC’s guidelines or with the help of a third-party adviser as a light-touch review or full mirroring of an HMRC style review.
The time and cost dedicated to a regular national minimum wage health check will by far offset the resources, business disruption, reputational damage and fines associated with an HMRC review.
Finally, continuing on day-to-day management, private care homes have a new challenge on the horizon. The government has extended support funding to spring 2022, but it looks like operators will have to stretch this until 2023 at least, when occupancy rates should return to pre-COVID-19 norms.
Many care home operators have reported strong results throughout the last 18 months. This is due to the support monies provided to offset the impact of reduced income and increased costs from COVID-19. It's uncertain how long this support income stream will continue, however.
Final extension to care homes support?
The government has extended the Infection Control and Testing Fund to March 2022, but this may well be its final extension. The extra £388.3 million of funding is being split three ways. There is £237 million for infection control measures, £25 million to support care workers to access COVID-19 and flu vaccines, and a further £126.3 million for lateral flow testing.
This is a new grant with separate conditions. It brings the total ring-fenced funding to help reduce the rate of coronavirus transmission, within and between care settings, to almost £1.75 billion, plus around £525 million to support staff and visitor testing. We estimate that this latest funding allocation could be worth around £450 per registered bed to care home operators, although the details of the latest extension to the scheme are only very brief at present.
Occupancy levels rising too slowly
The best indicator for care home profitability is occupancy. The recognised market average occupancy for the care home sector was a percentage point or two under 90% before lockdown. Occupancy has suffered significantly, however, with reports that most operators have lost around 10% of occupancy since the start of the pandemic.
Following the end of the second wave of infection in April 2021, the industry expected occupancy to improve. But market intelligence indicates that while operators are seeing a small rise in occupancy levels, the increase is not as marked as expected. In fact, we understand from several care home clients that the increases seen since the start of Q2 2021 are lower than normal following the winter season. In other words, seasonally adjusted, there is no discernible sustained growth in occupancy. Encouragingly, Q3 2021 has finished strongly.
Occupancy build is unlikely to be uniform due to the seasonal impacts on resident levels, including the winter flu season. Based on current figures and speed of recovery, we consider that occupancy levels will not reach pre-COVID-19 levels until summer 2023 at the earliest. The support monies received by care homes could therefore be needed to support trading for a further two-year period.
The crucial question is: will care home operators retain enough of the support funding to cover this length of time? The answer for some operators will unfortunately be no.
For more information on care homes restructuring, please contact Daniel Smith