Lower Physician Practice Transaction Volume May Impact Valuation

Mixed Activity Trends Highlight the Importance of Individual Practice Characteristics

Conflicting trends in M&A activity highlight the importance for the valuator of understanding certain factors. These include the micro-environment of each physician specialty, specific factors affecting M&A transaction activity and the resulting valuation implications. Overall, transaction volume trends have been lower in most specialties that were historically very active. While M&A activity in many physician specialties has been slowing, some specialties are displaying M&A trends in the opposite direction, yielding steady or increasing activity. 

By the Numbers

We analyzed physician practice transaction volume data provided by Scope Research. To normalize volatility in the monthly or quarterly data, we prepared an analysis of transaction volume trends based on a rolling average of the prior three quarters. Smoothing the data allows us to better identify trends.

Transaction Volume – Specialty Practices Trending Lower

  Average Rolling 3 Quarters Ended June 30 % Change
  2020 2021 2022 2023 '20 to '23 '21 to '23
25 34 33 16 -35% -51%
Hospital - Based 9 7 13 5 -38% -27%
Gastroenterology 5 13 10 7 25% -47%


Transaction Volume – Specialty Practices Trending Steady or Higher

  Average Rolling 3 Quarters Ended June 30 % Change
  2020 2021 2022 2023 '20 to '23 '21 to '23
Dermatology 10 11 15 15 50% 41%
Orthopedics 9 14 16 14 71% 0%

Source: Scope Research

  • Specialty practices trending lower include Ophthalmology/Optometry, Hospital-Based Physicians and Gastroenterology. In particular, Ophthalmology/Optometry, historically one of the most active specialties for M&A, is showing significantly lower transaction volume trends (-35% comparing last three quarters ended June, 2023, to the same period in 2020 and -51% comparing 2021 to 2023).
  • High transaction volume specialty practices holding steady or trending higher include Dermatology and Orthopedics. Dermatology transaction volume is higher comparing 2023 to 2020 (50%) and higher comparing 2021 to 2023 (41%). Orthopedic transaction volume is 71% higher in 2023 compared to 2020, and flat in 2023 compared to 2021.

Yes, But...

  • Clearly, lower M&A activity is not homogenous across all physician practice specialties. While there is some evidence that overall physician practice transaction activity has slowed, the data is mixed as M&A for some practice specialties has held steady or increased (somewhat surprisingly in a challenging transaction environment).
  • Transaction volume trends do not always correlate directly with valuation pricing. A physician practice in a specialty with very limited supply, with a large percentage of the practices in the specialty having already sold to hospital systems or private equity backed firms, may create a “scarcity” factor. Despite the challenging capital environment, the physician practice may trade at a high multiple due to a perceived supply and demand imbalance.
  • From a buyer’s perspective, offers and M&A activity will continue to be affected by higher interest rates and limited borrowing sources. Lower transaction volume may result in lower overall valuations over time, all else equal. 
  • If prices are indeed decreasing for any given specialty, lower transaction volume may just be indicative of the lag time needed for sellers to adjust their expectations to match the valuations buyers are willing to offer. If pricing differences have slowed M&A, it may be reasonable to conclude that transaction volume may return to historical levels once price adjustments are accepted by sellers.

Health Care Valuation Takeaways

  • The valuator must understand transaction volume trends and create an estimate of industry valuation metrics. The mixed transaction volume results illustrated above clearly highlight the need for the valuator to understand the transaction dynamics of each individual specialty, not just physician practice transaction volume as a whole.
  • In a rapidly changing transaction environment, the valuator should use caution in relying on historical transactions for valuation guidance and transaction comparables.

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This is one in a series of related health care valuation posts: