Healthcare mergers and acquisitions hit new low in first quarter

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Healthcare mergers and acquisitions data shows only 12 transactions recorded during the first quarter of the year, continuing a downward trend: To date, it's the lowest number of consolidations since Kaufman Hall first started tracking these statistics in 2016.

What's more, most of the 12 deals were smaller transactions, according to the firm's newest data. This trend is a departure from previous quarters, when high-priced "mega" mergers offset the declining number of deals in terms of the sheer dollars being transacted. In four of the 12 mergers and acquisitions so far this year, the smaller party's average revenues were below $100 million.

With both a smaller number of transactions and a smaller average seller size, total transacted revenue for the quarter was also below historical averages, at $2.95 billion. This was substantially below the $8.8 billion seen in Q1 2021, which was the second highest first quarter figure that has been recorded.

In 11 of the 12 transactions, the acquirer was a nonprofit health system. Of these 11, two were academic or university-affiliated, and three were religiously affiliated.

One trend that continued during the quarter was portfolio realignment by for-profit health systems. The percentage of transactions involving a for-profit seller reached an all-time high of 58% – good for seven transactions during Q1.

Fourteen hospitals are included in these seven transactions, with half being transferred to a new owner in two deals involving California-based Prospect Medical Holdings. Prospect will be exiting two of three states in which it has hospitals in the Northeast with the sale of Pennsylvania-based Crozer Health to Christiana Care, and the sale of Connecticut-based Waterbury Health and Eastern Connecticut Health Network to Yale New Haven Health.

Other for-profit health systems selling hospitals this quarter included LifePoint Health, Community Health System and Pipeline Health, which will be exiting the state of Illinois with the announced sale of two hospitals to Michigan-based Resilience Healthcare, a new company formed for the transaction.

WHAT'S THE IMPACT

Another trend spotlighted in the report is vertical integration by national health plans, which have been expanding into care delivery to support value-based payment structures. The latest push in this verticalization effort is expansion into home-based services.

Last year, Humana acquired Kindred at Home, which has about 775 locations in 40 states. In Q1 2022, UnitedHealth Group's Optum division announced its plan to acquire home-based health operator LHC Group, which has a presence in 37 states and the District of Columbia.

LHC provides healthcare services in the home for a demographic of mostly older patients dealing with chronic illnesses and injuries. It will be melded with Optum, which manages drug benefits and offers data analytics services and works with more than 100 health plans.

Optum positioned the move as helping to advance value-based care, and said it would accelerate the combined companies' ability to deliver integrated care, leading to improved outcomes.

Kaufman Hall believes health systems are also moving into vertical partnerships that that expand services or enhance delivery, as organizations compete for consumers' medical spend.

THE LARGER TREND

The move away from mega mergers was a stark contrast to recent quarters. A year ago, the average size of the seller or smaller party reached a historic high of $619 million, driven by the highest percentage of mega transactions seen in the past six years.

By contrast, in the first quarter of this year, the average size of the smaller party was $246 million. In addition to the four transactions with smaller party revenues below $100 million, another six had revenues between $100 million and $500 million, and two had revenues between $500 million and $1 billion.

An executive order issued by President Joe Biden last summer sought to crack down on hospital and health insurance consolidations and other actions it said decreases competition and drives up prices.

Hospital consolidation has left many areas, especially rural communities, without good options for convenient and affordable healthcare service, the order said. It encouraged the Department of Justice and the Federal Trade Commission to enforce antitrust laws vigorously and "recognizes that the law allows them to challenge prior bad mergers that past Administrations did not previously challenge."

In the order, Biden encouraged the DOJ and FTC to review and revise their merger guidelines to ensure patients are not harmed by such mergers.

Rick Pollack, president and CEO of the American Hospital Association, urged federal agencies to focus on policies that address competition among commercial health insurers.

Hospital mergers and acquisitions, he said, "undergo an enormous amount of rigorous scrutiny from the federal antitrust agencies and state attorneys general. Finally, contrary to statements in the executive order, health systems can be a particularly important option for retaining access to hospital services in some rural communities. Mergers with larger hospital systems can also provide community hospitals the scale and resources needed to improve quality and decrease costs."
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com