Health system mergers still low in Q3, despite high value of deals

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Merger and acquisition activity between hospitals and health systems remained low in the third quarter of 2022, with just 10 announced transactions – comparable to Q3 2021, which saw seven announced transactions, according to a new analysis from Kaufman Hall.

Yet while the volume of announced deals was scant, the value of the deals that did occur remained high. Two deals in the quarter met the definition of "mega" transaction, defined as when the smaller party in a deal sees annual revenues in excess of $1 billion. 

Those two transactions include Pure Health's $500 million minority equity investment in Ardent Health Services as well as a transaction involving the sale by Medical Properties Trust of nine hospitals and two related medical office buildings in California, Indiana, Nevada and Pennsylvania to Prime Healthcare pending a tenant purchase option

The largest strategic transaction in Q3 was UChicago Medicine's acquisition of a controlling interest in AdventHealth's Great Lakes Region, according to analysts.

Mega transactions typically are strategic in nature, but financial and capital structure interests drove the two Q3 mega transactions, Kaufman Hall found.

WHAT'S THE IMPACT?

The 10 announced transactions in the quarter were slightly below the numbers seen in Q1 and Q2, but that's consistent with the trend of falling below prepandemic deal numbers. The size of the transactions in Q3 generated an average smaller party size of $834 million, above the 2021 year-end average of $619 million.

Total transacted revenue was $8.3 billion, above the $5.2 billion recorded in Q3 2021.

In two of the 10 transactions, the acquirer was a for-profit health system. In four transactions, there was an academic/university-affiliated acquirer and there was a religiously affiliated acquirer in one transaction. Other nonprofit health systems were the acquirer in the remaining three transactions.

According to Kaufman Hall, portfolio realignment has been a significant trend among the for-profit sector, with for-profit sellers rebalancing their portfolio holdings to concentrate on core assets and markets. That trend toward portfolio realignment continued into Q1 of this year, when the percentage of transactions involving a for-profit seller reached an all-time high of 58%.

The for-profit sector again showed movement in Q3. In West Virginia, Community Health Systems continued the trend of for-profit systems selling specific, stand-alone assets with its announced intention to sell Greenbrier Valley Medical Center to Vandalia Health. Vandalia Health is itself a new entity formed in September by the merger of Charleston Area Medical Center Health System and Mon Health; the acquisition of Greenbrier Valley will extend the new system's geography into eastern West Virginia as it pursues a regional growth strategy.

Also in September, Pure Health – based in the United Arab Emirates – announced its intention to acquire a $500 million minority equity investment in Ardent Health Services, a 30-hospital, for-profit health system with locations in six states. This investment represents a new type of capital provider in the U.S. market, where private equity firms have typically invested in specialty service providers or hospital management companies, said Kaufman Hall.

Analysts expect the trends of portfolio realignment and focused regional growth will continue. They also anticipate continued growth in partnership models that can offer new sources of capital, and new capabilities, as organizations emerge from an extremely challenging year from a financial standpoint and refocus on strategic growth opportunities.

THE LARGER TREND

It was a couple of mega transactions that pushed total transacted revenue in Q2 to a record $19.2 billion. The planned merger between Advocate Aurora Health and Atrium Health – in which the smaller party, Atrium, records an annual revenue of $12.9 billion – was the main contributor to the historically high quarter.

In September, the deal was delayed by the Illinois Health Facilities & Services Review Board when the majority voted to deny a change of ownership request for the Advocate Aurora Health and Atrium Health merger. The board later voted to reconsider the vote. It next meets December 13.

The $19.2 billion mark is double what healthcare posted in Q2 2021, when $8.5 billion in transacted revenue occurred.

An executive order issued by President Joe Biden last summer sought to crack down on hospital and health insurance consolidations and other actions deemed to decrease competition and drive 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 that such mergers do not harm patients.
 

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