Financial challenges spurring healthcare merger and acquisition activity
Thirty-nine percent of the announced transactions in Q3 were spurred at least in part to financial distress, Kaufman Hall finds.
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Hospitals and health systems have been under extreme financial pressure since 2022, when median operating margins remained in negative territory for the full year. And while the picture has improved somewhat this year, these challenges spurred about a third of the hospital and health system merger and acquisition activity in the third quarter.
That's according to a new Kaufman Hall analysis, which found that 39% of the announced transactions in Q3 were spurred at least in part to financial distress.
For many smaller to medium-sized health systems, the upward reset in fixed costs – including both labor and nonlabor expenses – is an especially acute problem. Their relative size constrains their ability to spread these costs across a larger number of facilities and services.
The analysis found continued activity among systems with annual revenues in the range of $250 million to $750 million that have sought a partner. What is new in recent quarters is the number of larger systems – those with annual revenues of $1 billion or more – that also are citing financial distress as a driver for their decision to partner.
Transaction activity remained high during the quarter, continuing the trend of returning to pre-pandemic levels. Eighteen transactions were announced in the quarter, eight more than Q3 2022 and 11 more than Q3 2021.
WHAT'S THE IMPACT?
With only one "mega merger" transaction – a transaction in which the smaller party has annual revenues above $1 billion – both the average size of the seller and total transacted revenue were below recent quarters, in which a smaller number of total transactions and a higher percentage of mega mergers drove these metrics up. Despite that, the Q3 figures still remain well above historical levels.
The average size of the seller or smaller party, as measured by annual revenues, was $453 million. This was closer to – but still above – pre-pandemic historical year-end averages, which ranged from $272 million to $409 million from 2017 through 2019.
Total transacted revenue was $8.2 billion, which is on the higher side of recent historical numbers for Q3. This figure was down significantly from Q2 2023, which had $13.3 billion in total transacted revenue, driven primarily by the three announced mega mergers in Q2, compared to just one in Q3.
When removing the mega mergers from each quarter, the average revenue in Q3 was actually significantly higher than that of Q2, at $243 million and $159 million respectively, demonstrating a significant uptick in activity in sizable independent hospitals seeking out partnerships with larger organizations.
Nonprofit health systems were the acquiring party in 14 of Q3's 18 transactions, with for-profit systems acting as the acquiring party in the remaining four transactions. Of the 14 nonprofit acquirers, seven were academic or university-affiliated organizations and one was a religiously affiliated organization.
The four transactions in which a for-profit system acted as acquirer focused primarily on smaller, financially distressed organizations: three of the four acquired organizations were financially distressed.
A recent analysis of Kaufman Hall National Hospital Flash Report data showed a median inpatient occupancy rate of 70% at academic health centers, compared to a 53% occupancy rate at acute-care hospitals generally.
THE LARGER TREND
While partnership, merger and acquisition activity is returning to pre-pandemic levels, regulatory scrutiny of these transactions is also increasing. New proposed merger guidelines were issued by the Federal Trade Commission (FTC) and the Department of Justice (DOJ) in July.
While the guidelines determine a merger's effect on competition in industries ranging from food and agriculture to healthcare, they are expected to impact the latter as health system M&A continues to climb back to pre-pandemic levels.
Since 1968, the DOJ and FTC have issued and revised merger guidelines several times, including in 1982, 1984, 1992, 1997, 2010 and 2020.
In January 2022, the agencies announced a broad initiative to evaluate potential updates and revisions to the Horizontal Merger Guidelines, issued in 2010, and the Vertical Merger Guidelines issued in 2020.
Twitter: @JELagasse
Email the writer: Jeff.Lagasse@himssmedia.com
