Expect more hospital mergers and partnerships out of financial necessity

With hospitals continuing to struggle financially, more health systems are going to be looking to partnerships, says KPMG’s Ross Nelson.

Nelson, KPMG’s national healthcare strategy leader, says he expects to see more mergers in the coming year. In an interview with Chief Healthcare Executive®, Nelson discusses the outlook for mergers, why hospitals should look to find partners for some services, and the financial landscape in the coming months.

Hospitals have been struggling with rising expenses, including higher labor costs, and volumes and reimbursement rates haven't kept pace with inflation. Nelson expects those challenges "will persist for a while."

“We're going to continue to see consolidation,” he says. “There were obviously some major deals in the fourth quarter of 2022 that closed and there probably will be others in 2023.”

When asked if more deals will be arising due to strategic opportunities or finances, Nelson says, “It’s probably a little bit more out of financial necessity.”

(See part of our conversation with KPMG's Ross Nelson. The story continues below.)

• Read more: Hospitals facing ‘very difficult year,’ with some signs of hope

While many industries saw relatively little merger activity in the first quarter of 2023, healthcare and life sciences proved to be an exception to the rule, according to KPMG.

While merger and acquisitions dropped in the consumer & retail and technology, media & telecom sectors, healthcare & life sciences saw a substantial increase in merger activity. KPMG’s preliminary data in the first quarter found M&A activity in healthcare and life sciences rose to $71.3 billion, up from $28.7 billion in the first quarter of 2022.

Atrium Health and Advocate Aurora Health completed their merger in December. The new organization, now known as Advocate Health, operates 67 hospitals and boasts a combined $27 billion in revenue.

Last month, UnityPoint Health and Presbyterian Healthcare Services said they were exploring a merger. If they move forward and strike a deal, they would create an organization with more than 40 hospitals.

More health systems are looking at merging with hospitals outside of their core areas, Nelson says. With Atrium and Advocate Aurora coming together, Atrium operates hospitals in North Carolina, South Carolina, Georgia and Alabama, while Advocate Aurora runs hospitals in Illinois and Wisconsin. Likewise, UnityPoint operates in the midwest, while Presbyterian is based in New Mexico.

As health systems from different areas come together, Nelson says they can still centralize some professional services, but opportunities to reconfigure care are “a little bit more limited,” Nelson says.

Regulators typically have been most concerned about deals involving health systems that have competed in the same markets. The Federal Trade Commission has objected to some proposed deals involving hospitals in overlapping or adjacent markets, prompting some systems to abandon proposed mergers.

• Read more: These planned hospital mergers and acquisitions collapsed. Here's why

Now, Nelson says regulators are starting to apply more scrutiny to proposed mergers of organizations that are based in different markets.

“Now we're seeing challenges to combinations that are across state lines and in states that are not even adjacent to each other,” Nelson says. “So I think that's going to persist as well.”

Beyond traditional mergers, Nelson sees the likelihood of more hospitals looking to find partners to operate some services, such as outpatient services.

Health systems with assets outside of acute care, such as ambulatory surgical centers, home health and hospice, and physical therapy are taking a closer look at those operations.

With those services, health leaders are increasingly asking, “Are we running these optimally? And are we running these profitably? I think in many cases, we're working with health systems and other independent providers to do partnerships around those areas,” Nelson says.

“It makes sense for health systems to potentially partner those assets,” Nelson says.

Rural hospitals, which have been stressed for years before the COVID-19 pandemic, are also looking to partner with larger health systems, he says. Such partnerships help both the rural hospitals and the health systems, allowing larger hospitals that are filled to capacity to send some patients with lower acuity to the rural markets, he says.

Hospitals may also look to partnerships as they face non-traditional rivals, including retailers such as Amazon, CVS Health, and Walmart. While those retailers could be competitors, there could also be room to collaborate as well.

Healthcare executives need to make sure that “assets that are not their core assets are running profitably, and partnership sometimes makes sense,” Nelson says.

Given the difficult financial environment, more hospitals are exploring the possibility of launching health insurance plans to try to capture new revenue streams outside of traditional care delivery models, Nelson says.

“Folks that have done performance improvement programs in the past and are still struggling to break even from a health system perspective are now open to pursuing other ventures and avenues, opportunities that they might not have been open to in the past, just to try to make ends meet,” Nelson says.

And he says that includes taking on the risk of managing patients, especially when they can find partners to help them succeed. Health systems that may have been deterred by unsuccessful health plan ventures in the past are now considering taking the leap.

“We're seeing some management teams that were previously not open to that, are now a lot more open than they were even five years ago,” Nelson says.