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Mergers and acquisitions fell to the lowest point in a decade. There should be more discussions in the months ahead.
The healthcare industry witnessed a sharp drop in mergers and acquisitions in 2021, and the COVID-19 pandemic played a big factor.
An analysis by Kaufman Hall identified 49 announced healthcare transactions in 2021, down from 79 the previous year. There were fewer mergers and acquisitions in healthcare than at any point in the past decade, according to the report.
“You could attribute a pretty significant portion to the pandemic,” said Anu Singh, managing director at Kaufman Hall.
While there were fewer mergers, there was a higher percentage of large transactions, according to the Kaufman Hall report. Eight transactions were “mega mergers” where the smaller partner had more than $1 billion in annual revenue.
Some analysts project that healthcare systems will engage in more mergers and acquisitions in 2022. At the very least, analysts said there should be more discussions, even if deals don’t get finalized until 2023. Healthcare systems are still dealing with an overwhelming number of COVID-19 patients along with serious staffing shortages.
In a changing landscape, providers have to deliver healthcare in ways that are more convenient for the consumer. Some hospitals and providers may need to find partners to meet those needs, analysts said.
Richard Bayman, senior vice president and managing director of H2C Securities Inc., an investment banking firm that offers strategy on mergers and acquisitions, said he projects more mergers will take place in 2022.
“We do believe it’s going to pick up,” he said.
Why mergers dropped
With healthcare organizations grappling with the worst pandemic in more than a century, executives have been in crisis management for two years. That leaves much less time for long-term strategy, analysts said.
“You have the switch from strategic thinking to tactical thinking,” Bayman said.
In addition to dealing with COVID-19 patients, hospitals have been scrambling to address a shortage of healthcare workers, particularly nurses. “Labor is a giant issue,” Bayman said.
For some leaders, it wasn’t just a lack of time.
“It’s not just resources and people's attention that were redeployed,” Singh said. “It’s that we couldn’t even launch a lot of strategic initiatives to say, ‘What do we want to look like at the other end of this?’”
Hospitals received billions in federal relief aid during the pandemic, helping systems stay afloat and removing some financial pressure that often drives mergers. In addition, healthcare systems have been able to take advantage of extremely low borrowing rates. With more money available, at least temporarily, hospitals felt less urgency to find new partners, analysts said.
Beyond the pandemic, some larger systems are being more selective in choosing partnerships. In the past, healthcare systems aggressively moved to expand their geographic footprint by acquiring more hospitals, Bayman said.
Today, healthcare organizations, particularly for-profit systems, are looking at markets where they can be significant players and aren’t simply looking to add as many sites as possible to their corporate maps.
“The dots on the map strategy didn’t work,” Bayman said. “You have to be relevant in your market.
“It's a much more strategic viewpoint from the buyer’s side of things.”
Analysts also note that given the amount of consolidations in the industry that have taken place, there aren’t as many suitors.
“There’s just fewer buyers,” Bayman said.
Expecting more mergers
Analysts do expect more mergers and acquisitions in the year ahead.
“We’ll see more activity than we did,” Singh said.
H2C Securities is having more conversations about transactions now than six months ago, Bayman said.
“People are going to have to figure out how to do more with less,” Bayman said. “Some will say they can’t generate enough cash from operations to support all the investments I need.”
At the very least, analysts expect more conversations that could lead to new partnerships, even if the deals aren’t finalized before the end of 2022.
Some of the activity will go beyond healthcare organizations acquiring more hospitals. Singh projected there will be different types of mergers.
More hospitals and healthcare systems will be merging with specialty providers, such as those focused on outpatient services, telehealth services and home healthcare, he projected.
“All alternative sites of care are going to be of interest,” Singh said.
More consumers are demonstrating they want options such as outpatient care or services that will allow them to see doctors at home, either virtually or with in-person home visits. Healthcare organizations are going to have to offer more robust options outside of hospital settings, Singh said.
Bayman also projected there would be more mergers between hospital systems and outpatient services.
“It’s becoming more important, those non-acute, non-in-patient services,” he said. “A lot of times, hospitals don't manage those businesses well because they are different than running a hospital.”
While the coronavirus has suppressed merger activity, Bayman said the pandemic is eventually going to drive more transactions.
Hospitals have already received billions in aid from the government. The CARES Act funds buoyed providers but some systems aren’t going to be able to ignore their precarious financial position much longer.
Hospitals and healthcare systems have also received billions in loans from the Medicare program as part of the federal relief effort, and many providers must repay the loans this year, Bayman noted.
“Our overarching belief is that activity is going to accelerate and the pandemic is the underlying accelerant,” Bayman said. “You’re not going to have the artificial support that kept everyone up over the last two years.”
More healthcare organizations will begin asking hard questions about the markets they’re serving, Singh said.
“All health systems in multiple geographies are going to be very focused on where they believe they can meet the objectives they have in the markets they are in, and ask probing questions of: Are we going to be a leading provider of care?” Singh said.
Making the right moves
Healthcare organizations who are weighing mergers need to consider a number of factors, including what they want to get out of a partnership.
When talking with clients, Bayman said he asks, “What’s the rationale? What do you want out of it?”
Bayman cited McLaren Health Care’s acquisition of St. Luke’s Hospital just outside Toledo, Ohio, a deal that was finalized in 2020, as a partnership that made sense. The merger offered more cancer care options to the Toledo market.
As healthcare organizations consider their options, Singh predicted providers would engage in bold strategies to enter new markets or expand in other markers.
He also predicted some providers could employ bold exit strategies in certain markets.
Some healthcare organizations showed the willingness to concentrate on markets where they can grow and the willingness to leave certain markets where they didn't have a dominant presence.
Last fall, HCA Healthcare agreed to buy Steward Health Care’s five hospitals in Utah, citing the opportunity to expand in a state with a rising population. At the same time, HCA also sold four hospitals in Georgia to Piedmont Healthcare, where Bayman noted other providers had a greater presence. “HCA is a very well-run organization and they’re focused on growth,” Bayman said.
Steward Health Care also purchased five Florida hospitals and physician practices from Tenet Healthcare. With the move, Steward now operates 10 hospitals in the Sunshine State.
Consumers could spur hospitals to consider more mergers and partnerships. Increasingly, consumers are showing they want the same convenience in healthcare they can get in other services. Patients are also showing they are willing to go elsewhere if healthcare organizations don’t offer what they want.
“It’s not that these choices didn’t exist before but there’s more access now,” Singh said.
Even with the challenging landscape, healthcare organizations have tremendous opportunities to serve their patients in different ways. For some systems, merging with other providers will make sense.
“In many communities, the hospital is seen as the provider of care,” Singh said. “To hold that position in the community mind will require careful and thoughtful alignment strategies at an increasing pace.”