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Hospital merger activity is projected to increase in 2024

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After an uptick in deals last year, analysts say they expect more transactions in the coming year, driven by financial need or aiming to keep up with the rapid changes in healthcare.

The pace of hospital mergers increased over the past year, and analysts say it’s safe to expect more deals in 2024.

In 2023, there were 65 announced hospital mergers and acquisitions, up from 53 the year before, according to a report issued last week by Kaufman Hall, a healthcare consulting firm that advises hospitals on mergers.

Industry analysts say they expect to see more deals in 2024. Many will be driven by hospitals and health systems that continue to face financial pressures. About 28% of the hospital mergers in 2023 were driven by hospitals or systems in financial distress, and analysts say many hospitals will continue to see tight margins in the year ahead.

Other health systems may be healthier financially, but they could be scouting for merger partners to stay competitive in a rapidly changing healthcare landscape.

Anu Singh, managing director at Kaufman Hall, points to the mix of strategic deals and mega mergers, along with the transactions driven by hospitals looking for a lifeline.

“I think it's going to be all cylinders firing from an M&A driver perspective,” Singh says. (Healthcare leaders share their projections on mergers in this video. The story continues below.)

Rick Gundling, senior vice president of the Healthcare Financial Management Association, said he expects more merger activity in the coming year.

“I do think that we're going to continue to see mergers and acquisitions, consolidation, across the board,” Gundling tells Chief Healthcare Executive®.

Even in the early weeks of 2024, the industry has seen some noteworthy and unconventional deals.

Last week, the Health Assurance Transformation Corporation, a subsidiary of General Catalyst, the venture capital firm, announced it intends to acquire Summa Health, a hospital system in Ohio. Penn Medicine is continuing its expansion with plans to acquire Doylestown Health. In New Jersey, Hudson Regional Hospital and CarePoint Health System, which operates three hospitals, say they signed a letter of intent for a merger, creating a new system operating for-profit and nonprofit hospitals.

“We're seeing various types of transactions, for sure,” Singh says. “And I think even in the last few days, we've seen the emergence of new types of structures and participants as well. So I think that's a signal of what's to come.”

Analysts note one factor that could affect the pace of dealmaking is the increased scrutiny of regulators, which has spurred some hospitals to abandon merger plans.

Systems in need

As more health systems face an uncertain future, they are likely to look for partners, analysts say.

Michael Abrams, a managing partner of Numerof & Associates, a global healthcare consultancy, says some hospitals will look to find partners to keep their doors open.

“The financial pressure that has plagued the sector since the pandemic is not letting up,” Abrams says. “I mean, labor shortages, labor unrest, new contract demands, plus, inflation in everything that they purchase, is putting pressure on all hospitals and healthcare providers. And there's no getting away from that.”

Hospitals continue to cope with the long-term effects of the pandemic. About half of the nation’s hospitals had negative margins in 2022, and many had a slow recovery in 2023.

“A lot of companies were financially damaged by the pandemic, and I don't think that they really had an opportunity to recover,” Abrams says. “And finding a bigger partner for many will be the only path to viability. So they don't really have a choice.”

Analysts expect some improvement for hospitals in the coming year, but many still face substantial headwinds with higher expenses and uneven revenues. Fitch Ratings has projected that nonprofit hospitals should expect another challenging year in 2024, and S&P Global Ratings says the outlook for hospitals is negative.

“The cost impact, the expense impact of the pandemic, is lingering on for these health systems right now,” Singh says. “It's not like other crises where, you know, it's a capital markets or a credit crisis, and you get over that, and then rates stabilize. We're in the opposite position here. We had a clinical event and operational solution, and now we have a financial expense base that's lingering, that is significantly higher than it was before.”

Seeing opportunities

Some health systems that are healthy are looking at mergers and acquisitions as strategic opportunities.

In 2023, 12% of the hospital deals qualified as mega mergers, with the smaller organizations having more than $1 billion in revenue, according to Kaufman Hall. It’s the third consecutive year such deals topped 10% of all transactions.

Abrams also expects to see more deals involving health systems eyeing more than a single hospital or two.

“I do think that, in the long term, we're going to see more systems merging with systems,” Abrams says.

Singh notes that some systems may be seeing solid performance, but are looking to keep pace with the transformation of healthcare.

“We need to think about telehealth, we need to think about consumerism, we need to think about networks, value-based population health management,” Singh says. “And for some of those organizations, the tool set to get there isn't really homegrown.”

Larger health systems are also looking at ways to expand their services and offerings beyond caring for patients in hospital beds, Singh says. They’re looking at providing more outpatient services and surgical procedures that can be done quickly and don’t require an overnight stay.

Organizations are always better positioned to consider mergers when they are healthy, Singh says. While some organizations may be faring adequately, Singh says some systems that are looking to grow and expand are likely to at least have more conversations about potential mergers and partnerships.

Singh says more organizations will be asking questions such as, “Are we managing for growth? Are we managing for advancement? Are we managing for mission enhancement and accomplishment? And if we're not, organizations who answer those rhetorical questions with either a ‘no’ or ‘maybe’ are going to increasingly start (asking), what do we need to do? How do we need to reposition? What does that look like? And that's going to open up a slew of options all the way from performance improvements, debt capital restructuring, all the way up to, in some cases, M&A.”

Academic health systems have been engaging in more mergers and partners with community hospitals, and Singh also expects that trend to continue in the coming year.

“I think academic medical centers that had a tighter geography are now looking at a broader geography,” Singh says.

Academic health systems are forming networks with community hospitals to ease constraints on capacity. Patients with less serious conditions can be treated in community hospitals, allowing the flagship hospitals of academic systems to focus on those with higher acuity.

Hospitals and health systems are likely going to look at fast-growing markets, such as Texas and Florida, as potential areas for mergers and acquisitions, analysts say. Last year, CommonSpirit Health purchased five hospitals in Utah from Steward Health Care. However, some systems have shown they are pulling out of areas where they are less competitive.

Health systems, for-profit and nonprofit alike, are going to have to assess how long they want to stay in areas where they aren’t big players.

“Large health systems are going to have to make a choice of which markets they think they can be successful in,” Singh says. And he adds, “That's not going to be in every market they’re in.”

Regulatory hurdles

While most analysts project more hospital mergers will take place, they also note the increasing scrutiny from federal regulators.

Kevin Holloran, senior director for Fitch Ratings, says that the current regulatory environment makes it more difficult for mergers in the same region. He stresses that he's not making an assessment about whether that’s good or bad policy, but simply recognizing that’s a factor that could affect deal-making.

Holloran says he expects to see more deals involving systems operating in different markets, such as Atrium Health’s merger with Advocate Aurora Health to form Advocate Health in 2022.

“I expect the big systems to do more of that as time goes on,” Holloran told Chief Healthcare Executive® in a recent interview.

Moody’s Investors Service actually projects that the number of mergers could drop this year due to greater attention from regulators.

“The rate of consolidation among health systems may slow due to increased scrutiny of mergers by federal and state governments, potentially depriving distressed systems of exit strategies and slowing the growth of larger systems active in the M&A space,” Moody’s stated.

Still, most analysts expect to see more mergers, driven by strategy or survival. Singh also expects more hospitals and health systems to pursue mergers beyond other hospitals and systems. He says more hospitals are merging or acquiring partners that can help bolster areas where they’d like to improve, such as telehealth or ambulatory surgical centers.

“I think the complementary side of transactions, and I've said it before, I'll say it again, I think it's representing even more of the activity than we can even measure,” Singh says.

He expects large health systems and smaller community hospitals to look at partnerships that can help with areas such as virtual care, improving the consumer experience and training staff.

“That's going to result in tactical partnerships for a specific service line or a specific solution that are going to probably not just continue, but probably accelerate over time,” Singh says.

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