Hospital mergers and acquisitions may be picking up

The number of transactions this year is on the lower side, but they are bigger deals. And three health system deals were announced within a week.

After a very quiet period for hospital mergers and acquisitions, the pace of deal-making could be picking up.

Within just about a week in October, three noteworthy hospital transactions were announced.

Essentia Health and the Marshfield Clinic Health System said last week that they have signed a memorandum of understanding to examine the possibility of creating a regional health system. Essentia operates 14 hospitals along with dozens of clinics in Minnesota, North Dakota, and Wisconsin. Marshfield Clinic manages 11 hospitals and other sites of care in Wisconsin and Michigan’s upper peninsula.

LCMC Health announced last week it has struck a deal to purchase three hospitals in the New Orleans area from HCA Healthcare. LCMC also announced plans to work with Tulane University to boost academic medicine in the region.

And Yale New Haven Health System said it has reached an agreement to buy two Connecticut health systems, including three hospitals, from Prospect Medical Holdings.

The deals, along with some other recent transactions, provide evidence that hospitals and health systems are starting to do more strategic thinking, said Anu Singh, managing director of partnerships, mergers and acquisitions at Kaufman Hall, a healthcare consulting firm.

Even before the spurt of October deals, Singh said, “‘I felt the ice has been thawing.”

Fewer deals, more money

To be sure, the number of hospital transactions has remained low. Analysts have said some hospital and health systems have been focused on dealing with the COVID-19 pandemic, labor shortages, and supply chain hassles to look at deal making.

In the third quarter of 2022, only 10 hospital deals were announced, according to an analysis by Kaufman Hall. During the first half of the year, there were 25 hospital transactions announced. With one quarter remaining, it looks like the number of hospital deals will be in the neighborhood of the 49 transactions recorded in 2021, according to Kaufman Hall’s data. For perspective, there were 79 hospital deals the previous year.

While the industry is seeing fewer deals, there are some bigger transactions emerging. Singh said the size of the deals is a bigger indication that health systems are doing some more long-term planning. The total value of the transactions was $8.3 billion, up from $5.2 billion in the third quarter of 2021.

“I’m actually looking at that number in terms of the size of the deals,” he said.

In the biggest third quarter deal, UChicago Medicine said last month it reached an agreement to acquire a controlling interest in AdventHealth’s Great Lakes Region, which includes four hospitals in the Chicago region. AdventHealth will retain partial ownership and manage daily operations of the facilities.

Also in September, Pure Health, based in the United Arab Emirates (UAE), said it was buying a minority stake in Ardent Health Services for $500 million. Ardent, based in Nashville, Tennessee, operates 30 hospitals in six states.

Trinity Health, one of America’s largest Catholic systems, completed its acquisition of MercyOne, an Iowa-based system, in September. Trinity had jointly operated MercyOne under an agreement with CommonSpirit Health, but the systems struck a deal in April for Trinity to acquire all of MercyOne’s facilities and assets. With the deal, Trinity Health acquires MercyOne’s 16 medical centers and more than 400 sites of care.

Five months after announcing plans to come together, the Charleston Area Medical Center and Mon Health systems in West Virginia announced they received regulatory approval for their merger.  The organizations have named the new system Vandalia Health. And Vandalia plans to buy Greenbrier Valley Medical Center from Community Health Systems.

While some notable transactions have occurred, the Federal Trade Commission has opposed some hospital deals involving systems, prompting the systems to abandon the deals. Federal regulators have looked closely at hospital deals, particularly those involving systems in the same region.

Hospital leaders are anxious to see if regulators approve the planned merger of Atrium Health and Advocate Aurora Health. If that deal passes muster, analysts expect to see other similar deals.

Strategy as recession looms

While Singh cautioned the hospital industry hasn’t returned to normal, he said there is enough stability for health system executives to be thinking more strategically and engaging in long-term planning.

In this environment, long-term planning has changed, Singh said. Health leaders once aimed to develop - and stuck to - five-year plans. Now, it’s probably more realistic to plan a year or two out, he said.

The possibility, if not likelihood of a recession, presents another variable that hospital leaders must factor into their plans. About three-quarters of leaders in healthcare and life sciences say there’s a strong possibility of a recession in the next year, according to a recent survey by KPMG.

“It’s another financial kick in the pants,” Singh said.

If hospitals face greater costs in the recession, Singh said, “That may cause some organizations to scale back some capital investments.”

The Federal Reserve has indicated more rate hikes are coming. If, as expected, it becomes more expensive to borrow money, Singh said, “That's going to cause organizations to rethink their strategic plan going forward.”

Many hospitals are struggling financially in the pandemic. More than half of all hospitals could finish the year in negative margins, according to a Kaufman Hall study prepared for the American Hospital Association.

Analysts, including Singh, project the losses, combined with the prospects of a recession, could spur hospitals to find partners to stay alive.

“For some it will be a lifeline conversation, for others it may be a strategic tipping point,” Singh said. “I think we’re going to see financial tipping points for need, I think we’ll see some strategic tipping points for investment.”

Singh said it’s incumbent for executives to be taking a close look at their operations to assess their strengths and challenges. They need to evaluate their facilities with an eye toward the future.

Hospital systems could be willing to consider partnerships to help them meet specific needs, particularly in areas such as telehealth or outpatient services, Singh said. There could be partnerships in areas of need, such as behavioral health or care coordination with an aging population, he said.

“Healthcare leaders are going to have to have their head on a swivel,” he said.

Now more than ever, Singh sees potential for hospitals to look to partner with other organizations with specific capabilities. “I think there are increasing opportunities and avenues for those discussions to take place now,” he said.

Systems with precarious finances face the most urgent need to develop strategies moving forward. But Singh said even those executives whose systems have better balance sheets must also be looking ahead.

“Every organization Is going to have to constantly rethink what their strategic aims need to be,” Singh said. “Even the strongest have to think, what is going to allow us to retain this level of strength? There is no time to rest right now.”