The pace of transactions is picking up, with deals in the second quarter matching pre-pandemic levels. Anu Singh of Kaufman Hall says he expects more activity in the months ahead.
After speculation that more hospital mergers would be taking place in 2023, the pace of deal-making appears to be picking up.
There were 20 announced hospital mergers and acquisitions in the second quarter of 2023, the highest number since the first quarter of 2020, according to a report released Thursday by Kaufman Hall, the healthcare consulting firm. That’s also around pre-pandemic levels, with 19 mergers in the second quarter of 2019 and 21 in 2018’s second quarter.
Anu Singh, managing director and leader of partnerships, mergers and acquisitions at Kaufman Hall, says he expects to see more hospitals making deals in the months ahead.
“I expect that the underlying nature of industry transformation is going to force it,” Singh tells Chief Healthcare Executive® in an interview.
“There are organizations that are looking for complementary resources and capabilities … there are ones in the middle who have maybe some increased concerns about their long-term viability of remaining independent,” he says.
While the number of deals is rising, Kaufman Hall also points to the substantial revenue of the transactions.
In the second quarter, the average size of the smaller party of the deal was $664 million, which is high by historical standards. It’s actually lower than the record $852 million in 2022, but the firm notes that more deals are taking place now.
Opportunities and needs
While some health systems may be eyeing mergers for strategic reasons, some also could be looking for partners out of financial necessity, or even to stay afloat.
“There might even be a third category of organizations that were honestly focused on survival during the pandemic, and now that they've had a chance to catch their breath, their ability to even deliver on what they did before is questionable enough, that it’ll cause them to look at partnership discussions,” Singh says.
Healthcare mergers dropped sharply during the COVID-19 pandemic. Health systems found themselves immersed in the crisis, leaving little time for merger discussions or, to some degree, long-term planning, analysts say. In addition, hospitals received federal pandemic relief aid, helping them sustain operations.
However, that aid has largely dried up, and 2022 was the worst financial year for hospitals in a long time.
“Now we're coming out of that, and the repositioning may lead to more and more partnership discussions,” Singh says, “And in my estimation, I will suggest that whether it’s strategic in nature for accessing the capabilities, or whether it's financial in nature, because of viability, and all points in between those two extremes, that all leads to the logical conclusion, there's going to be more transaction and partnership activity going forward.”
The hospital industry witnessed some major deals in the second quarter, but none gained more attention than Kaiser Permanente’s plans to acquire Geisinger Health, the Pennsylvania system. Kaiser is forming a new organization called Risant Health, and Geisinger will be its first member. Risant will look to acquire other hospitals in the next few years, officials say.
BJC HealthCare of St. Louis and Saint Luke’s Health System of Kansas City announced May 31 that they plan to merge and form an integrated academic health system. The two systems plan to form an organization with 28 hospitals and $10 billion in combined annual revenue. Both systems are based in Missouri, but they note that they serve different markets.
University of Michigan Health completed its acquisition of Sparrow Health in April. Two Wisconsin hospital systems, Froedtert Health and ThedaCare, said in April that they plan to consolidate.
UnityPoint Health and Presbyterian Healthcare Services said in March that they are exploring a merger, potentially creating an organization with more than 40 hospitals.
While the UnityPoint-Presbyterian discussions came in the first quarter, the exploration illustrates the growing interest in health systems to explore partnerships. It’s also another example of a possible merger involving systems from different markets, avoiding one potential concern of regulators. UnityPoint operates hospitals in Iowa, Illinois and Wisconsin, while Presbyterian serves New Mexico.
UPMC is planning to acquire Washington Health System, a smaller provider in western Pennsylvania. When the deal was announced in June, Brook Ward, president and CEO of Washington Health System, said partnering with UPMC is the right decision for the present and the years ahead.
“Our primary focus is to ensure the residents of Washington and Greene Counties have local access to high-quality health care that is sustainable into the future,” Ward said in a statement last month.
There were 15 announced transactions in the first quarter of 2023, putting the total number of deals in the first half of the year at 35. By comparison, there were 53 mergers in all of 2022, and 49 in 2021. So barring an unexpected slowdown in deal-making, the number of hospital mergers and acquisitions in 2023 is on pace to at least surpass the previous two years.
Still, regulators and lawmakers have voiced some concerns about the growing number of hospital consolidations.
The Federal Trade Commission has objected to some recent deals involving systems in the same region, saying the planned mergers would lead to reduced competition, fewer services and higher costs for consumers. Several systems have abandoned deals in the wake of regulator opposition. In February, SUNY Upstate Medical University dropped its plans to acquire Crouse Health System in Syracuse, N.Y. after heavy FTC opposition.
Given the pace of the transformation of the healthcare industry, Singh expects to see more health systems consider mergers. The regulatory environment or even a downturn in the economy aren’t likely to prevent health systems from pursuing partnerships.
“I think when you're talking about complementary capabilities and resources, those strategic imperatives so far overshadow a tactical economic or maybe a tactical regulatory matter in the grand scheme of things, that while they may influence the pace or the number, I don't think they're going to reverse the flow of activity that we're seeing,” Singh says.
“I think we're going to continue to see that activity because of the impact of industry transformation.”