Some systems will seek partners out of opportunity or necessity. Anu Singh of Kaufman Hall talked with Chief Healthcare Executive about the outlook for deals in the year ahead.
After a flurry of hospital mergers and acquisitions in the last few months of the year, analysts are expecting to see more deals in 2023.
About a third of the year’s hospital mergers and acquisitions (17) came in the last quarter of 2022, according to a new report from Kaufman Hall, a healthcare consulting firm.
Beyond the number of deals, it’s the size of the transactions that analysts say is an indicator that hospitals and health systems are looking more strategically and considering partnerships to position them for the future.
The smaller party in the hospital mergers in 2022 had an average annual revenue of $852 million, significantly higher than the former peak of $619 million in 2021. In many deals, the smaller party had an average size topping $1 billion.
While health systems are looking more strategically, hospitals are also facing some daunting economic hurdles, including higher labor costs, and the disappearance of federal pandemic assistance, said Anu Singh, managing director of partnerships, mergers and acquisitions at Kaufman Hall.
“If you're measuring numbers of deals, the reason we'll see the acceleration is the smaller organizations that maybe got the benefit of the lift from CARES Act funding and everything else, with that going away, I think they're going to be forced to deal with the new reality,” Singh told Chief Healthcare Executive in an interview.
To be sure, dealmaking remains well below the level of previous years.
There were 53 hospital mergers and acquisitions in 2022, which represents only a slight uptick from the 49 deals in 2021, Kaufman Hall reported. By comparison, there were at least 90 hospital deals annually from 2012 through 2019 (including a peak of 117 in 2017), but fewer transactions have happened since the beginning of the COVID-19 pandemic.
However, Singh and other analysts expect to see more hospital mergers out of opportunity or economic necessity. He talked with Chief Healthcare Executive about the factors driving more health systems to explore mergers in 2023. (See part of our interview in this video. The story continues below.)
‘More strategic discussions’
Nearly three years after COVID-19 emerged in the United States, hospitals are still facing steep economic challenges, Singh noted. But some leaders are coming through the worst of it, and they are seeing the need to look at their operations in a rapidly changing environment.
“The realities of industry transformation are now leading the pandemic, as a driver to strategic thinking and strategic movement. And in that context, we still have a lot to do,” Singh said.
“We have consumerism, we have telehealth, we have systemic issues around health and maintaining health,” he continued. “We have payer-provider opportunities, or threats around reimbursement. So those things are all back, and now we have to deal with them. And I think that's going to open up more strategic discussions, and as a result, new or renewed pathways to partnership models.”
More systems are starting to explore mergers beyond geography to expand their capabilities, as evidenced by the merger of Atrium Health and Advocate Aurora Health, the biggest hospital merger of the past year. The two systems announced they completed the merger in December, forming a new organization known as Advocate Health. The organization boasts a combined annual revenue of $27 billion.
Analysts have said they expect to see other systems use the Atrium-Advocate Aurora merger as a template for other deals.
The systems had no geographic overlap: Atrium is based in North Carolina, while Advocate Aurora operates in Illinois and Wisconsin. Since the systems weren’t looking to merge with organizations in their own market, they avoided one potential headache with regulators. The Federal Trade Commission has applied increasing scrutiny to proposed hospital deals involving systems in the same market.
Hospital systems should look to the Atrium-Advocate Aurora transaction as an example for other partnerships beyond geography, Singh said. Rather than simply looking at a system in another state or region, healthcare organizations should look to find partners that can expand their ability to provide services and solve other strategic challenges.
“This idea of geographic scale isn't really what's at play,” Singh said. “What's the focal point of what's happened over the last few years, and I would say, going back five or seven years even, is this idea of capabilities, this idea of components of healthcare delivery, acting as complements, to potential partnership models.”
“I think that what we're going to continue to see is a clear expression, and a rigorous study of articulating a new way that organizations want to work with each other, usually with complements, potentially across wider geographies, to get those complements and capabilities,” he said. “And so that strategic rationale underpinning it, I think that is going to be a template for others going forward.”
Other systems looking at partnerships beyond geographic markets include Essentia Health and Marshfield Clinic Health System, which are exploring a merger. Sparrow Health is also planning to join University of Michigan Health.
Such deals aren’t being driven as much by economic difficulties as much as systems seeing where they need to find partners with different strengths and to offer more ways to provide healthcare.
“They're probably taking a very deep dive into the strategic inventory of what they have, or what they're comfortable of executing inside of their strategic plan as an independent, and they're probably seeing the list increase of the things that they would look for, for an outside third party partnership model to accelerate,” Singh said.
Economic headwinds could spur deals
While many deals are going to be motivated by expanding capabilities, the economic headwinds also are going to motivate some systems to seek partners. With systems dealing with higher inflation and other challenges, Singh said, “I believe it's going to accelerate and lead to overall activity increasing.”
Some organizations that are struggling with costs outpacing revenues may have to pursue mergers beyond strategic reasons and simply as a way to survive.
In Singh’s view, some may say, “We're still looking at financial performance that isn't really giving us a lot of comfort about long-term viability … it's time to probably evaluate something before things get very, very challenging for us.”
“I think it will accelerate because of those economic headwinds for some,” Singh said. “But I don't think that's going to crowd out the others that are thinking strategically. And that's part of the reason why I get to the point where I do believe we're going to see much more increased activity, and we're going to start heading towards the trajectory of where we were, in terms of the numbers of transactions, over the coming years.”
Many rural hospitals are experiencing severe financial difficulties, and analysts say some are barely staying afloat. More than 600 rural hospitals, nearly 30% of America’s rural hospitals, are at risk of closing in the near future, according to the Center for Healthcare Quality and Payment Reform. Singh expects rural hospitals to form partnerships with other health organizations.
“I do believe there's going to be increased alignment strategies,” Singh said. Whether those go all the way to mergers or change of control for some rural providers remains a little bit unclear, he added.
“But I do think that rural health systems, and rural organizations will increasingly look to regional health systems for solutions … And what I expect is that there will continue to be alignment strategies, collaboration strategies, and then ultimately for some integration strategies that will link those two,” he said.
Different types of deals
Hospitals aren’t simply looking at mergers or acquisitions of other health systems, Singh said.
More hospitals are going to be looking to acquire or partner with organizations that can fill some gaps and help add capabilities, such as telehealth, remote patient monitoring, or added outpatient services.
Those types of partnerships are increasing “at a significant pace,” Singh said.
“It is exponential, the amount of discussions that hospitals and health systems are having with those who are outside of their traditional footprint of care and services,” he said. “And it's because of this capability-based pursuit that everyone's after.”
Hospitals increasingly aren’t seeing the need to broaden their geographic footprint.
Many are looking to “deliver more on that community promise with different types of services, different types of access points, different types of technology, and so on.
“And so there's a lot more activity taking place along what I consider to be those cross vertical lines, as opposed to deeper penetration and just the traditional hospital inpatient-outpatient businesses,” he said.