The pace of hospital mergers should pick up, eventually

It’s been a slow start to the year for healthcare mergers, but analysts project more transactions in the coming months. Critics worry about the prospect of mega-deals.

While a few big hospital mergers have been announced in 2022, the size of the deals doesn’t change the fact that there haven’t been many transactions.

The first three months of 2022 saw only 12 deals, the smallest number of hospital mergers in a first quarter in years, according to the Kaufman Hall consulting firm. Health systems were dealing with record highs in COVID-19 hospitalizations in the beginning of the year, along with serious staffing shortages, and it made sense that deal-making wasn’t at the forefront of executives’ minds.

But the second quarter of 2022 didn’t exactly see a spike in merger activity. There were 13 transactions involving hospitals and health systems from April through June, the smallest number for a second quarter since 2016, according to Kaufman Hall's July 13 report.

Anu Singh, who leads Kaufman Hall’s mergers, acquisitions, and partnerships practice, thinks there are going to be more deals in the coming months and in 2023. With the pandemic, hospitals have had to focus more on operations, rather than long-term planning.

“The number of transactions to me is a function of the lag time it takes to think strategically,” Singh said.

“Those who have the capability to do operation and strategic planning, are starting to reinvigorate that strategic thinking,” he said. “We’re going to see that come back.”

Singh said he didn’t suspect there would be a sudden surge of merger activity. As more health systems do long-term planning, Singh said, “I think we’ll go back to a similar level of activity we’ve seen before.”

Other analysts, such as KPMG, have forecast an uptick in merger activity as the year continues.

At the same time, the Federal Trade Commission has opposed three proposed hospital transactions this year on the grounds they could lead to less competition, and the deals collapsed. Critics of healthcare mergers say they can be bad for consumers, and are wary of some other proposed deals.

Deals so far

While the hospital industry has seen a smaller number of mergers, a mammoth deal was announced in the second quarter.

Atrium Health and Advocate Aurora Health announced their intentions to merge in May; the two systems have a combined $27 billion in annual revenue.

If regulators approve the deal, it would create one of America’s largest hospital systems. The new organization, which would be dubbed Advocate Health, would operate 67 hospitals with more than 1,000 ambulatory sites and employ more than 148,000 people.

Trinity Health, the Michigan-based Catholic system operating 88 hospitals, plans to acquire MercyOne, a health system in Iowa. Trinity and CommonSpirit, formerly Catholic Health Initiatives, have jointly operated MercyOne for more than two decades, but Trinity is moving to take sole ownership.

The Bellin Health System and Gundersen Health System are also planning a merger, while Universal Health Services has also struck a deal to assume sole ownership of George Washington University Hospital after having a majority stake for years.

Still, the Atrium-Advocate Aurora deal has commanded the most attention. Analysts have said if the deal is approved, other hospitals and healthcare systems could pursue similar deals.

It’s possible other larger systems will look for partners in other areas of the country to combine resources. Larger systems can pool their resources together to invest in technology to improve the health of larger population bases and address disparities in healthcare, Singh said.

“I see the commitment to put resources aside to address broader societal and healthcare issues than they could do alone,” he said.

Atrium and Advocate Aurora have pledged to spend $5 billion to improve access and health in vulnerable communities. They also vowed to examine the causes of health disparities in urban and rural communities.

The two systems don’t operate in competing markets, avoiding one problem that has been a roadblock to securing regulatory approval in other hospital mergers. Atrium Health, based in Charlotte, N.C., serves North Carolina, South Carolina, Georgia, and Alabama, while Advocate Aurora operates in Illinois and Wisconsin.

‘Too big to care’

Still, some critics contend the Atrium-Advocate Aurora deal could be bad for consumers.

Michael Abrams, a managing partner of Numerof & Associates, a consulting firm, said he fears that if regulators approve the Atrium and Advocate Aurora deal, it would trigger more deals among large health systems.

He is hoping the FTC will oppose the deal, but he’s skeptical that will happen.

“FTC’s point of view is they’ve always defined mergers that have anticompetitive consequences only in mergers with overlapping market areas,” Abrams said.

“If this does not provoke pushback from the FTC, ultimately that opens the door to a continuing series of mega mergers that are carefully designed to not have overlapping markets,” he added.

Abrams has spoken out for years against hospital consolidations.

“The end game is we get to a relatively small oligopoly of healthcare systems that provide care to the majority of citizens in this country,” Abrams said. “They are too big to fail, and too big to care.”

Healthcare industry leaders took notice when the FTC came out against two deals within days in June. HCA Healthcare had planned to buy five hospitals in Utah from Steward Health, but the systems dropped their plans in the face of opposition from regulators. Days earlier, RWJBarnabas Health and Saint Peter’s Healthcare System said they were ending their plans to merge the two New Jersey systems following the FTC opposition.

When asked if that represents a tougher stance from the FTC, Abrams said regulators acted because both transactions involved providers in the same markets. “There’s nothing new here,” Abrams said. “Both of these deals fell comfortably in the same category as others challenged by the FTC.”

“If the FTC is seriously going to take a tougher stand with regard to hospital consolidation, they’re going to have to develop a new legal framework for pursuing mergers that are cross market and even mergers that are vertical mergers,” he said.

Hospital mergers have often led to higher costs and reduced services, which hurt consumers, Abrams said. He’s hopeful that the FTC will closely examine the Atrium-Adovcate Aurora deal, even if the systems aren’t in competing markets.

“The question is whether the FTC is going to play it safe and within the well worn framework of established case law, or whether they will take on the challenge,” he said. “Are they going to do something outside the lines, or are they going to keep on doing what they’ve always done?”

President Biden issued an executive order last July directing regulators to closely examine mergers to ensure that consumers aren’t hurt by reduced competition. The order listed deals in a host of industries, including hospital consolidation.

Abrams said the FTC is sending a message that it is giving careful scrutiny to health systems looking to consolidate in the same region.

“Hospitals and systems that are contemplating a merger where it would mean reduction of competition in a given market, will think twice about doing that,” Abrams said.

Financial woes could spur deals

Some analysts say hospital mergers may eventually pick up because health systems that are struggling financially are going to need to find partners to stay afloat.

“Organizations that were struggling before the pandemic will face significant headwinds going forward,” Singh said. “That will raise more questions of financial viability.”

The federal government offered hospitals aid under the CARES Act, which became a lifeline during the pandemic for some providers. For most providers, the aid sustained hospitals that were losing revenue due to higher labor and supply costs and lost revenue from people delaying care.

But that aid was only temporary, and some hospitals and health systems could face difficult choices.

For providers coming out of a post-pandemic world, when it happens, Singh said, “the question becomes, what about your post-pandemic operations were different than pre-pandemic?”

Hospitals are also going to realize that the higher costs for labor to attract and retain staff aren’t going away.

“We’re seeing permanent adjustments being made by organizations for the increased cost of labor,” Singh said.

Finding strategic partners

In the rapidly changing healthcare industry, more hospitals and health systems are going to be looking to deals to help them succeed in areas where they need to approve, Singh said.

Some hospital systems may not see the need to expand their physical footprint, but they are more interested in finding a partner in an area where they may have more expertise, such as telehealth, remote patient monitoring or outpatient services.

“They may like their sites for care, but want a more strategic, integrated platform of non-acute care services to bring a better solution to communities,” Singh said.

Some hospitals are finding it’s a better idea to team with someone with success in telemedicine or wearable technology than trying to build a new system on their own.

“It is an increasing part of the activity that’s taking place out there,” Singh said.

Deals beyond hospitals

Oracle completed its $28-billion acquisition of Cerner, the nation’s second largest electronic health records company, in June. Within days of completing the deal, Oracle’s Larry Ellison positioned healthcare as the software giant’s prime mission. Oracle announced plans to build a national health records database.

Amazon has entered the primary care space with its $3.9 billion purchase of One Medical last week. Analysts say the deal has the potential to alter primary care and gives Amazon relationships with hospitals, who may want to collaborate with the e-commerce titan to ensure a steady stream of patients.

Microsoft wrapped up its acquisition of Nuance Communications, a voice technology firm, in a $20 billion deal in March.