A new Kaufman Hall report outlines the uptick in consolidation. Some struggling systems sought partners to secure their future.
More hospital mergers and acquisitions took place in 2023, as many health systems continue to struggle with financial challenges.
In 2023, there were 65 announced hospital deals, up from 53 transactions in 2022, according to a new report by Kaufman Hall, a firm that consults with health systems on mergers. It’s the highest number of mergers since 2020, when there were 79 deals, likely including some that had been in the works before the arrival of COVID-19.
Analysts say the COVID-19 pandemic delayed some deal-making, as health systems were more occupied with confronting the crisis than long-term strategy. Now, as many hospitals continue to battle financial woes exacerbated by the pandemic, some hospitals are looking for partners to stay viable.
Financial distress is playing a larger role in hospital mergers, according to the Kaufman Hall report.
About 28% of the deals announced in 2023 involved a hospital or health system in distress, the highest percentage since 2019, when 18.6% of mergers involved a struggling organization, the report states. It’s also a sharp uptick from 2022, when 15% of the announced deals involved a hospital or system in distress.
The report notes that smaller hospitals aren’t the only ones seeing continued financial headwinds.
“We are seeing an increasing number of larger systems citing financial distress, a change from the historical concentration of distress in smaller hospitals and health systems,” Kaufman Hall said in the report.
Hospitals and health systems are seeing improved financial performance, but analysts say it’s been a slow recovery for many systems. The median calendar year-to-date operating margin index for hospitals was 2% in November 2023, according to Kaufman Hall’s most recent National Hospital Flash Report. But healthy nonprofit hospitals typically have margins of 3% to 4%, Kaufman Hall notes.
Other industry analysts, including Fitch Ratings and S&P Global Ratings, have said they expect to see hospitals continue to have financial difficulties in 2024, even as they forecast some improvement.
Here are some other noteworthy takeaways from the report on trends in hospitals mergers and acquisitions.
While a substantial number of deals were driven out of financial need, Kaufman Hall notes a significant number of “mega mergers” took place in 2023. Those deals refer to mergers or acquisitions where the smaller party has more than $1 billion in revenue.
In 2023, 12% of the announced deals qualified as mega mergers, marking the third consecutive year such deals topped 10% of all transactions. The percentage of mega meals was down a bit from 2022 (15%) and 2021 (16%).
Among the mega mergers, Kaiser Permanente announced plans in April to acquire Geisinger Health in Pennsylvania.
More health systems and hospitals are looking at becoming regional organizations, Kaufman Hall notes.
BJC Healthcare, based in St. Louis, and Saint Luke’s Health System, anchored in Kansas City, came together to form a regional system in Missouri. The two systems completed their merger on Jan. 1, forming the BJC Health System, with 24 hospitals and $10 billion in revenue.
In another example, two Wisconsin-based hospital systems, Froedtert Health and ThedaCare, finalized their merger, creating a system with 18 hospitals and a combined revenue of more than $4 billion.
More academic health systems are partnering with community hospitals to develop regional networks, a trend that began in 2022, Kaufman Hall says.
In the third quarter of 2023, academic systems were the acquiring organization in seven of the 14 deals involving nonprofit systems, the report states. Academic health systems are seeing higher occupancy rates than other hospitals.
“A strong community hospital network allows academic health systems to ease some of the occupancy constraints at the academic medical center flagship by utilizing available space in high-quality community hospitals for lower acuity patients,” the report states.
Focus on core markets
Some larger health systems have opted to focus on core areas where they are big players, and they’ve been moving out of markets where they are less dominant.
While for-profit systems have engaged in that strategy, some nonprofit systems, such as Ascension, have taken that approach, the report notes.
Health systems are also focusing on markets with higher population growth, such as CommonSpirit Health’s purchase of five hospitals in Utah from Steward Health Care.
The year’s mergers had a total transacted revenue of $38.4 billion, down from $45 billion in 2022 but still higher than in previous years. It exceeds the transacted revenue of each year from 2018 through 2021.
The average size of the smaller party in 2023’s hospital mergers was $591 million, down from the record $852 million in 2022. But it’s higher than most previous years.
Other than in 2021, when the average size of the smaller party was $619 million, the 2023 figure is significantly higher than each year between 2012 and 2020.