Kaufman Hall Report: Hospital Mergers Fewer But Increasingly Bigger

A smaller number of mergers and acquisitions took place in the healthcare provider sector in the third quarter of 2021, but those mergers and acquisitions were larger than before. That’s the bottom-line takeaway from a report released on Oct. 6 by the Chicago-based Kaufman Hall consulting firm, entitled “M&A Quarterly Activity Report: Q3 2021.”

As the report noted, “Merger and acquisition activity in the third quarter of 2021 looked much like Q2: A lower total number of transactions compared with pre-pandemic historical activity, but a notably high level of total transacted revenue and average seller size by revenue, driven in part by regional health system partnerships and divestitures of hospitals outside of core regional markets. A total of 7 transactions involving 20 hospitals were announced in Q3. Total transacted revenue for the quarter was $5.2 billion; combined with Q1 and Q2, total transacted revenue for 2021 is now at $22.4 billion. Average seller size by revenue year-to-date was $659 million, more than double the average of $329 million over the past six years (2015–2020). Of note, the total revenue transacted year-to-date is nearly on par with that of years past, despite only half (or even less) of the total transaction volume. We believe that the trend of high average seller size will continue into Q4 as larger health systems look to partner to overcome adverse effects from the COVID-19 pandemic and seek strategic combinations that broaden their reach.”

The report highlighted three business deals of particular interest. “Two of the most significant Q3 transactions were in the Mountain West. These included:

◾ The planned merger of Utah-based Intermountain Healthcare and Colorado-based SCL Health. The combined $11 billion system would operate 33 hospitals and provide services in six states, including Colorado, Idaho, Kansas, Montana, Nevada, and Utah.

◾ HCA’s planned acquisition of five hospitals in Utah from Steward Health Care. The acquisition would add to the eight hospitals HCA already operates in the state. Credit Suisse reports that the five hospitals had approximately $616 million in combined net patient revenue for their most recent reported fiscal years.

In the Chicago area, Edward-Elmhurst Health announced plans to merge with NorthShore University HealthSystem to create a $4+ billion system. The combined system would operate nine hospitals in the city’s northern and western suburbs and create the second largest physician network in Illinois with more than 6,000 employed and independent clinical experts.”

As the report noted, “Average seller size by revenue for Q3 2021 was $736 million, more than double the $346 million year-end average for 2020 (Figure 3). Total transacted revenue for the quarter was $5.2 billion, lowest among historical third quarter figures (Figure 4) but still consistent with historical levels. For-profit health systems were the acquirer in 3 of the 7 announced transactions and religiously sponsored systems were the acquirer in 1. Other not-for-profit systems were the acquirer in the remaining 3 transactions.”

There are clear implications in all these developments. The report noted that “The trend we have seen throughout 2021—a smaller number of transactions, but a higher level of large and mega-merger transactions—is one we expect to continue. There are several factors driving this trend:

◾ Fewer independent hospitals. The number of unaffiliated, independent community hospitals is decreasing. The most recent data from the American Hospital Association, based on its 2019 Annual Survey, indicates that 67% of the 5,141 community hospitals are already part of a system.

◾ Emphasis on strategic partnerships. Hospitals and health systems have become much more strategic and selective in identifying potential partners, as these reports have noted on several occasions. Both the process of completing a merger and the work of integration that follows the transaction are a heavy lift; organizations are focused on transactions that have a strong strategic rationale to make the effort worthwhile.

◾ Desire for transformative impact. Health systems increasingly seek a transformative impact from M&A activity—not just the acquisition of another facility, but the addition of new capabilities or access to new markets. In particular, the drivers for many of the larger platform transactions reflect a pursuit of increasing intellectual capital, expanding the base for resources and know-how, and combining complementary capabilities and expertise within a single organization. These pursuits transcend the traditional definitions of scale and market presence and instead reflect the transformative importance of pursuing new business models, thriving on diversification of operations, and succeeding in new models of care.”