Kaufman Hall Report: M&A Activity Slowed in 2020, Will See Changes in 2021
COVID-19 has been a blow to the U.S. economy overall and the health care sector in particular, but it did not substantially alter hospital mergers and acquisitions (M&A) in 2020, according to a new analysis from hospital and health system consultant Kaufman Hall. In total there were 79 announced deals, which is significantly lower than 2019 (92) but marginally higher than a decade low in 2010 (74). Seven of these transactions were “mega mergers”—involving two companies with over $1 billion in annual revenue—up from three transactions in 2019.
The analysis outlines lessons from the past year—including the need to focus on core business strengths, build new partnerships to address infrastructure gaps, and strengthen intellectual capital—that will transform the industry for years to come.
Anticipated trends for 2021 hospital M&A activity include:
> New strategic imperatives. The pandemic may bring permanent changes to the healthcare business model. For example, telehealth will likely remain above pre-pandemic utilization levels, while volume for services that fell significantly, such as elective visits, may be slow in recovering.
> An emphasis on addressing broader societal issues. A new focus on reducing disparities in healthcare outcomes—one of the priorities of the incoming Biden Administration—may put a new emphasis on addressing social determinants of health and treatment of chronic conditions.
> A growing diversity of partners and partnerships. Assets removed from non-core areas such as skilled nursing and behavioral health may be replaced by partnerships with specialty service providers to ensure health system consumers maintain access to a full range of services.
The report’s authors noted that “[T]he the COVID-19 pandemic has compelled healthcare organizations to:
> Focus on core business strengths and assess the long-term viability of non-core assets, aligning as needed with partners that offer complementary, innovative, or otherwise unrepresented capabilities
> Build partnerships to address gaps in the healthcare infrastructure exposed or intensified by the virus, including collaborative partnerships with non-traditional partners
> Strengthen intellectual capital resources to be nimbler and more flexible in dealing with the current crisis and in pivoting to new modes of providing care more efficiently, effectively, or uniquely relative to other legacy providers and potential new market entrants.”
In looking at the types of mergers and acquisitions that were pursued last year, the report notes that “Trends in the data for 2020 include the following:
> Organizations with significant scale and high credit quality were the smaller partner in a significant percentage of 2020 announced transactions, in line with historical peaks. Seven of the announced transactions in 2020 were “mega mergers” (transactions in which the seller or smaller partner by revenue had more than $1 billion in annual revenue), up from three such transactions in 2019.
> In 10 transactions, the smaller partner had a credit rating of A- or higher in 2020, up from five such transactions in 2019.
> In line with growth in the number of mega mergers announced in 2020, the average size of smaller partner by annual revenue increased to $346 million, up from $278 million in 2019. Since 2010, average smaller partner size by annual revenue has increased at a compound annual growth rate (CAGR) of 6.2 percent.
> Activity by for-profit health systems as both acquirer and seller increased as a percentage of total transactions in 2020. Combined, transactions involving a for-profit partner represented 37 percent of announced transactions, compared with 23 percent in 2019, with a nearly even split between transactions in which the for-profit partner was acquirer versus seller.
> Although the impacts of the COVID-19 pandemic resulted in a lower number of announced transactions (79 in 2020 compared to 92 in 2019), the number of announced transactions remained within the historical range of the past 10 years.
> The number of financially distressed sellers was stable but lower in 2020, down to 16 percent of announced transactions from 20 percent in 2019.
Meanwhile, because of the instability of the financial and operational landscape for hospitals and health systems right now, the report notes that “An emphasis on resiliency will bring a greater focus to what ‘core’ business activities will drive the future direction of hospitals and health systems. Organizational leaders will have to look hard at underperforming service lines and facilities to determine how and how much they contribute to the overall enterprise.”
Looking forward in 2021, the report predicts that the COVID-19 pandemic might end up creating “permanent changes to the healthcare business model,” because of the shift to remotely delivered care. Meanwhile, a “new focus on addressing disparities in healthcare outcomes,” through the addressing of the social determinants of health, could refocus some organizational activity, while at the same time, the report foresees the potential for partnerships across different healthcare sectors.
