Financial insecurity was the driving force behind more than a third of the hospital and health system transactions announced during the year’s third quarter, according to a report on recent merger and acquisition activity in the sector.
Among the 18 deals unveiled from July through September, seven involved a party for which “financial distress” was a major factor, healthcare advisory firm Kaufman Hall wrote.
Those parties had either explicitly announced their difficulties, or publicly available information allowed the firm to infer the pressure finances had on the organization’s decision-making, according to the report. The large portion of such cases comes as hospitals have weathered “extreme financial pressure since 2022,” the firm noted.
“We are seeing continued activity among systems with annual revenues in the range of $250 million to $750 million that have sought a partner,” Kaufman Hall wrote in the report. “What is new in recent quarters is the number of larger systems—those with annual revenues of $1 billion or more—that also are citing financial distress as a driver for their decision to partner.”
The quarter’s 18 deals are a step above the third quarter of 2022’s 10 transactions and the third quarter of 2021’s seven, which the firm said signals a continued return to pre-pandemic dealmaking activity.
On the other hand, the quarter had just a single merger announcement in which the smaller party had annual revenues above $1 billion, referred to by the firm as a “mega-merger.” This brought the quarter’s total transacted revenue and average seller size by revenue to $8.2 billion and $453 million—down from the second quarters and the third quarters of of 2022 and 2021 but still above the third quarters of the years prior, according to the report.
“When removing the mega-mergers from each quarter, the average revenue in Q3 was actually significantly higher than that of Q2, at $243 million and $159 million respectively, demonstrating the significant uptick in activity in sizable independent hospitals seeking out partnerships with larger organizations,” Kaufman Hall wrote.
Nonprofit systems represented the larger party in 14 of the 18 announced deals, half of which involved academic or university-affiliated organizations. Here, the firm noted that academic systems have recently seen higher occupancy levels despite the industry’s gradually recovering volumes (70% median inpatient occupancy at academics versus 53% for all acute care hospitals).
“Aligning an academic health system with a community-based health system provides the opportunity to relieve some of the occupancy pressures at the academic flagship hospital by utilizing available space in high-quality community hospitals to treat lower acuity patients,” Kaufman Hall wrote. “An academic/community health system pairing also offers expanded opportunities for residency programs, clinical research trials and patient access to tertiary and quaternary services.”
Kaufman Hall also noted that among the four remaining deals that had a for-profit acquirer, three involved a smaller organization that was in financial distress. The group also pointed to a pair of deals with “creative transaction structures” in which smaller stakes of a system were sold off in order “to maintain their independence while building strategic alliances that enhance access to care.”
Even as dealmaking volume returns to pre-pandemic levels, Kaufman Hall cautioned that scrutiny of these transactions has elevated among state and federal regulators alike.
“There are many compelling reasons for hospitals, health systems, and other healthcare organizations to seek new alliances and partnerships in the current operating environment,” the firm wrote. “The effect of new guidelines on these transactions will remain unknown until they have been tested in the federal and state judicial systems.”