COVID-19 a Catalyst for Healthcare Merger and Acquisition Activity

January 13, 2021 - Despite delivering an economic blow to provider organizations, the pandemic confirmed the “strategic rationale” for healthcare mergers and acquisitions, according to consulting firm Kaufman Hall.

A year-end analysis of healthcare merger and acquisition activity in 2020 found that there were 79 transactions announced, significantly down from the 92 transactions announced in 2019 but marginally higher than the decade low in 2010 (74 transactions).

Additionally, seven of the transactions announced in 2020 were “mega mergers,” which the firm defines as a merger involving two companies with over $1 billion in annual revenue. There were only three mega mergers announced in 2019.

Healthcare merger and acquisition activity in the last year highlighted the need for hospitals and health systems to focus on core business strengths, address infrastructure gaps through partnerships, and strengthen intellectual capacity, the firm explains.

And the ongoing COVID-19 pandemic could be the catalyst for more healthcare merger and acquisition activity in 2021.

“The pandemic has accelerated the need for strategic initiatives that address the opportunities of industry transformation and that reward well-thought-out alignment opportunities,” Kaufman Hall stated in the analysis.

Healthcare leaders are already anticipating a higher level of merger and acquisition activity heading into the new year. According to a recent survey of healthcare CFOs conducted by BDO, 44 percent say the pandemic will drive an increase in partnerships in 2021. Another 41 percent of CFOs expect an increase in consolidation.

“From improving relationships between payers and providers to research partnerships between academic medical institutions and pharmaceutical companies, the walls in the healthcare ecosystem continue to come down in favor of collaboration and community to serve the greater good,” the authors of the survey report stated.

Hospitals and health systems with “significant depth of intellectual capital and expertise” are at an advantage in the COVID-19 world, Kaufman Hall emphasized.

Providers who can deliver telehealth, develop and disseminate new clinical protocols, rebuild supply chains, manage vaccine trials and vaccination, and implement other innovative adaptations had the upper hand with addressing the challenges of COVID-19, the firm explained. This has led some organizations, like regional health systems, to announce transactions with academic medical centers or teaching hospitals, for example.

In practice, for instance, New Hanover Regional Medical Center announced last year that it is joining Novant Health to partner with the UNC School of Medicine in North Carolina. Northwest Community Healthcare also unveiled plans to merge with NorthShore University Health System in Illinois in 2020.

“As health systems face ongoing uncertainty and work to transform healthcare, intellectual capital will be as important as scale in helping them respond nimbly and efficiently to new challenges,” Kaufman Hall stated.

Partnerships can also help hospitals address gaps in infrastructure that the COVID-19 pandemic highlighted, such as ICU bed capacity. In this case, regionalization has become more prevalent as a healthcare merger and acquisition strategy as evidenced by the planned but stalled merger of four safety-net hospitals in Chicago, Illinois last year.

Hospital leaders also realized last year that they must focus on core business strengths to maintain financial stability while divesting or creating partnerships to manage underperforming areas.

For instance, six of the 14 announced transactions represented divestitures by major for-profit health systems in the second quarter of 2020, Kaufman Hall reported.

This trend is likely to continue into 2021, BDO added, with healthcare CFOs most likely to divest from behavioral health (24 percent), retail properties (23 percent), virtual health (17 percent), and post-acute care (16 percent).

But divestitures may spark more partnerships, as health systems seek to fill the gaps to ensure consumers maintain access to high-quality care, Kaufman Hall stated. Physicians groups hit the hardest by the pandemic’s financial impact are also likely to be seeking new partnerships that provide more financial security, the firm added.

The analysis also showed that healthcare merger and acquisition activity by for-profit health systems as both acquirer and seller increased in 2020. The number of financially distressed sellers also remained stable last year at 16 percent of announced transactions compared to 20 percent in 2019.