COVID-19 Spurs Fewer, But Larger Hospital Merger, Acquisition Deals

April 08, 2021 - Hospital merger and acquisition activity was significantly down in the first quarter of 2021 despite larger-than-average transaction sizes, according to a new report from Kaufman Hall.

Hospitals and health systems announced just 13 merger and acquisition deals at the start of 2021, coming in below recent historical averages, the consulting firm found.

However, the smaller number of deals was offset by a higher number of “mega” mergers and acquisitions in which the smaller organization has revenues between $500 million and $1 billion.

The average seller size by revenue in the first quarter of 2021 was $676 million—well above historical averages for the first quarter and for recent year-end averages, Kaufman Hall stated. The figure is also now the third-highest quarterly figure the firm has recorded in the past decade.*

With such large hospitals and health systems engaging in M&A activity, the average size of the quarter’s announced transactions also nearly hit a historical high at $8.8 billion. This was second only to the first quarter in 2018 among historical first-quarter figures.

Additionally, the quarter ended with a high number of hospital facilities included in announced transactions. Based on the announcements, 72 hospitals in total are currently part of a merger or acquisition deal.

The hospital merger and acquisition deals announced at the start of 2021 may be hinting at a new trend for hospitals and health systems in which leaders seek larger transactions.

A year ago, when COVID-19 was just starting to emerge in the US, the first quarter of 2020 finished with a relatively high number of transactions, but few large transactions. Notably, the average seller size by revenue that quarter was just $172 million.

Since the pandemic was announced, hospital mergers and acquisitions have started to get larger. Average size of seller by revenue increased to over $800 million by the second quarter of 2020, which is currently the highest average size recorded in the last decade.

The COVID-19 pandemic has changed hospital and health system perspective on scale, Kaufman Hall explains in the report.

“The COVID-19 pandemic has affirmed the importance of transformation and again validated the pursuits of scale, relevance, and intellectual capital that remain evident in nearly all this quarter’s transactions,” the firm states.

Hospitals and health systems are seeking diversification in light of the pandemic, resulting in more across-market deals like the proposed LifePoint acquisition of Ardent Health Services.

These organizations are also finding new value of local market knowledge, according to the report.

The intellectual bandwidth and understanding of local issues demonstrated by some smaller health systems have become more important to larger systems as they look to grow. CommonSpirit’s and Ascension’s recent transfer of assets to local systems is an example of this trend.

Both health systems have announced plans to sell some of their hospitals, with CommonSpirit potentially offloading hospitals in North Dakota and Minnesota to Essentia Health and Ascension possibly selling seven hospitals in Wisconsin to Aspirus Health.

This type of transactions can enable larger systems with a more national presence to move their resources to markets they consider essential to the organization’s future success, the report states.

Moving forward, experts at Kaufman Hall anticipate COVID-19 to have a lasting impact on hospital merger and acquisition activity.

“Reevaluation of the strategic rigor of past, present, and future partnership opportunities will continue in response to new market dynamics,” the report concluded.

*CORRECTION: A previous version of this article stated that the proposed acquisition of Ardent Health Services by LifePoint was an example of a mega-merger. The acquisition is still speculative and, therefore, not a real-life example.