Healthcare Mergers and Acquisitions Regain Momentum

January 16, 2023 - Healthcare merger and acquisition (M&A) activity has regained momentum, ending 2022 with 53 announced transactions and more than $45 billion in total transacted revenue, reports Kaufman Hall.

The healthcare consulting firm’s latest analysis of healthcare transactions shows a rebound in M&A activity after COVID-19 dampened enthusiasm over the last couple of years. The total number of healthcare transactions remains below pre-pandemic levels, but there are clear signs that the momentum will continue into 2023, the firm says.

Firm chair Ken Kaufman noted in a recent blog post, “this is a transformative period in American healthcare, when hospital organizations are faced with the need to fundamentally reinvent themselves both financially and clinically.” Severe financial pressures and the “unpausing” of initiatives put off during the height of the pandemic will prompt more transactions this year, analysis authors write.

The “mega merger” trend continued through 2022, the analysis shows. Mega mergers are transactions in which the smaller party has annual revenues of over $1 billion. Smaller party annual revenues exceeded $1 billion in more than 15 percent of last year’s transactions, coming in just below the previous year’s historic high of 16.3 percent. More than 15 percent of smaller parties also had a credit rating of A- or higher, representing a recent trend toward stronger credit ratings.

The high percentage of mega mergers, along with other significant transactions announced in 2022, led to a historically high average smaller party size by annual revenue of $852 million, more than $200 million greater than last year’s historic high of $619 million.

The analysis shows that the compound annual growth rate (CAGR) of the average smaller party size over the past decade nears 12 percent, up from 8 percent in 2021.

Among the largest and most transformative transactions announced in 2022, according to Kaufman Hall, are the deals between Advocate Health and Atrium Health, Essentia Health and Marshfield Clinic Health Systems, and Sanford Health and Fairview Health, as well as the University of Michigan Health’s $800 million commitment to expand services as part of its merger with Sparrow Health.

The analysis notes that these four transactions are also representative of cross-market deals, marking another significant trend in 2022. These organizations have little or no overlap between markets, indicating “capability-based scale is much more prominent than adjacent market-based scale.”

“A benefit of cross-market mergers is that they do not actually change the competitive structure of the markets involved in the merger—there is no increase in the concentration of local hospitals or health systems, an increasingly important feature considering the current regulatory landscape,” the analysis states.

“A noteworthy element of many of this year’s cross-market mergers is that the systems have a common focus (e.g., rural health), complementary skillsets (academic medicine and community health), or a shared desire to improve health outcomes.”

Additionally, Kaufman Hall highlights that the percentage of financially distressed sellers remained steady at 15 percent last year versus 16 percent in 2020 and 2021. This is in the face of the financial difficulties hospitals and health systems faced in 2022.

Financial pressures are sure to continue in 2023. However, higher interest rates, rising costs of capital, and heightened regulatory scrutiny of M&A activity across industries could present some headwinds this year, the analysis says.