Hospital M&A Activity Dips in Q1 as Providers Pursue Looser Deals

April 30, 2019 - Kaufman Hall’s latest quarterly analysis of hospital merger and acquisition (M&A) activity shows that 2019 is off to a strong start. In the first quarter of 2019, hospitals and health system announced 27 mergers, with approximately one-half of the announced mergers occurring in January.

However, the quarter did not end quite as strong, the national healthcare consulting firm finds.

As a whole, hospital M&A activity in the first quarter of 2019 was slightly down compared to the extremely high level of mergers and acquisitions observed in the first quarter of 2018. That quarter saw 30 total announced hospital M&A deals, Kaufman Hall reports.

But the consulting firm points out that the level of hospital M&A activity observed in the first quarter of 2019 is still on par with activity levels seen in recent years. For example, the first quarter of 2017 saw approximately the same number of announced transactions, and hospitals and health systems were slightly less active at the starts of 2015 and 2016.

Additionally, the quarterly analysis finds that total revenue for announced hospital M&A deals is down compared to previous first quarters. At the start of 2019, total revenue for announced transactions was $4.9 billion, down from $12.7 billion in the first quarter of 2018.

The first quarter of 2019 saw fewer large-scale transactions, Kaufman Hall explains. Although, hospitals and health systems still engaged in a significant number of deals involving sellers with annual revenues of $100 million or less.

Hospital M&A transactions between smaller organizations brought down the average size of seller by revenue from the record-setting $409 million in 2018 to approximately $196 million.

2018 was the year of the larger deal, Kaufman Hall reports in its year end hospital M&A analysis for 2018. Of the 90 total hospital M&A deals announced in 2018, seven involved sellers with net revenues of $1 billion or more.

Anu Singh, managing director at the firm, explains that hospitals and health systems were seeking more “strategic growth” in 2018 driven in part by the need to “acquire expertise and resource to manage the industry-wide changes,” such as value-based payment models and non-traditional competitors.

Hospital mergers and acquisitions among larger organizations allow providers to expand beyond their market to leverage economies of scale, fill gaps in capabilities, and elevate the patient experience, he adds.

But the latest analysis indicates a shift in hospital M&A activity. Larger hospitals and health systems are announcing fewer deals and organizations across the size spectrum are seeking looser transactions that do not require an official merger or acquisition, the report shows.

“To construct improved models of care, many hospitals and health systems are pursuing less than fully integrated partnerships, including joint ventures, management services agreements, minority investment models, and other structures,” Singh states in the press release regarding results from the first quarter of 2019.

“These strategic structures are desirable because they can provide opportunities for organizations to maintain local influence and improve the benefits they offer to their communities, while also exploring the possibility of deeper alignment in the future,” he continues.

An example of a looser hospital M&A deal announced in the first quarter of 2019 is the partnership between Evangelical Community Hospital and Geisinger Health System in Pennsylvania. In February 2019, the providers finalized a 30 percent minority investment model in which investments from Geisinger will enable Evangelical Community Hospitals to upgrade its EHR system while remaining independent.

In exchange, Geisinger Health Plan members now have access to Evangelical’s services at lower-out-of-pocket costs. The plan will also appoint 30 percent of the community members who serve on the hospital’s board of directors. Evangelical will appoint one member to Geisinger’s board.

According to the analysis, other major hospital M&A deals announced at the start of 2019 include the mergers between UPMC and Western Maryland Regional Medical Center, Loyola Medicine and Palos Health in Illinois, Dartmouth-Hitchcock Health and GraniteOne Health in New Hampshire, and Verity Health and the KPC Group in Florida.

While hospital M&A activity at the start of 2019 looked different compared to previous quarters, Kaufman Hall still anticipates larger hospitals and health systems to announce deals as the year progresses.