Hospital M&A Activity Slows in First Quarter of 2019
Hospital M&A activity hit the lowest quarterly volume in nearly a decade, with acute care organizations announcing just 14 deals at the start of 2019.
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By - Hospital merger and acquisition (M&A) activity hit the lowest quarterly volume since the end of 2009, a new report from the healthcare financial advisory firm Ponder & Co reveals.
Hospitals and other acute care providers announced just 14 M&A deals in the first quarter of 2019, which also makes it the first quarter since the third quarter of 2016 to see less than 20 announced transactions.
“The reduced volume of M&A transactions is indicative of a shift to more thoughtful, slow and highly-disciplined processes,” the report states. “As more and more healthy systems partner with each other, creativity will be needed to structure these alignments in a way that appeals to two healthy systems, not simply a takeover.”
“Many health systems are seeking ways to be proactive in their consideration of strategic options and to identify and approach strategically valuable assets, instead of being reactive to opportunities when they are presented to them,” the report continues. “Systems are seeking external growth, but also have to evaluate their own partnering options on a regular basis, as regional opportunities and threats cannot be ignored.”
Hospital merger and acquisition activity has exploded in the last decade. Cited data from the American Hospital Association (AHA) shows that about one-half of hospitals (49.1 percent) were not part of a health system in 1991. By 2016, the percentage of hospitals not affiliated with a system decreased to 33.2 percent.
READ MORE: How Hospital Merger and Acquisition Activity is Changing Healthcare
Hospitals and health systems are rapidly merging with and acquiring other providers to increase economies of scale, implement value-based care, reduce costs, improve efficiency, and more. Hospital and health system leaders say the deals will lower costs, increase patient access to care, and improve care quality among other reported benefits.
But hospitals and health systems may now be hitting pause, the new report shows.
A “natural pause” occurs after a period of acquisitions, Ponder & Co explains. Consolidators must take time to “digest and integrate” their new provider partners and assess their need for additional acquisitions.
“Tackling the demands of integration, while simultaneously addressing the nationwide decline in inpatient utilization trends, consolidators are questioning the need to continue to acquire small community hospitals,” the firm adds. “Furthermore, the number of non-rural struggling hospitals that need to seek a partner has diminished after a decade of rampant M&A activity.”
Struggling hospitals may continue to suffer in the near future as the pool of potential hospital partners shrinks following the period of rapid consolidation, the firm says.
READ MORE: Major Healthcare Mergers and Acquisitions Making Waves in 2019
“The increasing rate of rural hospital closures also indicates the options for these hospitals are shrinking,” the report states. “Meanwhile, healthy independent small-to-mid-sized systems are carefully considering all strategic options available – organic growth, acquisitions, or partner. With the changing healthcare delivery landscape, the impetus for growth still exists, but these systems are balancing the need to act with the need for judicious action.”
The decline in for-profit divestitures is also contributing to slower hospital M&A activity, the report shows.
In the past two years, health systems like Community Health Systems (CHS) and Tenet have announced dozens of divestitures. The health systems intend for the transactions to boost their financial standing and reduce costs across the for-profit organizations.
However, over the last several quarters, the number of for-profit divestitures declined as the health systems sold their “most isolated and disparate assets,” the report states.
Hospital M&A activity may be slowing down in early 2019. But Ponder & Co does not expect the reduced pace to spell the end of consolidation in the healthcare industry.
READ MORE: Hospital Mergers Produce Modest Healthcare Supply Chain Savings
“We do not view the reduced volume of the first quarter 2019 to be a harbinger of the end of hospital M&A,” the firm states in the report. “First, the drivers of consolidation have not changed. The need to consistently grow at a rate that exceeds persistent expense inflation, reimbursement challenges, technology and capital needs, and the need to adapt to uncertain value-based payer models continue to pressure hospitals and systems of all sizes.”
“Scale is critical in helping address these challenges although regional relevance is also essential,” they add.
Additionally, the ability of financially sound small-to-medium sized health systems to remain independent will become more challenging as regional health systems continue to expand, even at a slower pace.
The firm finds that hospitals and health systems are still engaging in strategic M&A discussions. Although, discussions now include mentions of looser affiliations, as well as control transactions.
Significant merger and acquisitions deals are also already under consideration in certain markets. For example, Atrium Health, Wake Forest Baptist Health, and Wake Forest University recently announced their plans to merge and expand the medical school in the Charlotte, North Carolina area.
Ponder & Co also predicts the number of for-profit divestitures to remain high in 2019 if not at the same levels observed in 2017 and 2018. CHS and other for-profit organizations have announced 2019 transactions and hinted at additional divestitures in recent earnings calls.
