Practice Management News

Hospital Merger, Acquisition Activity Steady With 71 Deals So Far

Hospital merger and acquisition activity in 2019 is on par with the level of activity observed the previous year, but the size of sellers is dipping, Kaufman Hall reports.

Hospital merger and acquisition activity

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By Jacqueline LaPointe

- Hospital merger and acquisition activity through the third quarter of 2019 is running slightly ahead of 2018 levels, according to a new report from Kaufman Hall.

The consulting firm recently reported that hospitals and health systems announced 71 merger and acquisition transactions through the third quarter of the 2019 calendar year, which is up from 68 announced transactions through the third quarter of 2018.

Specifically, the report showed that hospitals and health systems announced 25 deals in the third quarter of 2019, and that is compared to 19 transactions announced in the second quarter and 27 transactions announced in the first quarter.

Hospital merger and acquisition activity remained steady through most of 2019. But the value of the announced deals dipped compared to the previous quarter, Kaufman Hall reported.

Total transacted revenue for the third quarter was lower at $8.14 billion, which paled in comparison to the near-record high of $11.3 billion in the second quarter of 2019.

In the third quarter of 2019, transacted revenue was also below the levels observed in the third quarter of 2018, which saw a total transacted revenue of $10.7 billion, the report showed. However, revenue from hospital merger and acquisition transactions in the third quarter of 2019 surpassed the totals from the third quarters of 2017 and 2016.

The report also revealed that the average size of the seller by revenue dipped from approximately $597 million in the second quarter of 2019 to $326 million the next quarter. Kaufman Hall explained that the second quarter of 2019 experience three significant announced deals in which the seller had $1 billion or more in annual revenue.

In comparison, hospitals and health systems announced just two of these significant transactions, and that impact of these announcements were “diluted by a slightly higher total number of transactions announced in the quarter,” the report stated.

Hospital merger and acquisition activity has historically been a numbers game in which hospitals and health systems rapidly combined to gain the scale, efficiency, and service lines and capabilities to succeed in a changing healthcare economy. The organizations, for example, announced a record number of merger and acquisition deals in 2017 with 115 transactions, Kaufman Hall previously reported.

Lately, however, hospital merger and acquisition activity has shifted. Kaufman Hall announced last year that the average size in revenue of sellers in hospital merger and acquisition deals in 2018 was $409 million, the highest average recorded by the consulting firm.

“What we’re seeing is a move toward strategic growth, driven in part by the need to acquire expertise and resources to manage the industry-wide changes facing hospitals and health systems,” Anu Singh, managing director at Kaufman Hall, said at the time. “These include changes in payment and care delivery models and the push for greater value, but also the emergence of new competitors that bring significant capital resources and strong capabilities in both digital technology and consumer experience to healthcare.”

Large hospitals and health systems are still actively engaging in hospital merger and acquisition deals to manage changes like value-based care and reimbursement and market disruption. But their activity may be waning. Year to date, the average size of seller through the third quarter of 2019 was $337 million, the report showed.

Hospitals and health systems are taking a slightly different approach to merger and acquisition deals, Kaufman Hall stated. In the third quarter of 2019 report, the consulting firm highlighted transactions that deepened partnerships between provider organizations and health plans.

For example, HCSC Ventures, the venture capital arm of Health Care Service Corp. (HCSC), and Sanitas, a multinational advanced primary care provider, announced their plans in the third quarter of 2019 to open ten advanced primary care medical centers in two Texas markets. HCSC owns Blue Cross Blue Shield (BCBS) of Texas and several other BCBS plans in Illinois, Montana, New Mexico, and Oklahoma.

Similarly, BCBS of Minnesota recently released details of its joint venture with North Memorial health in which the payer will have ownership of North Memorial’s 20 primary and specialty care clinics in the Minneapolis-St. Paul market.

“While these transactions have unique attributes, structures, and drivers, they share a consistent theme of payers and providers looking to collaborate within their markets,” the report stated. “There is a clear focus on creating efficiencies for the consumer: reducing total cost of care through better care coordination, providing one-stop convenience by offering a range of services at a single site, and reducing or eliminating administrative hassles between payer and provider.”

Kaufman Hall anticipates more hospital merger and acquisition deals to focus on the payer-provider relationship.