Hospital Merger and Acquisition Activity Strong and Steady in 2019

January 22, 2020 - Hospital merger and acquisition (M&A) activity in 2019 remained “strong and steady,” with 92 transactions announced in 2019 compared to 90 the previous year, consulting firm Kaufman Hall recently reported.

2019 may not have been a historic year for hospital M&A activity in comparison to the recent past, the Chicago-based firm’s annual M&A in review report found. However, the average size of sellers by annual revenue remained above recent historical levels at $278 million in 2019.

The report also found:

• The trend toward deals between financially strong health systems continued, with 3 announced “mega mergers” in which the smaller partner had more than $1 billion in annual revenue. In another 11 transactions, the smaller partner had annual revenue between $500 million and $1 billion. The small partner also had an “A” credit rating for higher in five transactions.
• Enterprise performance strategy efforts among for- and non-profit systems remained stable, with fewer independent hospitals engaging in M&A activity. For-profit business line and unit rationalization saw the most activity, with 19 announced divestiture transactions. Although, non-profit system continued to be the primary acquirer of other health systems, representing 80 percent of transactions.
• Health systems increasingly looked across state lines and geographies to expand their business in new markets. Four transactions involved cross-state deals.

“What we saw in M&A activity in 2019 represents a clear turning point away from the aggregation of assets and toward real transformation of hospitals and health systems,” Anu Singh, managing director at Kaufman Hall, recently said in a press release. “Acquirers are less focused on obtaining ‘more of the same’ and instead are looking for ways to expand their portfolios, market opportunities and service offerings, especially when it comes to consumers.”

Consumerism in healthcare and market disruption from non-traditional stakeholders really defined hospital M&A activity in 2019, pushing provider organizations to engage in more strategic deals rather than those based on “purely financial concerns,” Singh added.

“It’s a trend we expect to see continue in 2020, and also accelerate in terms of more cross-vertical partnership activity,” he stated.

How consumerism and disruption are impacting hospital M&A

In last year’s M&A in review report, experts at Kaufman Hall predicted increasing competition to control healthcare’s “front door” to guide hospital M&A activity in 2019. And that prediction was largely right, according to this year’s report.

Hospitals and health systems engaged in a diverse range of partnerships with other health systems, payers, physician practices, and health IT companies to make care easier to access and more convenient. For example, Blue Cross and Blue Shield of Minnesota and North Memorial Health announced a new joint venture last year in which the payer will assume partial ownership of the health system’s 20 primary and specialty care clinics.* Through the joint venture, the organizations aim to reduce confusion for consumers navigating the complex healthcare system.

Other “non-traditional” partnerships announced in 2019 included:

• North Carolina-based Sutter Health and Aetna unveiling plans to partner with house-call provider Health to create a joint venture that will offer more convenient care options for health plan members
• Cleveland Clinic announcing its formation of a new joint venture with health IT company American Well to offer consumers broader access to “comprehensive and high-acuity services” through telehealth

These partnerships will help hospitals and health systems compete with non-traditional stakeholders, like CVS and Walmart, which both launched new healthcare capabilities and facilities in 2019.

“New healthcare competitors are seeking to attract consumers early in their healthcare journey, when they can have the most influence over the consumer’s path forward. Without a strategy to compete in this space, legacy hospitals and health systems risk disintermediation,” the report stated.

With competition from outside actors a new reality, hospitals and health systems are likely to keep pursuing a diverse range of partnerships, experts at Kaufman Hall predicted.

“Partnerships between healthcare organizations that historically have operated separately, or even in opposition to one another, will continue to grow as health plans, health systems, and physician practices seek new ways to provide better consumer experiences. Partnerships with organizations that bring strong digital and retail capabilities to legacy healthcare organizations will also continue to grow,” the report stated.

Experts also anticipate hospital M&A activity in 2020 to focus on the growth of regional health systems, as well as extending the reach of systems in existing markets. Hospitals and health systems are also more likely to use alternative capital structures for partnerships and acquisitions, including minority interest structures and leaseback structures, experts concluded.

CORRECTION 01/23/2020: A previous version of this article incorrectly said Blue Cross and Blue Shield of Minnesota would assume ownership on North Memorial's 20 primary and specialty clinics.