Large Hospital Mergers Signal New Phase of Healthcare Deals

January 13, 2022 - Hospital mergers and acquisitions were down in 2021 as industry leaders faced another year battling the COVID-19 pandemic, new research from Kaufman Hall shows.

There were 49 transactions announced by hospitals and health systems last year, the healthcare consulting firm reported in its annual year-end healthcare merger and acquisition report. That number is down significantly even from a record low in 2020 when there were 79 announced transactions. In prior years, the number of announced transactions were close to or exceeded 100.

While the number of hospital mergers and acquisitions remained low, the size of those few announced transactions were significantly up, researchers reported.

The report identified eight “mega-mergers” in which the seller or smaller partner by revenue had over $1 billion in annual revenue. Out of all the announced transactions, that is the largest percentage of announced mega-mergers in the last six years at 16.3 percent. It was also nearly double the percentage of mega-mergers announced in 2020.

The average size of the smaller party in hospital merger and acquisition deals was also up significantly compared to previous years, according to the report. The average size by annual receive increased to $619 million from $388 million in 2020.

The data may point to a new trend in healthcare consolidation. Researchers noted that the average smaller partner size by annual revenue has grown at a compound annual growth rate (CAGR) of about 8.0 percent since 2011.

One reason for the shift in hospital merger and acquisition activity in 2021 was that fewer independent, unaffiliated community hospitals sought partnerships, the report stated. The reason for seeking a partnership may have also shifted, researchers said.

“Organizations are focused on partnerships with a strong strategic rationale and have become increasingly selective in identifying potential partners,” the report said. “They seek partnerships that will have a transformative impact through the addition of new capabilities, enhanced intellectual capital, and access to new markets or services.”

One example researchers pointed to is the transaction between Intermountain Healthcare and SCL Health. The non-profit health systems inked a deal in September to create an $11 billion—one of the largest transactions announced in 2021. Combined, the health system will operate 33 hospitals and employ 58,000 people across six states. Health system leaders emphasized how the merger would advance population health and value-based care efforts.

Many hospitals and health systems also merged or acquired new facilities in 2021 to address health equity and other societal issues, according to the report. One such transaction involved Edward-Elmhurst Health and NorthShore University HealthSystem in Chicago, Illinois. The health systems completed their 2021 merger deal earlier this month. As part of the deal, the systems funded several community investments to address health equity and local economic growth.

Transactions from 2021 point to a new phase in healthcare merger and acquisition activity, Kaufman Hall reported.

“Even before the pandemic struck, new forces were laying the groundwork for a new phase of healthcare partnerships,” the report stated. “Factors including the ongoing movement of care from inpatient to outpatient settings, technological change, and the push toward consumerism in healthcare created opportunities for legacy healthcare providers as well as new providers who could focus on a specialized segment of the market for healthcare services (e.g., primary care, behavioral health, ambulatory surgery, telehealth, home health, chronic care management, etc.) without bearing the high costs of providing acute inpatient services.”

This is different from previous phases, such as the first phase in the 1980s and 1990s during which independent hospitals sought partnerships to contain rising costs. The next phase, which peaked in the 2010s, focused on mergers and acquisitions that advanced access to resources for population health, integration of services, and risk assumption, researchers explained.

“As the Affordable Care Act’s encouragement of integration of services across the care continuum took hold, new industry participants were bringing focus and optimization in singular service lines, which is now opening up avenues to optimize various service providers in a single coordinated model,” they wrote in the report.

Healthcare industry leaders can look out for hospital merger and acquisition activity in this next phase to prioritize scale, the rightsizing of markets, and capabilities for addressing the patient as a consumer.