Mega Mergers Behind Recent Hospital Merger and Acquisition Activity

July 23, 2019 - Overall hospital merger and acquisition (M&A) activity moderated in the second quarter of 2019, but the size of the deals increased, consulting firm Kaufman Hall recently reported.

Hospitals and health systems announced 19 merger and acquisition transactions in the second quarter, down from 27 transactions announced the previous quarter.

The volume of hospital merger and acquisition announcements is down slightly. However, quarterly volume is in line with recent trends, Kaufman Hall stated. Hospitals and health systems announced 21 transactions in the second quarter of 2018, and year-to-date volume in 2019 is following a similar trajectory as last year with 46 announced transactions in the first half of the year versus 50 in the first half of 2018.

While hospital merger and acquisition activity is starting to slow, hospital and health system leaders are pursuing larger deals, the firm found. The average size of the seller by revenue increased significantly in the second quarter of 2019, rising from $196 million in the first quarter to about $597 million in the second quarter.

“What we saw in Q2 is the continuation of a trend toward mega-mergers, transactions in which the seller has $1 billion or more in annual revenues,” Anu Singh, managing director at Kaufman Hall, said in a press release.

Total transacted revenue totaled $11.3 billion in the second quarter of 2019, which was the highest level recorded by Kaufman Hall since 2017.

The total transacted revenue was four times higher than the revenue of the second quarter of 2018, and the most recent figure was just short of 2017’s record-high of $12.6 billion, which occurred in the second quarter of that year.

Three major hospital merger and acquisition announcements drove the recent mega-merger trend, the report showed.

First, in April 2019, Atrium Health in North Carolina announced plans to merge with Wake Forest Baptist Health and Wake Forest University. The merger would create “a next-generation academic healthcare system,” in which Atrium would add another seven hospitals to its 42-hospital system and establish a second campus for Wake Forest’s medical school.

About a month later, Wisconsin-based Gundersen Health System and Marshfield Health System released their merger announcement. The health systems are geographically contiguous, but have little overlap in existing markets, Kaufman Hall pointed out.

Finally, Sanford Health and UnityPoint Health signed a letter of intent to merge in June 2019. The transaction would create an $11 billion integrated system in American’s Heartland, ranking in the top 15 largest non-profit health systems in the country.

“There is a tremendous amount of uncertainty and volatility in the healthcare industry right now, driven in part by hospitals and health systems taking on more risk while continuing to operate on very thin margins,” Singh stated. “Some organizations are vulnerable, and they are searching for alignment with more sustainable platforms. However, for stronger organizations, new revenue streams and expansion into new regions are attractive options, and M&A activities are helpful for both. We expect to see this trend continue for the immediate future.”

Additionally, Kaufman Hall found that a significant number of hospital merger and acquisition deals in the second quarter of 2019 involved divestitures, or the sale of one or more hospitals from one health system or hospital operator to another. About 40 percent of announced transactions in the second quarter were divestitures, the firm reported.

For-profit health systems or hospital operators accounted for five out of seven divestitures during the period.

“The relatively high percentage of divestitures in recent quarters demonstrates both ‘sell-side’ and ‘buy-side’ strategies for health systems, depending on their strategic priorities and portfolio composition,” the report stated.

On the sell-side, health systems are increasingly deciding to sell hospitals without geographic synergies, meaning the facilities are outside of the system’s major markets, the firm added. Hospitals may also be in markets are that “over-bedded” or facing population declines.

For hospitals on the buy side, acquiring another health system’s or operator’s hospital can fill gaps in capabilities or market coverage, the firm stated. Strategic partnerships with another organization can also accomplish the same goals, while expanding care models into new regions.

“From both the sell-side and buy-side perspectives, health systems are demonstrating an increased awareness and sophistication in identifying what they need to achieve strategic growth, and what assets they can monetize to strengthen the system as a whole,” the report stated.