- Thirty-nine percent of mergers and acquisitions announced in the third quarter included a hospital or health system that cited financial distress as a driver for deal, according to a report by Kaufman Hall.
- Though M&A activity is continuing to trend back to pre-pandemic levels, the number of hospitals in distress shows the financial strain of the past two years, the report said. Eighteen transactions were announced in the third quarter, compared with just seven in the same period in 2021 and 10 during the third quarter in 2022.
- Increased costs, both for labor and other expenses, has been a significant challenge for smaller and medium-sized health systems. Now, more large systems — with annual revenue of $1 billion or more — are pointing to financial concerns as their reason for dealmaking, according to Kaufman.
Hospitals faced their worst financial year in 2022 after the onset of the pandemic as high labor expenses pummeled their margins, according to an earlier Kaufman report. Though operating margins have improved this year, the consultancy noted they’re still below historic levels and those needed for long-term sustainability.
Some hospitals have reported improved financial results this year, but others haven’t bounced back as quickly. Chicago-based nonprofit system CommonSpirit Health posted a $1.4 billion operating loss for its fiscal year ending June 30, and it reported it had laid off about 2,000 full-time employees in its fourth quarter.
The latest Kaufman report tallied only one mega merger — a transaction where the smaller party has annual revenue above $1 billion — in the third quarter. Total transacted revenue was $8.2 billion, a significant drop from the $13.3 billion in the previous quarter. But the second quarter’s numbers were bolstered by three mega mergers announced during the period.
“When removing the mega mergers from each quarter, the average revenue in Q3 was actually significantly higher than that of Q2, at $243 million and $159 million respectively, demonstrating the significant uptick in activity in sizeable independent hospitals seeking out partnerships with larger organizations,” the report’s authors wrote.
Fourteen of the 18 deals announced in the third quarter involved nonprofit acquirers, with half of those deals including academic or university-affiliated health systems.
Though patient volumes have been slow to reach pre-pandemic levels at many hospitals, academic health systems are facing higher occupancy levels, which could be driving them to merge with community systems to alleviate some of the pressure, according to the report.
The four deals with a for-profit acquirer focused on smaller, financially distressed health systems.