Healthcare M&A now more about strategy than opportunity, Kaufman Hall says
The size of the companies involved in healthcare M&A continues to grow. The average size in revenue of sellers was $409 million last year, nearly 14% higher than a decade ago, Kaufman Hall said in a new report.
Kaufman Hall found that seven transactions in 2018 involved sellers with net revenues of at least $1 billion.
Healthcare M&A today is more of a strategic decision than one about opportunistic growth. Fewer deals last year involved financially distressed sellers, according to the report.
Healthcare M&A isn't so much about saving a struggling hospital now. Instead, these deals often involve strong health systems looking to expand into new areas.
Nearly one-third of healthcare transactions last year involved companies with revenues of between $100 million and $500 million. About one-fifth of deals were at least $500 million.
Nearly half involved not-for-profit companies acquiring other nonprofits and about one-quarter were not-for-profits buying for-profits. Another nearly 25% involved a for-profit acquiring either another for-profit or nonprofit.
Kaufman Hall said M&A activity isn't about taking advantage of a struggling competitor. A mere 20% of deals involved a distressed company. Instead, health systems want strategic advantages.
"Health system leaders are seeking to acquire organizations that bring embedded expertise and resources to the deal, making these transactions more of a strategic partnership than an asset acquisition," according to the report.
Kaufman Hall said it has found that health systems with "strong operational or clinical capabilities" are looking beyond their local markets.
New competitors in the market are offering larger scale and resources, including annual revenues as much as nearly 10 times the levels of the biggest not-for-profit systems. The CVS Health-Aetna deal kicked off a trend that continued with Humana-Kindred Healthcare and Optum-DaVita Medical Group and goes on with Amazon's efforts to enter healthcare.
"New combinations across healthcare verticals and new market entrants are creating competitors that dwarf the scale of even the largest health systems," according to the analysis. "The forces that are reshaping the industry affect not-for-profit and for-profit health systems alike and are causing not-for-profit and for-profit strategies to converge."
Kaufman Hall found that consolidation is happening faster in some states than others. Not surprisingly, Texas led with eight deals in 2018. Florida (seven), Pennsylvania (six) and Louisiana and Tennessee (five each) ranked next.
Texas ($6.8 billion) and Florida ($3.6 billion) led in terms of revenue of announced deals. Kaufman Hall said 16 states didn't have any healthcare transactions. However, some of those states, such as Kentucky and Massachusetts, have seen a high volume or large deals in recent years.
One downside of M&A is consolidation that can limit competition. The Center for American Progress recently reported that provider consolidation has led to higher healthcare prices. That report also found that consolidation isn't lowering costs and improving care coordination, which is a common argument in favor of M&A activity.