- Both nonprofit and for-profit hospitals are expected to continue mergers, acquisitions and partnerships at a fast clip following the COVID-19 pandemic, continuing a decade-long trend, Moody's Investor Service said in a new report.
- Larger health systems will seek out mergers that bulk up their market share by adding new geographic locations and service lines that help diversify offerings. By contrast, smaller hospitals — weighed down by the pandemic — are likely to form partnerships to gain access to more resources, which could help drive down expenses, including labor and supply.
- Meanwhile, for-profit hospital operators are likely to hunt for mergers and acquisitions that are focused on offerings outside that traditional hospital setting, Moody's analysts said.
Even as the pandemic put considerable pressure on hospital and providers, it did not dramatically reduce merger and acquisition activity. Now, Moody's analysts say deals will accelerate, particularly for smaller hospitals and physician groups that continue to feel COVID-19-related pressure on their operations.
For this cohort, "expenses remain elevated, leaving many of them vulnerable to further operating disruption," Moody's analysts said, noting some may find it challenging to repay Medicare loans that were disbursed to providers to help them weather the economic downturn spurred by the pandemic.
After navigating an unprecedented year, physicians are burned out, and this may drive them into deals with larger organizations that can offer more financial security, analysts noted.
But not all operators are looking for the same partner or type of deal.
Large nonprofit health systems are likely to search for deals that will pump up the scale of their operation by looking to new markets. Building greater scale can give them the upper hand in negotiations and helps diversify revenue. Scale is especially important as a larger share of hospitals' reimbursement is tied to government payers, Medicare and Medicaid, which tend to pay less than private payers.
Moody's said nonprofits have leaned on this strategy of consolidating for their financial benefit over the past decade. "Median net patient revenue for not-for-profit health systems was $1 billion in fiscal 2020, nearly double the $568 million in 2010," Moody's said.
On the other hand, for-profit hospitals, which currently have "unprecedented levels of liquidity" will be interested in deals that meet patients outside a hospital setting. A good example would be Tenet's $1.1 billion deal for SurgCenter Development, which netted the hospital operator 45 ambulatory surgery centers.
So far for 2021, hospital analysts found that the number of deals was down during the first quarter but overall transaction value was larger than during the first quarter of last year.
Still, some experts say antitrust scrutiny may intensify, even at the state level as legislators seek to rein in dominant health systems that abuse their market power to inflate prices following the blockbuster Sutter settlement in California.