- There were more hospital and health system deals last year than in 2021, a record low year for M&A, according to consulting group Kaufman Hall’s annual analysis of healthcare M&A.
- Still, with 53 total transactions in 2022, M&A continued to trail deal volume prior to the pandemic, when 92 transactions were announced in 2019.
- Anu Singh of Kaufman Hall said indicators show that deals were strategically motivated and not driven by financial distress last year despite operating challenges. But that’s likely to change in 2023, Singh said.
This is the first year since 2019 that deal volume has ticked up, according to the report.
Kaufman Hall said the results signal that M&A is regaining momentum after a lull following the onset of the pandemic. Singh, the report’s author, expects that momentum to continue this year, predicting that 2023 deal volume will eclipse 2022.
The industry should expect to see an uptick of financially stressed sales due to the absence of federal pandemic relief funds that helped prop up hospitals and health systems, Singh said. In 2022, only 15% of transactions involved a financially distressed seller, even amid financial pressures facing providers.
“The cost structure in 2023 of operating that same community hospital is significantly higher than it was in 2019,” Singh said. If reimbursement does not stay on pace with climbing expenses, the industry will likely see more financially distressed sellers this year, especially without relief funds.
The latest annual report shows that hospitals and health systems were looking for tie-ups that accelerated strategic goals, Singh said.
In 2022, the smaller party involved in an M&A transaction was larger on average in terms of revenue and had a stronger credit rating than prior years, the report shows.
The size of the smaller party in 2022 had average annual revenue of $855 million and about 15% of transactions involved a smaller party with revenues exceeding $1 billion.
The increased size of the smaller party indicates to Singh that systems are joining larger systems to see how fast they can accelerate achievement of their strategic goals.
“That's the phenomenon we're seeing more and more of right now,” Singh said.
A research report from Deloitte and Healthcare Financial Management Association echoed similar findings after interviewing executives involved in hospital M&A deals between 2008 and 2014. The biggest driver behind an acquisition for the acquired party was gaining access to capital.
And if hospitals and health systems continue to focus on capabilities, as opposed to geography, then the sector is poised to see more cross market mergers, Singh said.
Additionally, cross market deals may escape regulatory enforcement.
The cross market deal that joined Advocate Aurora Health in the Midwest and Atrium Health in the South did not face an antitrust challenge last year.
Research has found that prices can increase after systems acquire hospitals in separate markets within the same state, finding that providers had more leverage over insurers after combining.