- Although the number of provider mergers and acquisitions dropped in the second quarter of this year, the revenue volume of the deals was at its highest level since 2017, according to a new report from consultancy Kaufman Hall.
- The firm counted 19 announced hospital and health system transactions in the quarter, down from 27 in the first quarter of 2019, but in line with the second quarter last year, which tallied 21 transactions.
- However, dollars spent on M&A spiked. Total transacted revenue in the second quarter was $11.3 billion, well above the norm for a single quarter, Chicago-based Kaufman Hall found. The figure is almost four times higher than the total value of M&A in the second quarter of 2018.
The scope and volume of hospital mergers and acquisitions has ebbed and flowed of late, but this new data is evidence M&A is still an attractive strategy as providers bet it can help them weather thin margins, increased risk assumption and market volatility.
The $11.3 billion is not an inexpensive tab, but it falls slightly short of the historical M&A high in a single quarter: $12.6 billion in the second quarter of 2017. The first half of 2019 saw 46 provider mergers and acquisitions, roughly in line with 50 in the first half of 2018.
The average size of the seller grew, from $196 million in revenue in the first quarter of the year to roughly $597 million in the second, reflecting three huge transactions announced over the three months ended June 30: Sanford Health-UnityPoint Health, Atrium Health-Wake Forest Baptist Health and Gunderson Health System-Marshfield Clinic Health System.
Sanford and UnityPoint signed a letter of intent to explore a merger in June. If combined, the systems would have more than $11 billion in annual operating revenue and would rank among the 15th largest nonprofit health operators in the country.
Regional system Atrium Health snapped up seven-facility Wake Forest Baptist Health in April to create a system with annual operating revenue of over $9 billion. The transaction will add an academic medical center to Atrium's 42 existing hospitals, creating a system with almost 50 hospitals and roughly 1,300 additional care locations.
The two expect talks to conclude later this year, and will expand the reach of Atrium — a mega-regional player — across state lines. Health providers are increasingly unconstrained by state lines in their search for targets to form behemoth players in their region, including Illinois-based Advocate Health Care's 2017 merger with Wisconsin-based Aurora Health Care.
Integrated health systems Gunderson and Marshfield Clinic, however, are geographically contiguous, and once joined, will stretch from southwestern to north central Wisconsin, with a smattering of locations in northeastern Iowa and southeastern Minnesota. The goal is to become the "preeminent rural healthcare organization in the country," according to Susan Turney, CEO of Marshfield.
The average size of the seller peaked for the entirety of 2018 at $409 million, steadily pushed upward by an increasing number of megamergers.
A significant share (40%) of the transactions in the quarter were divestitures as health systems sloughed off low-performing facilities. Five out of the seven divestitures were completed by for-profit systems or hospital operators. Academic medical centers and religiously-affiliated systems were both acquirers in three of the 19 transactions announced in the second quarter, while for-profit systems were acquirers in two.
"Some organizations are vulnerable, and they are searching for alignment with more sustainable platforms," Anu Singh, managing director at Kaufman Hall, said in a statement. "However, for stronger organizations, new revenue streams and expansion into new regions are attractive options, and M&A activities are helpful for both."
Singh expects the trend to continue in the near future.