Last year ended with 65 M&A deals having been announced in the U.S. hospital sector, up from 2022’s total of 53. Financial distress was a key reason for this increase in hospital M&A activity, according to a new report from Kaufman Hall.
In 2022, hospitals weathered one of their most challenging years, with median operating margins staying in the red throughout the vast majority of the year. Those money problems proved to be a major factor shaping 2023’s M&A transactions — financial pressures influenced 28% of hospital M&A deals last year, up from 15% in 2022, the report showed.
The report uncovered other figures demonstrating the impact that hospitals’ financial distress is having on the sector’s M&A activity. For example, the median size of smaller parties by annual revenue during 2022 and 2023 was much higher than historical levels. The median annual revenue for smaller parties involved in M&A deals in 2022 and 2023 was more than $200 million, compared to $100 million in 2019.
Kaufman Hall’s analysts also pointed out that a growing number of larger health systems are citing financial distress as a motivator to pursue their M&A deal — which is unlike previous years, during which financial struggles were usually confined to smaller hospitals and health systems. Be that as it may, the analysts also noticed that the percentage of transactions in which the smaller party has a credit rating of “A-” or higher is keeping steady with historical trends — which means creditworthy organizations are also recognizing that they could benefit from a strategic partner.
Megamergers — defined as deals in which the smaller party has annual revenue of $1 billion or higher — continued to play a significant role in deal activity. These types of deals represented 12% of all hospital M&A transactions in 2023, compared to 15% in 2022 and 16% in 2021.
The report predicted that some of the M&A trends the hospital sector saw in 2023 will continue or intensify this year. One example is the trend of M&A activity among independent community health systems that were financially stable in previous years. Economic pressures are affecting hospitals all over the country, and organizations with lesser scale “typically have less margin for error” and are therefore expected to continue to seek partnerships, the analysts wrote.
Other trends expected to hold steady in 2024 include acquirers’ focus on regional market development and the prevalence of financial pressure as a motivating factor for seeking partnership.
New partnership models are one trend the analysts predicted will grow this year. Hospitals are coming up with new, creative ways to participate in strategic partnerships — for a number of reasons, including regulatory hurdles, a shift toward less capital-intensive partnership architectures and a desire to maintain independence — according to the report.
Photo: Nuthawut Somsuk, Getty Images
