Financial distress fueled more hospital M&A deals in 2023, report finds

Hospitals’ immediate financial needs drove more than a quarter of the sector’s merger and acquisition activity through 2023, which also brought a higher overall number of unveiled transactions than its predecessor, according to a new year-end dealmaking review from Kaufman Hall.

Per the report, 65 hospital and health system deals were announced in 2023, which was up from 2022’s 53. Total transacted revenue across 2023 was $38.4 billion.

The average size of a deal — measured by the firm as the smaller party’s annual revenue — was $591 million, which is a slight cutback from 2022’s high but still “significantly outpaces” averages from 2012 to 2020.

Nearly half of 2023’s deals involved smaller parties with $100 million to $500 million annual revenue. Eight involved a smaller party with more than $1 billion in annual revenue, continuing a “megamerger” trend that kicked off in 2021, Kaufman Hall wrote.

The major difference among this year’s dealmaking was that 18 of the transactions involved a seller that cited financial distress as a factor in their decision or was otherwise evidently in financial distress.

At 28% of the year’s total deal volume, that portion well outpaced the 17% of 2020, 16% of 2021 and 15% of 2022.

“While many of these financially distressed organizations are smaller hospitals and health systems, the presence of larger systems in the mix has now resulted in average size of a financially distressed partner by annual revenue of over $160 million for the past two years, again, the first time that figure has been reached in recent history,” the hospital advisor wrote in its report.

The uptick came as many of the nation's hospitals posted negative operating margins, the firm said in reference to its regular monthly sector report. Even the most recent of these reports, for November, showed a rising median year-to-date operating margin of 2.0% in November that remains “well below the 3% - 4% range often cited as a sustainable operating margin for not-for-profit hospitals and health systems,” Kaufman Hall wrote.

The continued financial difficulties outline struggling hospitals and health systems’ need to investigate any potential partnerships “from a position of strength,” when they still have some flexibility.

“Doing so allows community hospitals the opportunity to secure key service and other commitments to ensure that their community continues to have access to the appropriate level of care and that the hospital’s legacy survives into the future,” the firm wrote.

The other standout among 2023’s dealmaking were those that led to major reorganizations of a region’s healthcare market, according to the report.

Major for-profit systems and, now, nonprofits are realigning their portfolios to maximize opportunity in “core” markets and make the best use of their scarce resources, the firm wrote. A regional approach — as seen among the Froedtert Health-ThedaCare merger in eastern Wisconsin and the BJC Healthcare-St. Luke’s Health System merger in Missouri/Kansas — allows health systems to match their complementary capabilities and better coordinate care across a combined entity, Kaufman Hall said.

The firm said it expects both of these trends to continue into 2024. They’ll be joined by a bump in new partnership models molded by regulatory challenges, interest in retaining independence and a desire for less capital-intensive partnership structures; as well as new partnership interest among independent community health systems hoping to get ahead of market headwinds, Kaufman Hall predicted.

The 2023 recap’s focus on operating pressures echoes a healthcare industry dealmaking forecast released earlier this month by KPMG. Among hospitals and health systems specifically, the professional services firm said it expects to see “more megadeals in 2024 and cross-market deals that allow new economies of scale without triggering antitrust concerns. Some health systems will also seek in-market deals that can help improve efficiencies and community access to a wide range of care.”