'Megamerger' flurry caps off another year of low-volume, high-value hospital M&A

The fourth quarter of 2022 saw 17 hospital merger and acquisition deals announced, four of which are set to bring two billion-dollar organizations under the same roof, according to a year-end report from Kaufman Hall.

The finish line push brought 2022’s total combined revenues of transacted hospitals above $45 billion, just edging out 2017’s previous high mark of $44 billion, according to the review comparing a decade of hospital merger and acquisition announcements.

On the other hand, 2022 logged a total of 53 announced deals, well below 2017’s 117 or any year other than 2021. It continues the trend of fewer, but larger, hospitals M&A deals that kicked off with the pandemic, the advisory firm wrote.

Across the year’s announced transactions, 15% had a smaller party with revenue exceeding $1 billion (“megamerger”), 15% between $500 million and $1 billion, 42% between $100 million and $500 million and 27% lower than $100 million, according to the report.

Two-thirds involved a nonprofit acquiring a fellow nonprofit, and 19% of the deals involved a nonprofit acquiring a for-profit. About 6% of the deals involved for-profit organizations acquiring a nonprofit. There were no deals in 2022 involving a for-profit acquiring a fellow for-profit. Fifteen percent involved a seller that was financially distressed, a hair below the 16% seen in 2021 and 2020, the firm wrote.

The push for larger organizations to partner comes alongside several industrywide pressure points that drive increased competition and a demand for investments into expanded capabilities, Kaufman Hall noted. Encroaching services from tech companies, health plans and retailers; labor shortages; and tight margins each made mergers more appealing to larger entities.

"These transactions transcend the simplicity of raw scale, and instead more often exhibit a desire to transform healthcare for the communities that will be served by the combined system is an explicit goal of the transaction,” the firm wrote.

Also worth noting is that some of the year’s biggest announcements—such as those involving Advocate Aurora Health and Atrium Health or Essentia Health and Marshfield Clinic Health System—are connecting systems with little or no market overlap, the firm wrote. These deals allow systems to expand their capabilities and geographically distribute operational risks while also facing less scrutiny from regulators—“an increasingly important feature considering the current regulatory landscape,” they wrote.

The end-of-year flurry may also signal an end to the pandemic dealmaking dearth, Kaufman Hall continued. Alongside the financial pressures, many organizations that paused their strategic discussions during recent years’ uncertainty are now ready to reopen negotiations, the firm wrote.

“Some market forces present challenging headwinds to transaction activity, including a higher interest rate environment that is raising the cost of capital as well as heightened regulatory scrutiny of M&A activity across multiple industries, including healthcare,” the firm wrote. “We believe, however, that these tactical factors are overshadowed by an increasingly important strategic rationale for providers to form partnerships.”