Though health system merger and acquisition activity remained frequent in the first quarter of 2023, fewer organizations are looking at partnerships as a life-or-death arrangement, according to a new industry report from Kaufman Hall.
Rather, recent months have seen “a new wave” of health system mergers take form in which deal participants are midsized regional health systems still in a position of relative financial strength, the advisory firm said.
With inflationary and supply pressures mounting, these health systems are cutting deals that “balance their desire to influence local healthcare delivery with utilizing the capabilities and resources of larger health systems,” Kaufman Hall wrote.
The shift in thinking is clear across transaction numbers, as the past few years have included a growing number of deals in which the smaller party lands in the range of $250 million to $750 million in annual revenues, the firm wrote.
Kaufman Hall backed its case by pointing to recent statements from Flagler Health+ and Singing River Health System asserting that their respective mergers were primarily a bid to secure strategic funding for systemwide investments. Similar comments came just this week from Froedtert Health and ThedaCare during their own (somewhat larger) deal announcement.
“As health systems adapt to a new environment of razor-thin—and for many organizations, negative—operating margins, we anticipate that this new wave of mergers will continue,” the firm wrote.
Outside of the emerging trend, Kaufman Hall’s report detailed the 15 health system merger and acquisition deals announced during the first quarter.
Though just a hair behind the fourth quarter of 2022’s 17-deal “megamerger” flurry, the pandemic’s trend toward larger deals persisted.
Total transacted revenue for the quarter reached $12.4 billion, just under the historic $12.7 billion high of the first quarter of 2018, and the average size of the smaller party “remained very high at $827 million,” according to the report. Presbyterian Health Services and UnityPoint Health’s 40-hospital merger deal was the quarter’s sole announcement for which the smaller party’s annual revenues exceeded $1 billion.
All but one of the quarter’s transactions involved a nonprofit health system as the larger party, three of which were academic or university-affiliated and five of which were religiously affiliated.
Outside of the midsized mergers, Kaufman Hall noted that the Presbyterian-UnityPoint deal continues a trend toward cross-regional partnerships that can often escape regulatory scrutiny. The firm also highlighted a nearly six-year trend of for-profit health systems trimming their portfolios to refocus their efforts on core markets with strong potential for growth.
“As organizations seek a path to long-term sustainability in this new environment, we anticipate that partnerships between health systems will be an important component of that effort,” Kaufman Hall wrote.