Hospital M&A deal volume returns to pre-pandemic levels as systems seek out complementary services

Dave Muoio | July 14, 2023

Hospital merger and acquisition deal volume has returned to pre-pandemic levels as of the second quarter of 2023, according to a new roundup report.

Twenty new deals were announced from April to June, up from the 15 of the first quarter and squarely above the 14 announced in the second quarter of 2020 along with the 14 and 13 transactions announced in the second quartesr of 2021 and 2022, respectively, healthcare consultancy Kaufman Hall wrote in an analysis released Thursday. The most recent count is in line with the 21 deals tallied by the firm in the second quarter of 2018 and the 19 deals that were inked in the second quarter of 2019.

Deal size, on the other hand, remains elevated compared to the years leading up to the pandemic. Second-quarter average deal size, as measured by the smaller organization’s revenue, was $664 million—down from the second quarter of 2022’s $852 million average but still above every other year dating back at least to 2017, Kaufman Hall wrote.

Similarly, the second quarter’s $13.3 billion in total transacted revenue is below the prior year’s $19.2 billion but above the other second quarters during and leading up to the pandemic, according to the report.

Part of that scale came from three “megamerger” health system deals announced during the most recent quarter: the planned merger of Wisconsin’s Froedtert Health and ThedaCareKaiser Foundation Hospitals’ purchase of Geisinger Health for the later launch of new value-based care nonprofit Risant Health and a nonbinding letter of intent for BJC HealthCare and St. Luke’s Health System to form an academic, Missouri-based system.

The driver behind recent hospital deals, and particularly the larger ones, has been an interest among provider organizations to “combine, complement, expand and optimize organizational capabilities,” the firm wrote in its report.

Part of that is a new way of conceptualizing forms of scale, the firm continued. With operating expenses elevated and margins slimming, organizations are focusing on expanding or accessing new, complementary service capabilities, allowing them to organize regional markets and coordinate a greater portion of a patient’s care.

“As capabilities become an increasingly compelling factor in partnerships and mergers, hospitals and health systems should focus on developing unique capabilities that would make them a strong partner, whether or not they are currently seeking a partnership,” the firm advised in the report. “This strategy will help organizations differentiate themselves within an increasingly competitive healthcare market and enhance their options as that market continues to evolve.”

Meanwhile, nonprofit and for-profit systems alike have been unafraid to trim the fat from their portfolios, Kaufman Hall noted. This has led to the selloff of partially owned ventures or individual facilities that aren’t supporting the larger care network.

“We anticipate more portfolio optimization from large, multi-market health systems as they look across the geographies in which they operate and determine where scarce resources can be best deployed,” Kaufman Hall wrote.

The firm’s report follows a broader analysis from PricewaterhouseCoopers that found healthcare industrywide 12-month deal volumes had increased from last year while deal values rose by 15%. The bulk of that dealmaking came from “other services” such as ambulatory surgery centers, home infusion services and contract research organizations.

All this comes as regulators and policymakers sound alarms on healthcare consolidation and vertical integration. The interest in greater scrutiny led the Federal Trade Commission to propose new updates to its pre-merger notification requirements that would give the agency more information to review—and potentially block—deals it views as anticompetitive.

Source: Fierce Healthcare