Hospital consolidations for the first quarter dropped in number while the size by revenue rose over last year as the sector marked the one-anniversary of the pandemic’s growing firestorm that has influenced merger and acquisition strategies.
The sector saw more “mega” deals where the smaller partner or seller had average annual revenues of more than $1 billion or sellers had revenues between $500 million and $1 billion. Overall revenue impacted totaled $8.8 billion and was second only to the first quarter of 2018 when looking back to quarterly levels since 2015.
The transactions seen in the first quarter reaffirm the traditional goals sought in M&A thinking but they also highlight strategies influenced by the pandemic’s impact on management, revenues, and services. The need to focus on core business strengths, build new partnerships to address infrastructure gaps, and strengthen intellectual capital are influencing the activity.
“The COVID-19 pandemic has affirmed the importance of transformation and again validated the pursuits of scale, relevance, and intellectual capital that remain evident in nearly all this quarter’s transactions,” reads the report from lead author Anu Singh, a managing director at the advisory firm.
Emerging trends include rising value in diversification and greater weight being placed on local market expertise.
“Organizations value diversification across markets and revenue sources. These transactions involve partnerships with well-established health systems in local markets,” the report finds. “While smaller health systems may not have the financial scale of multi-state systems their intellectual bandwidth and understanding of local issues provide significant growth advantages.”
Not-for-profits acquiring or merging with other not-for-profit providers accounted for 76% of the activity while not-for-profit acquisitions of for-profit facilities accounted for 8%, for-profit facilities acquiring not-for-profits represented another 8% and for-profit acquiring for-profits accounted for 8%. A total of 72 hospitals were impacted by announced transactions.
“The quarter’s activity includes a major combination of for-profit operators and a significant realignment of hospital ownership in the upper Midwest,” the report noted.
Some of the most notable transactions included OU Health signing a letter of intent to merge with the University of Oklahoma College of Medicine to create a fully integrated academic health system and CommonSpirit Health’s planned sale of 14 hospitals in North Dakota and Minnesota to Essentia Health.
Others include UK HealthCare and King’s Daughters Health System announcement of a joint venture partnership that will expand access to tertiary-level services for residents of eastern Kentucky and southern Ohio; and Aspirus Health’s plan to acquire seven hospitals in central and northern Wisconsin from Ascension Health.
Partnership with health systems that have an established market presence remains a key driver driven by an emerging trend of hospitals placing greater weight on local market knowledge.
The pandemic will linger on activity through 2021 and could steer future strategies over the long-term. “We have seen, for example, the pandemic’s effect on clarifying the strategic rationale for transactions that had been attempted earlier but are now moving forward,” the report said.
The CommonSpirit and Ascension’s transfer of assets to local systems in the upper Midwest allows for a more focused and regionally driven operator to take over allowing the two which are large systems with a national presence “to reallocate their time, capital, and resources to markets that they deem essential to their organization’s future success,” the report suggested.
The transaction involving Care New England, Lifespan, and Brown University to form an integrated academic health system in Rhode Island had been contemplated for several years. While the OU Health and the University of Oklahoma College of Medicine transaction cements a existing relationship.
The numbers from 2020 were down to 79 compared to 92 in 2019 but slightly up from the 2010 low of 74, according to the firm’s 2020 report. Seven were “mega mergers”—involving two companies with over $1 billion in annual revenue—up from three transactions in 2019.
Specific other pandemic-related strategies that stand to influence M&A include the impact of tele-health services that are likely here to stay, greater attention to societal issues and addressing healthcare disparities, and using partnerships to replace services not considered a core asset such as behavioral health facilities.
Another factor that could also guide future transactions and strategies is the expectation that under President Biden’s new administration, consolidation will face more antitrust scrutiny from the U.S. Department of Justice and the Federal Trade Commission. Secretary of Health and Human Services Xavier Becerra challenged healthcare consolidation as California attorney general.
Hospitals
