Hospitals and health systems have faced significant financial challenges in recent years, impacting their ability to achieve sustainable growth and stability. In a recent report by Kaufman Hall, it is revealed that these pressures have influenced the sector’s mergers and acquisitions (M&A) landscape. While there have been improvements in hospital finance this year, there is still work to be done to meet the necessary margins for long-term financial viability.
Financial Distress as a Driving Factor:
One notable finding from the report is that nearly 40% of the M&A deals announced during the third quarter were motivated by financial distress. This figure surpasses historical benchmarks and highlights the urgent need for hospitals to address their financial challenges.
Return of M&A Activity:
Another key observation is the resurgence of M&A activity in the hospital sector, which is returning to pre-pandemic levels. In the third quarter alone, 18 M&A transactions were announced, compared to only seven in the same period last year. This rebound can be attributed to hospitals seeking partnerships to foster growth and safeguard their long-term financial sustainability.
Total Transacted Revenue and Mega Mergers:
Although the total transacted revenue in the third quarter was lower compared to the previous quarter, it is important to note that the latter included three mega mergers. These mega mergers involve deals where the smaller party’s annual revenue exceeds $1 billion. The reduction in mega mergers in Q3 can be attributed to one significant agreement, the planned combination of Oregon Health & Science University and Legacy Health.
Increasing Activity among Independent Hospitals:
The report also reveals a notable increase in M&A activity among sizable independent hospitals seeking to align with larger organizations. When excluding the mega merger deals, there was a substantial rise in average annual revenue in the third quarter compared to the previous quarter. This trend signifies a proactive approach by independent hospitals to secure their long-term sustainability through strategic partnerships.
Role of Nonprofit and Academic Health Centers:
Of the 18 deals announced in the third quarter, nonprofit health systems were the larger party in 14 cases, with seven transactions involving academic or university-affiliated health systems. The report highlights that patient volumes are recovering more quickly at academic health centers compared to other acute care hospitals, with academic centers experiencing a median inpatient occupancy rate of 70% compared to 53% for acute care hospitals in general.
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