Health systems eye outpatient sector as hospital M&A continues to slump
Annual hospital merger transaction activity sunk to the lowest level in more than a decade, a new report shows.
Announced deals dropped to 71 in 2021, the lowest mark since 2009 and the fourth consecutive annual decline, according to the healthcare advisory firm Ponder & Co. The COVID-19 pandemic’s disruption paused many planned transactions, as relief funding and reimbursement cut delays allowed many health systems to hold steady, experts said.
“Buyers are much more selective and judicious when it comes to taking on potentially challenged assets, questioning whether they can make it work in this environment,” said Jake Aygun, director of Ponder’s M&A group.
While hospital executives are still probing potential deals, M&A volumes may not rebound until 2023, said Eb LeMaster, managing director at Ponder. Boosting outpatient networks has been a higher priority, he said.
“We are not going back to the Wild West days of the mid-’90s where we saw 150 deals a year. Many health systems are not relying on hospital acquisitions for future growth—so much centers around the outpatient sector,” said LeMaster, noting Tenet Healthcare’s acquisitions of ambulatory surgery centers. “Regulators are keeping an eye on it.”
For instance, LifePoint Health and Kindred Healthcare closed their transaction last month and formed a new company, consisting of 61 of Kindred’s long-term acute-care hospitals and 18 of LifePoint’s community hospitals.
While President Joe Biden and federal antitrust agencies have pledged to crack down on anticompetitive consolidation, including hospital acquisitions of physician practices, case law and regulatory guidelines haven’t kept up with vertical integration trends, industry overseers said.
“The foundation of the health system itself is in question,” said Nathan Ray, a partner at West Monroe who leads its healthcare M&A division, adding that health systems will continue to expand outside of the inpatient sector. “Health systems are trying to understand whether they should be a critical care center, a maternity ward, a nexus of multispecialty care or just the largest acute facility within a geography. Those questions, particularly as telehealth and the pandemic have strained in-person aspects of care, have changed how those organizations need to think strategically.”
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As the number of hospital transactions continued to slump, deal values were buoyed in 2021 by several large transactions.
Intermountain Healthcare and SCL Health proposed a deal to form an $11 billion system with 33 hospitals, after a deal between Intermountain and Sanford Health fell apart. Beaumont Health signed a definitive agreement with Spectrum Health following abandoned mergers with Summa Health and Advocate Aurora Health. Lifespan Health System, Care New England and Brown University joined forces to form a regional academic system.
Meanwhile, for-profit hospital chains HCA Healthcare, Tenet and Community Health Systems divested some inpatient facilities in their smaller markets. HCA announced Tuesday that it acquired MD Now Urgent Care, which has 59 urgent care centers that will bolster its growing network in Florida.
“Coming off waves of significant mega-mergers four or five years ago, there was an expectation of portfolio rationalization,” Aygun said. “We’ll see that going forward, but that will take a while.”
There are fewer independent hospitals and smaller systems, limiting acquirers’ choices. Bungled integration plans, diluted returns and rising regulatory scrutiny amid highly concentrated markets may also explain the dip in deal volume, experts said.
Even so, activity will likely start to rebound in the back half of 2022 and into 2023, said Jordan Shields, a partner at Juniper Advisory.
“The majority of Q4 announcements were from distressed sellers who had no choice but to go to market during the height of the pandemic,” he said. “As financially strong sellers get to the other side of omicron at the end of Q1 and beginning of Q2 2022 and ask themselves if they might have better served their communities from a larger platform, we will see more announcements in the second half of 2022.”