Kaufman Hall Expert: M&A Activity Reflects Current Overall Market Volatility
Merger and acquisition (M&A) activity slowed in the first quarter of 2025, leaders at the Chicago-based consulting and advisory firm Kaufman Hall, a Vizient company, noted in a report published on April 8. As the report noted, “Hospital and health system merger & acquisition activity in Q1 2025 reflected the overall market volatility and economic uncertainty surrounding tariffs and potential policy changes from the new administration, affecting healthcare with a chill on decision-making. Only five transactions were announced this quarter. This low level of activity reflected broader malaise in M&A markets across industries, both globally and in the U.S.”
The report noted that, “Although there was a very small number of transactions announced in Q1, it is worth noting that four of the five transactions involved financially distressed acquirees. This continues the uptick in financially distressed transactions noted in our 2024 year-end M&A activity report.”
That said, the report went on to state, “Hospital and health system M&A activity has been gaining momentum since a low point in 2021, when only 49 transactions were announced. In 2024, the number of announced transactions had grown to 72, with consistent year-over-year growth since 2021. Organizations abruptly hit the brakes in Q1 2025, with only five transactions announced (Figure 1). This is the lowest number in recent history, below the Covid-era low point of seven announced transactions in Q3 2021, a period when pandemic-related operational and financial turmoil distracted health system leaders from strategic transaction planning.”
What are the broader implications of these trends? To find out, Healthcare Innovation Editor-in-Chief Mark Hagland spoke recently with Anu Singh, the managing director at Kaufman Hall who is the firm’s lead expert on mergers and acquisitions. Below are excerpts from that interview.
What is your “40,000-feet-up-level” perspective on what you and your colleagues found in your report published last month?
At the 40,000-feet-up level, you’ll see activity of various different types, all of them accelerating. On the one extreme, you have organizations facing financial challenges—coming out of the COVID-19 pandemic, their revenues are down, expenses are up, and they have to make investments that are beyond their ability to finance them. So over the last few years, those organizations have been hit a little bit harder; and it’s more likely than not that they’ll find a path to partnership to be a better option than remaining independent.
On the other hand of the spectrum, there are organizations with one or two billion in net patient revenue; they have negligible risk of default on their debt because of their market position. And some of those organizations want more: they want a clinical business intelligence model beyond their means, for example. Or they’re doing very well at managing care but want a payer component to their business—the ability to contract or network in a way that they’re actually collaborating with a payer; or they need to join a payer. So there’s not necessarily anything wrong with those organizations, but getting to where they want to get to takes too long or is too costly for them to build up for themselves, or the path would be too long to develop themselves, so they’ll partner with an organization that already has those capabilities.
Those are the extremes, but there are many organizations in between. So there are all sorts of combinations in between, but from those extremes, you can see the full range of possibilities out there.
Some hospitals are so distressed that they might have to be acquired or shut down, yes?
Yes, there is a range of hospitals in financial distress. And we’ve long believed that organizations like that need to find some kind of partner. The economic reality now, though, is that there are organizations who, when they look to find a partner, may not actually find those hospitals appealing. Can we state with conviction that every organization will find a partner? No, we can’t. The economic challenges are such that some health systems may be constrained with what kinds of acquisitions they might make. We’re not talking purely about aggregation, but about transformation. There are organizations that will move away from an inpatient focus. And that could create challenges for organizations that five, ten years ago, might have felt certain they could find a partner. I’m not sure they can have that kind of certainty anymore.
What potential impacts might the current payment challenges have, on hospitals and health systems in the next few years? As you know, members of Congress are debating whether to enact massive cuts to the Medicaid program; some numbers we’re hearing are $880 billion or even $1 trillion. How might such cuts and other challenges impact M&A activity?
I haven’t done the math yet, but what’s clear is that when expenses are significantly higher than revenues, as they were just a short time ago, any shrinkage of reimbursement creates more stress. I don’t know of any organization right now that believes that the reimbursement long-term will be able to overcome their cost trajectory. So any major reimbursement change creates financial risk. And, net-net, if they start to reduce overall reimbursement by the order of magnitude you’re talking about, they’re drawn into the question of sustainability under that model. And I think it’s going to spell concern for a lot of organizations; and it may have implications for the industry.
How will the ongoing shift into value-based contracting impact M&A?
At 40,000 feet up, when you look at the whole array of market and landscape, there are areas where value-based contracting is going to accelerate, and other areas, where it might be slower to accelerate. So the value-based wave will evolve forward in different ways and to different degrees nationwide. If we believe that commercial payers will push for the same thing as government in certain ways, that could push the agenda a particular. Markets are broken into sub-markets, and that’s important.
From a policy standpoint, if you’re operating under financial distress and someone wants to move you into value-based contracting, that will be stressful. For the highly strategic, a move to value-based might lead to you say, “Well, we actually do pretty well with outpatient surgery.” But they have to have the infrastructure to accomplish it. So the strong organizations themselves will say, well, if we’re going to be moving more deeply into value-based and the federal government continues to press on it, that will mean a lot.
And I think organizations will ask themselves whether a partnership model will lead them forward under value-based contracting. And it is in any case not a bastion of stability right now.
What do you think will happen in the next year?
Everything! I honestly think we should continue to expect the unexpected. What I think is going to happen is that the attention we’ve seen taking place around the overall cost and value of government-sponsored activity, that focus on efficiency will come into healthcare. The optimist in me says there will be a uniform and unified effort to remove waste from the industry that will benefit everyone; the pessimist in me says that there may not be enough thought into the trajectory.
And if we’re not careful and we bring too much change at once, it’s unclear how the system would react to that and overcome that challenge. So I’m hoping that attention will be paid around the ramifications and consequences of the newer models. And you might have portions of your population unable to survive, and the implications would then be far more grave. I hope that the change can be managed and dealt with.
The fact of Oak Street and other companies coming into healthcare from outside the traditional bricks-and-mortar hospitals-and-clinics world, will that make a difference?
Anytime you juxtapose new models against traditional bricks-and-mortar, you’re saying something important. And you’re saying there that there are alternative ways that patients, health plans, and employers are going to look to make change. Some alternatives will be faster, cheaper, and more consumer-friendly. “Better, cheaper, faster” has always been my motto around what kinds of changes we’re looking for.
The challenge for legacy healthcare is, can you operate in both modes? In both the inpatient and outpatient spheres? Can you do segment-specific work around telehealth, around consumers? And if that’s what the incursions look like in our industry—and many organizations are going to look at that. Every organization’s leaders need to do an economic analysis: what is it that consumers want in our market? In some markets, either patients are willing to drive, or they’re in a very urban environment. So what is it that communities want? And which community needs can we meet, and which can’t we? And if not, who’s going to do certain elements? Is there a Doc-in-the-box presence in your market? The answer will be customized by the individual markets. And to me, that’s the most important question: what is it you can offer and not? And what is it that you need to offer and what do you need to bring in?
